Investment product that "optimizes taxes"

Question

My advisor is chasing me to buy a product (with 0.44% fees!) that is supposed to "optimize taxes" (in the US). The idea is that for those fees, they will track some index (the S&P500), and try to continuously "harvest losses" while keeping the positions in the portfolio reflective of the index sectors, by e.g. selling Yahoo! and buying Oracle (or some such "equivalent" stocks in the same sector). The benefit for me, at the end of the year, would be that I could write off those generated losses from my taxes to Uncle Sam.

The question of course is: is it really worth it? How should I analyze this product? Is it really better than tracking the S&P500 by holding positions for multiple years (I am a patient, long term investor with no immediate cash needs), and paying taxes when I sell after e.g. 10 years? Are there other details to watch our for - for example (I am not a tax expert at all), is there a cap on the amount I could deduce from my taxes, leading to a cap on the upside of the product for me? Are there also pointers to the theory behind this kind of tax optimization?

Also, are these kinds of products doing substantially better than harvesting the losses yourself once a year?

Answer 1

Tax loss harvesting is just one tax efficiency, which can be good enough.

It just strategically takes profits in profitable positions, creating a tax event for you, and simultaneously selling unprofitable positions. As the tax footprint on your long term profitable positions is only 20%, while the complete losing value on another position can be deducted against your gains, it is easy to reduce your long term capital gains tax to negligible amounts. The same concept applies to short term capital gains but that tax is almost as bad as a wage worker's income tax, so you need much greater losses.

To avoid wash-sale rules, you can just immediately buy a similar fund that tracks the same index right after, so you don't miss any potential growth.

regarding the .44% fee eh, hard to say. over time (15-20 years) those fees add up. there are likely more competitive funds that do the same thing, amongst other strategies.