"Tax-selling tends to peak in mid-November and mid-December, often producing mild dips at those times," says Phil Roth, technical analyst at Miller Tabak. "People that are intellectually preparing for the year-end tend to do the bulk of their tax-selling in November, so they have the opportunity to repurchase before the end of the year and avoid the wash-sale rule."
Here are two strategies using ETFs for investors who are resolute and smart enough to do their tax planning year-round -- although you should always check with your tax adviser before making any moves:
Strategy 1: Taking Individual Stock Losses While Maintaining Sector Exposure
In this case, let's use a real, but somewhat arbitrary, example. Let's say you are holding too large a position in Wal-Mart (WMT - Get Report) and your portfolio is dangerously out of balance. Furthermore, the Wal-Mart shares you purchased happen to be trading below your purchase prices. Because Wal-Mart accounts for more than 11% of the Consumer Staples Select SPDR (XLP), an ETF that contains the 37 consumer staples listed in the S&P 500, you can: (1) sell your Wal-Mart stock; (2) claim the loss on your tax return; and (3) buy the Wal-Mart-heavy ETF to maintain your exposure to Wal-Mart and to that sector in general.
And after 30 days, you can choose to buy back some or all of your Wal-Mart position and sell the ETF.Dan Dolan, an ETF specialist, says investors also can use this strategy to take a loss in a mutual or closed-end fund while maintaining exposure to a particular sector. For example, if you are holding a technology fund that is currently under water from where you purchased it, you can sell the fund, realize the loss and buy a tech ETF like the Technology Select SPDR (XLK) to stay exposed to the sector.