Use ETFs to Dodge Tax-Loss Rules

Under the wash-sale rule, the investor cannot claim ABC as a tax loss unless he or she waits 30 days before buying it back. But you need not kick yourself if ABC happens to rally during the 30-day wash-sale period, because you can enjoy part of the gain via your holding in the XYZ ETF.

"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," says Phil Roth, technical analyst at Miller Tabak.

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 Quote) 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 8.5% of the Consumer Staples Select SPDR(XLP Quote), 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.