Equity Investment Strategies: Taxes, Tax Efficiency, and After‐Tax Returns

Mill Creek Capital Advisors write: Higher tax rates are starting to attract investors’ attention. Rate increases have  increased the taxes payable on dividend income and on short‐term and long‐term realized  capital gains.  With few or no “tax loss carry‐forwards” to shelter future gains against taxes,  many investors are now wondering whether they should change their approach to equity investing.   

The accumulation of large potentially taxable capital gains is a “high quality” problem about 

which to be concerned, particularly since such gains have so closely followed sharp capital 

losses created during the stock market decline of late‐2007 to early‐2009.  However, not all 

investment strategies within an asset class produce the same pattern of tax liabilities.  Equity 

index funds and ETFs, for example, are generally more tax‐efficient than actively managed 

equity portfolio strategies on an annual basis.  Tax loss harvesting strategies can also help 

investors manage their investment‐related taxes by offsetting gains produced elsewhere.  

But both of these strategies still expose investors to potentially large tax bills when they are later liquidated. 

This report explores the relative tax efficiency of index funds and ETFs while also debunking a  belief that this characteristic makes such strategies inherently far superior to actively managed equity strategies.  It also analyzes how different investment strategies could affect investors’ future tax bills, and offers conclusions on how investors can best structure equity portfolios to manage their yearly and cumulative tax liabilities.  We recommend that investors consult their tax advisors for advice on how the conclusions we draw herein apply to their particular  situations.   Click here to read and or download Mill Creek Capital Advisors Report: Equity Investment Strategies:  Taxes, Tax Efficiency, and After‐Tax Returns. (read or download here).