GET TAX-SMART

For years, advisors and clients asked us if we could make our active risk managed traditional SMA products more tax efficient. In 2014, WBI launched 10 actively managed ETFs to bring to market  actively managed SMAs with increased tax efficiency. Today, we have five Tax-Smart SMAs available to investors.

Benefits of the Tax-Smart SMA

Buy & Hold Proprietary ETFs

ETFs Tend to Be Tax Efficient

Greater Diversification

The Tax-Smart Difference

WBI builds Tax-Smart SMA strategies with proprietary ETFs to actively manage risk and return, while helping clients keep more of the return generated after taxes. While many investment managers attempt to perform well relative to a fluctuating market index or benchmark, WBI’s risk-managed investment solutions have the goal of providing consistent, attractive returns with substantially less volatility and risk to capital. 

An active risk-managed process can be inherently inefficient from a capital gains tax perspective as we sell securities to raise cash to reduce risk. In a traditional SMA, these sales may generate short-term gains that can be taxed at high tax rates. However, active risk management within an ETF can be more capital gains tax efficient even when harvesting short-term gains, due to an ETF’s unique in-kind creation and redemption process. 

By creating portfolio allocations with WBI’s proprietary ETFs and allowing the active management process to take place within the ETFs, we can create more tax-smart SMAs than traditional approaches, whatever market conditions may be.

Traditional SMA Structure

Tax-Smart SMA Structure

Traditional vs. Tax-Smart

TRADITIONAL

Can be tax inefficient depending on market conditions from a capital gains perspective.

TAX-SMART

Active risk management can be more short term capital gains efficient through ETF holdings.

WHY ARE ETFS TAX Efficient?

Creation Process

A key feature of ETF tax efficiency is the process by which fund shares are created and redeemed. Rather than a fund creating shares and selling them directly to individual investors, as is typical for a mutual fund, ETF shares are created and redeemed in ongoing transactions between the ETF and institutional investors by specialized market makers. This process is separate from the secondary markets where shares of the ETF trade throughout the day on major exchanges.

The creation of ETF shares is generally handled as an “in kind” transaction that is facilitated by market makers between the investor and ETF sponsor. In a creation, an investor through their advisor delivers cash to an ETF market maker who then buys the underlying securities, or “basket,” of the ETF on the capital market exchanges. Then the market maker exchanges the basket for ETF shares with the ETF sponsor. Lastly, the market maker delivers the ETF shares to the investor.

In the event that a large investor wants to redeem shares in an ETF, the ETF market maker would reverse the creation process, i.e., the redemption would be done “in kind.” The market maker would take in the ETF shares from the investor and then trade the ETF shares back to the ETF sponsor for the underlying securities. The market maker would then sell the securities to cash and deliver proceeds to the investor.

Because ETF shares are being swapped for underlying securities — and not cash — the IRS does not consider this a taxable event. Moreover, not only are these redemptions not taxed, but they give the ETF sponsor an opportunity to dispose of the lowest-cost securities that would otherwise incur the largest capital gains if they ever had to be sold.

It is important to note the shares are priced at the time of redemption and may or may not be equal to the value of the amount invested.

Redemption Process

Each investor’s situation is unique so it is important to talk with a tax professional to decide which product may be right for you.

IMPORTANT INFORMATION

Past performance does not guarantee future results. This is not an offer to buy or sell any security. No security or strategy, including those referred to directly or indirectly, is suitable for all accounts or profitable all the time. Performance shown is composite performance which includes both Traditional and Tax-Smart Strategies. The Tax-Smart SMA program accounts are subject to investment risk, including the possible loss of principal. The ETFs in the Tax-Smart SMA program accounts may invest in other ETFs, mutual funds, and Exchange-Traded Notes (ETNs) which will subject the account to related additional expenses of each, and the risk of owning the underlying securities held by each. Investment risks may include but are not limited to: market, economic, political, interest rate, currency exchange, leverage, liquidity, credit quality, model, portfolio turnover, trading, REIT, high yield stocks, nondiversification, concentration, commodities, options, new fund, and client specific restrictions. WBI’s Passive ETFs are not actively managed and WBI does not attempt to take defensive positions in declining markets. You should not assume that any discussion or information provided here serves as a substitute for personalized investment advice from WBI or any other investment professional. If you have questions regarding the applicability of specific issues discussed to your individual situation, please consult with WBI or your chosen professional advisor. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. WBI’s advisory operations, services, and fees are in the Form ADV, available upon request. The allocation to ETFs can provide increased tax efficiency over traditional SMA approaches. We believe the structure of the Tax Smart Program provides several benefits in addition to the potential for increased tax efficiency. However, Clients should understand that tax-qualified accounts, such as IRAs, do not benefit from any additional tax efficiencies of the “Tax-Smart” structure. Please consult with a tax professional prior to making investment decisions.

WBI has an inherent conflict of interest in investing in or recommending Affiliated ETFs as follows: 1) WBI and affiliates receive management fees from Affiliated ETFs. To avoid receiving two layers of management fees in situations where clients invest in Affiliated ETFs through SMA and Platform accounts, WBI will either: (i) waive the management fee at the account level; or (ii) credit the management fees paid by the Affiliated ETFs to WBI and its affiliates with respect to an account’s investments in Affiliated ETFs against the account-level advisory fees the account owes WBI, and 2) WBI’s affiliated broker-dealer, Millington Securities, Inc., receives compensation (including payment for order flow, commissions or other fees) for transactions effected on behalf of Affiliated ETFs. Trades WBI places through Millington will be subject to WBI’s duty of best execution and applicable law.

You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format to any third party without the express written consent of WBI Investments, Inc.