- I think about when we're building portfolios, similar to how if you're building say a professional football team, right? You're not going to just go recruit all the best quarterbacks across the country. You're going to need to fill other roles. And I think it should be the same when it comes to tax strategies within a portfolio, being conscious of the specific role they're looking to play.
- Welcome to Inside the Advisor Practice, a BlackRock podcast for US financial advisors. When it comes to investing, what clients earn isn't always what they keep, yet despite growing demand for tax guidance, after tax returns are often overlooked in portfolio decisions. I'm Rich Kozlowski, head of distribution for BlackRock's US wealth advisory business. And today I'm sitting down with Brad Zucker, US head of iShares Product Consulting to explore how advisors can uncover potential tax opportunities, incorporate tax considerations into portfolio construction, and help clients keep more of what they earn. Brad, let's get into it then. Are advisors and investors thinking enough about after tax returns?
- I think we've made a lot of progress as an industry, but there's still a lot of room to run. Think about it, you look at our fund fact sheets, how most people quote the long-term returns from the stock market.
- Sure.
- Almost always pre-tax numbers, right? I think about all the commercials I'm seeing today for high yield savings accounts and their advertising rates. That's not what taxable investors get to keep. It's actually usually a lot lower than that. If we look at the average advisor portfolio today, the tax cost is about three times the amount of the average portfolio fee. That means less money can stay invested to compound for any future growth, right? So I think there's still room to work there, and this is actually a great opportunity for advisors. Taxes are one area where they may have more control relative to other aspects of the investment side of things.
- Sure.
- Can't control where the S&P is going to go next year, can't control where interest rates will be, but you can choose which investment vehicles you use or how to utilize strategies like asset location to hopefully help to improve the tax efficiency of a portfolio.
- Maybe double down on the actual investment vehicles. So what should some of the after tax considerations that you should be thinking about as you're evaluating products?
- Looking at the sources of income, obviously, advisors do a great job with that, thinking about utilizing muni bonds and taxable accounts, things like ETFs as a structure that might be more tax efficient relative to a similar mutual fund. So those are some of the vehicles that could help inside of a portfolio.
- On the ETF side of things, so one of the fastest growing vehicles in our investment universe has been active ETFs. So index ETFs historically have been extremely tax efficient. You mentioned a little bit about active mutual funds maybe not as tax efficient. Talk to us a little bit of how you think active ETFs would fit inside of that.
- Yeah, so I've been working with ETFs for about 18 years. Hopefully you think that's impossible because I look younger than that to be true, right? But for all that time, I've talked about tax efficiency using the two S's, strategy and then structure. And the strategy side of things, we were talking about index strategies. Many of the first ETFs, some of the largest still today track indexes like the S&P 500. There's very little trading inside of them and less trading means less opportunity obviously for a capital gain to be realized that would have to be distributed to investors. But over time, as innovation across the industry brought more and more strategies there, we realized just how important the structure side of it really was. Today, you look across the entire fund landscape. Over the last five years, 80% of active mutual funds have paid a capital gain compared to just 18% of active ETFs. But going back again to the strategy side of things, 65% of index mutual funds still pay a capital gain compared to just 3% of index ETFs. So of course the strategy still matters, but really that ETF structure has been the one providing that relative tax efficiency.
- But in general, if you were to think about an index ETF, an active ETF, and an active mutual fund, how would you think about the tax considerations of the three?
- The index ETF, if we're talking about, again, the core, the building blocks of a portfolio, your S&P 500, your MSCI ACWI, those are going to be probably the most tax efficient in relative terms because they're trading less inside of them. We have index ETFs today that turn over the portfolio 100% per year. I think about some factor strategies, MTM, we call our momentum ETF. Those are still incredibly tax efficient, but they're more active in the approach in terms of how much the portfolio changes over time.
- So we're talking a lot about cap gains distributions. The leaves have turned here in New York City. So as we get to year end, that tends to be when investors and advisors think about it. So should we only be thinking about after tax returns or tax considerations at year end or how do you think about that?
- Yeah, so two things that I think about at year end, looking into a portfolio, capital gains distributions, but also tax loss harvesting. And so focusing on the capital gains distributions, this time of year tends to be when most fund providers put out their estimates. So end of October, early November, you're going to start to see when most are expecting if they're going to distribute or not. Now, there's time between when the announcement is made and when investors in those funds would actually be locked in to receive them. And we've seen that over time actually be a catalyst for. Historically, the fourth quarter has been when we've seen the strongest mutual fund outflows and simultaneously the strongest ETF inflows. Maybe the mutual fund that I've been holding has been underperforming. Maybe it no longer meets the risk profile I'm trying to achieve for my client. And they've historically moved into ETFs, not just because they've been more tax efficient, but because there's so many more strategies now and some of the more innovative approaches to invest have been coming to market through that vehicle instead.
- Yeah, you could still get active manage it in an ETF structure, which hopefully will be a little more tax efficient for sure. So you talked about managing cap gains distributions is one way to focus on after tax returns, but there's also tax loss harvesting opportunities, especially in a year like this with what's going on in fixed income.
- Yeah. And you asked if this should be a year-end exercise or all year round. I think with many things in life, you can get away with procrastination by pulling an all nighter.
- No, I'm exceptional at that.
- I know that all too well personally myself, but when it comes to things like taxes, the market won't wait for you until December. And so there could be opportunities where you could have tax loss harvested earlier in the year, but the market moved against you already. So if you're only evaluating one time, you could miss out. And so while the market has been strong and that's kind of eliminated some of the opportunities on the equity side in most markets, you're right that fixed income is still an area where advisors should beconsidering. Interest rates have moved largely up over the last four years. That's put a lot of bond funds into an area where you would be able to potentially sell it for a loss. And that doesn't mean that they've lost money for investors. Based on where the yields are, we actually see a lot of bond funds that are flat or slightly positive from a total return standpoint. So the important thing is to look at what has the price done? And that's definitely an area that we're seeing tax loss harvesting happen, especially in the munis. We've seen a lot of flow in the last couple weeks in particular into high yield muni bond funds because of not just the opportunity to tax loss harvest, but as a way to get a good source of income into a portfolio that can allow investors to keep more of it after tax.
- Yeah, it's a big point that you're making, and especially on the fixed income side because people might be looking at the total return of their fixed income product, which takes into account income. They should be considering how the NAV had performed.
- That's right.
- Yeah. Fantastic. And I don't want to lose the thread that you were talking about cap gains being a year long. There's been a proliferation of active mutual funds that are now paying cap gains a portion of their cap gains at mid-year, even quarterly.
- Yeah. I mean, that could limit the size that you see at year end. So we have seen some of that. There will be some strategies where you might expect to see more frequent capital gains distributions like liquid alternatives is when I would think about that, which I think is also important not to lose sight of what the role is when you're building a whole portfolio. Some of those strategies are still absolutely great to help an investor achieve their ultimate goals. Taxes are just one part of it. I think this is a really important thing to continue to monitor year round. And the proliferation of the active ETFs has been really interesting as well. One historical trend we saw when I talked about how you would see flows out of mutual funds and into ETFs at the fourth quarter, many times some investors who really liked active strategies and believed in a type of way of investing, they would view that transition to an ETF as temporary, almost like rented assets into an index strategy to maintain exposure. Well, with the growth of active ETFs, we've actually seen those flows find more permanent homes, so to speak, within the ETF wrapper because now you're seeing similar strategies come out in that vehicle as well. One fund in particular where we've been seeing that, I think it's just an interesting example. At BlackRock, we have an actively managed ETF, BLCR, it had 94% turnover. Despite all that trading inside of the ETF, it did not make a capital gains distribution. So I think again, investors are continuing to see this and find that if I am looking to add more alpha potential into my portfolio, I don't need to limit the good strategies I find just into my qualified accounts. The ETF wrapper now allows me to use more of them in taxable accounts because at least for US equities, they're expected to be more tax efficient than a similar strategy on the mutual fund side.
- The point you're making on cap gains distributions, and we talked about this where you've got mid-year cap gains, a significant number. In the 30 years that I've been in the business, I've seen it be one of the most difficult things for an advisor to track. In your mind, are there tools out there or ways that you would think about how you can actually keep track of cap gains that are taking place or funds that might be trading at a loss that you're not aware of?
- Yeah, absolutely. And it's not only one of the more difficult things to track, tends to be one of the more difficult things to explain. I think back to 2022, not too long ago, that was a market where most things went down in the portfolio, yet we saw historic capital gains distributions and a lot of advisors had to speak to clients about how is it that I'm losing money yet I'm paying taxes on gains? And so not only tracking it, but understanding when to potentially expect it. At BlackRock, we tried to make this easier for advisors. We built what we call our tax evaluator tool. So instead of spending potentially hours each fourth quarter or throughout the year monitoring when fund companies are putting out their estimates, we make that all available in one place, just upload a portfolio of tickers and it's going to be doing that homework for advisors to show when a gain is expected to be paid. It also will highlight things like potential for tax loss harvesting by looking at the price return of funds.
- Yeah. And so that's an incredible time saver. It's an incredible, allows you to more efficiently run your practice. We spent a lot of time talking about active mutual funds, the cap gains distributions around that, ETFs. Can you talk a little bit more about the expanded set of products that help you manage for after tax return?
- Yeah, absolutely. ETFs are just one part of it. And also I think often we might think of individual types of products in isolation, but I think about when we're building portfolios, similar to how if you're building say a professional football team, you're not going to just go recruit all the best quarterbacks across the country, you're going to need to fill other roles. And I think it should be the same when it comes to tax strategies within a portfolio, being conscious of the specific role they're looking to play. And so I think about how ETFs are often used for the building blocks of a portfolio, long-term strategic asset allocations or to make tactical trades. For many clients, that's a great way to build an efficient start. And like we were talking about, they've been historically more tax efficient than other types of funds, but that doesn't necessarily solve for all clients. I think about the client that has a bunch of businesses that they run, and so maybe the gains that they're generating are coming from outside of their investment portfolio, maybe they're selling businesses. Now, ETFs don't necessarily help with things like tax loss harvesting to an extent that you're going to be able to offset some of that. So direct indexing, SMAs, those are going to allow more control over areas like that, not just to customize the portfolio, but to be able to tax loss harvest to help plan for some of those things that come from outside of the investments.
- Yeah, and we do see a significant amount of growth in the industry along, long, short. You mentioned SMA, option overlay strategies. How do you think about utilizing that in the construct of an entire portfolio as opposed to one-off trades?
- Yeah, I think it all goes back to the advisor really understanding the goal for each of their clients. And with all these tools together, honestly, in many ways, I think there's never been a better time to be an advisor because you have access to all these vehicles, not just for your clients of the highest net worth. At the same time, there's more complexities that have arisen over time thanks to things like a rising bull market, potential changes in regulations. So clients, our advisor teams that understand these nuances and the tools that are available to them are really distinguishing themselves from their peers. And so some of the ways I think about it are going back to those use cases, understanding for this particular client, I might need to use a direct index to be able to harvest more losses. Thinking about, well, this other client might become more concentrated in their wealth if they're not already today because maybe they've been working for a company and a lot of their pay is coming from options or from a company that may soon go public. Planning for that, thinking about how options overlay strategies might allow them to manage that risk in a more tax aware way, you start to realize there really is no one size fits all, and being able to look out and see all the tools in the toolkit and apply them for the specific use cases are really what we're seeing the best advisor teams do today.
- It's incredibly important. So we covered a lot of ground, Brad. If you had to say, if you're going to take an after-tax mindset as an advisor, what are the three things that you should be thinking about tomorrow morning?
- So three things that I would focus on right now. First is what's timely? So thinking about managing for capital gains distributions and spotting tax loss harvesting opportunities where they exist. Second, I would just keep in mind all of the strategies that are now available today. It's not just your IVVs of the world core index ETFs. Now active ETFs can help with managing the capital gain side as well. And of course, across muni SMAs, option overlays, there are so many more strategies advisors have. And finally, you're not on this journey alone. There are resources at BlackRock, not just the tax evaluator that we mentioned earlier, but subject matter experts across direct indexing with Aperio, options overlays with SpiderRock Advisors, Muni SMAs, and of course iShares with our ETF platform. BlackRock has the people that could help you learn more about these strategies across the entire portfolio.
- Brad, thanks for your insight.
- Thanks for having me.
- No problem, man. We're officially podcasters, my friend.
- My son might think I'm cool.
- Yeah, I was going to say, this officially gives me street cred. I can get my teenage daughter to actually reply to a text maybe.
- For more discussions about the challenges and opportunities across portfolios, wealth management, and client relationships, subscribe wherever you get your podcasts. This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener. Many of the products and strategies discussed here have complex tax consequences. BlackRock doesn't provide tax advice, and it's always important to discuss with an individual tax advisor. Visit blackrock.com or iShares.com for a prospectus or summary prospectus, which includes investment objectives, risks, fees, charges, expenses, and other information that should be read and considered carefully before investing. Investing involves risk, including possible loss of principle. For full disclosures, visit https://www.blackrock.com/us/financial-professionals/compliance/...
Sources:
- Source: BlackRock. Analysis includes the 22,042 advisor models collected by BlackRock in the 12 months ending 12/31/24. Models can include both ETFs and/or mutual funds across assets classes and share classes. The portfolios analyzed represent a subset of advisor models in the industry that have been shared with BlackRock. As such, there may be certain biases present in the data that reflect the advisors who choose to work with BlackRock to analyze their portfolios. Morningstar: “return lost to taxes” refers to the weighted average 1 year tax cost on the portfolios as calculated by Morningstar
- Source: Morningstar as of 12/31/2025. Includes funds categorized as “U.S. Equity” under Morningstar’s U.S. Category Group. % of funds that paid a gain = 5-year annual average % of funds that paid a gain from 2021-2025. Includes funds available as of 10/31 in each year from 2021-2025.
- Source: Morningstar. Turnover percentage for BLCR as of 12/31/2025.
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