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U.S. Federal Taxes and SACEVS, SACEMS

April 9, 2021 • Posted in Strategic Allocation

A subscriber requested an assessment of U.S. federal capital gains tax impacts on the Simple Asset Class ETF Value Strategy (SACEVS), the Simple Asset Class ETF Momentum Strategy (SACEMS) and combinations of the two for investors with taxable accounts. Modeling such impacts is difficult due to complexity of the tax code and its highly idiosyncratic effects across individual taxpayers. To get a rough idea of federal tax impacts, we use annual (calendar year) data and make the following (close to worst case for SACEVS and SACEMS) simplifying assumptions:

  • Federal taxes (income and capital gain) are per 2020 brackets.
  • All SACEVS/SACEMS gains are short-term, treated as income at the marginal rate (some years not true for SACEVS, especially Best Value; generally true for SACEMS).
  • All taxes for SACEVS and SACEMS are at marginal rates, debited annually, with losses carried forward and offsetting future gains until exhausted.
  • Benchmarks are (1) buying and holding SPDR S&P 500 (SPY) and (2) a monthly rebalanced 60% SPY, 40% iShares 20+ Year Treasury Bond (TLT) portfolio. Benchmarks are essentially buy-and-hold, the latter because monthly deviations from target allocations are usually modest, with long-term capital gain tax debited only at the end of the sample period.

We focus on compound annual growth rate (CAGR) and maximum drawdown (MaxDD) as essential performance metrics. Using annual gross returns for SACEVS and the two benchmarks since 2003 and for SACEMS and SACEVS/SACEMS combinations since 2007, all through 2020, we find that:


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