Beating the Index with ETFs

61 Pages Posted: 10 Oct 2023 Last revised: 16 Feb 2024

See all articles by Wentao Li

Wentao Li

Saïd Business School, University of Oxford

Date Written: February 15, 2024


This paper uncovers a new source of tax efficiency for ETFs---using highly correlated ETFs to harvest capital losses without violating the wash-sale rule. By exploiting the tax loophole, investors can potentially earn a better return than the index. The study reveals that highly correlated ETFs have an average monthly tax-loss trading volume of 9.1% of their assets under management, which accounts for 20.7% of their total trading volume. Tax-loss harvesting is negatively related to past returns, especially for recent and negative ones. ETFs with high past volatility have higher tax-loss trading volumes, while smaller and less liquid ones have lower tax-loss trading volumes. This paper develops a parsimonious model to explain the relationship between tax-loss harvesting and past price movements. Simulations with the model predict an annual tax revenue loss of 0.52% of assets under management for highly correlated ETFs, equivalent to approximately 25 billion USD in 2021.

Keywords: ETF, Tax-Loss Harvesting, Trading Volume

JEL Classification: G11, G12, G18

Suggested Citation

Li, Wentao, Beating the Index with ETFs (February 15, 2024). Available at SSRN:

Wentao Li (Contact Author)

Saïd Business School, University of Oxford ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

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