Year to date, passive investors who built most of their portfolios around major index benchmarks such as the S&P 500 are likely sitting on sizable, unrealized gains. Stock pickers may have had a very different experience. Not every company in the S&P 500 has been a winner, and several names have posted significant drawdowns.
For example, well-known apparel retailers have been hit hard due to shifting tariff threats, while weakening consumer demand, particularly among Gen Z, has pressured parts of the fast-casual restaurant industry.
For investors in this situation, the end of the year presents an opportunity to do more with unrealized losses than just averaging down. Selling a position below its cost basis converts an unrealized loss into a realized one, creating an opening for a strategy known as tax-loss harvesting.
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In a taxable brokerage account, realized capital losses can be used to offset realized capital gains. Short-term losses offset short-term gains, and long-term losses offset long-term gains. If total capital losses exceed total capital gains, investors can apply up to $3,000 of those losses against ordinary income and carry any remaining balance forward indefinitely.
One challenge is that some investors hesitate to sell a losing stock out of fear of missing a rebound. As a result, less experienced investors might consider selling to lock in the loss and immediately repurchasing the same stock. This is not permitted under the wash sale rule.
Specifically, the IRS blocks investors from claiming a capital loss if they buy the same or a “substantially identical” security within the 30-day window before or after the sale.
“If you buy the same security or a ‘substantially identical’ one before the 31st day, you will violate the wash sale rule, and your cost basis would remain at the original purchase price,” says Mark Andraos, partner and wealth advisor at Regency Wealth Management.
The definition of “substantially identical” is not always clear. The IRS has never provided a strict, all-encompassing rule, and interpretations can vary depending on the facts of each situation. It is often safest to err on the side of caution and seek professional guidance when uncertainty arises.
“To be as straightforward as possible, securities are often considered ‘substantially identical’ when they are obviously similar in nature based on the opinion of the IRS,” explains Zac Murphy, financial planning associate and investment analyst at Ullmann Wealth Partners.
This is where exchange traded funds (ETFs) can help. While each situation requires case-by-case judgment, investors can use more specialized ETFs with similar characteristics to the stock they sold. This allows them to maintain comparable exposure while respecting wash sale restrictions.
“ETFs may be more effective when harvesting tax benefits,” explains Brian Jacobs, managing partner at Jacobs Strategic Consulting. “Unlike individual stocks that can only be sold to harvest a tax loss once in a 31 day period, different ETFs providing similar exposure can be swapped multiple times in the same 31 day period, providing more opportunities to harvest tax losses.”
Here are five of the best ETFs for tax-loss harvesting a losing stock:
| ETF | Expense ratio |
| iShares U.S. Transportation ETF (ticker: IYT) | 0.38% |
| State Street SPDR S&P Retail ETF (XRT) | 0.35% |
| Invesco Food & Beverage ETF (PBJ) | 0.61% |
| VanEck Biotech ETF (BBH) | 0.35% |
| Hoya Capital Housing ETF (HOMZ) | 0.30% |
iShares U.S. Transportation ETF (IYT)
Transportation stocks have been pressured in 2025, in part due to uncertainty surrounding President Donald Trump’s tariff policies. Large integrated carriers such as United Parcel Service Inc. (UPS) have been hit especially hard, with UPS shares down about 15% year to date.
Several fundamental headwinds have also weighed on the company. Package demand has cooled from the pandemic-era surge and freight volumes have softened, especially from Amazon.com Inc. (AMZN), one of UPS’s largest customers. Moreover, UPS’s stretched dividend payout ratio raises questions about the sustainability of its 6.5% yield.
FedEx Corp. (FDX), the closest peer and competitor to UPS, is a possible tax-loss harvesting substitute, but it still faces many of the same idiosyncratic risks associated with integrated freight companies, such as exposure to fuel costs, shipping volume trends and global trade flows.
A more diversified alternative is IYT. This ETF tracks 44 companies in the S&P Transportation Select Industry FMC Capped Index. The portfolio spans three major subsectors: airlines, railroads and trucking.
“ETFs are often sector- or industry-specific, and can serve as a close proxy for holding the stock you’re selling for a loss,” says Tim Steffen, director of advanced planning and managing director at Baird Private Wealth Management.
UPS remains the third-largest holding at 7.6%, so investors maintain partial exposure, but the investment thesis broadens from a single-company rebound to a wider transportation sector recovery.
“Even if the ETF you purchase does hold those same companies, it won’t be a violation of the wash sale rules since, for tax purposes, you’re not deemed to hold the individual positions in the ETF,” Steffen explains. “Once the 31-day window ends, you’re free to sell the ETF and then repurchase the individual companies if you like, although any gain on the ETF during that period will be taxable to you.”
IYT pays a 1.1% 30-day SEC yield. The ETF charges a 0.38% expense ratio and carries a three-year equity beta of 1.4, reflecting its cyclical nature and higher sensitivity relative to the broad market.
State Street SPDR S&P Retail ETF (XRT)
Lululemon Athletica Inc. (LULU) is among the worst-performing S&P 500 companies year to date, with a 51% decline as of Dec. 11 (though the stock jumped on the morning of Dec. 12 on news that its CEO was stepping down). Management cut full-year guidance as U.S. sales slowed, tariffs pressured margins and same-store sales growth fell short of analyst expectations.
Footwear retailer Deckers Outdoor Corp. (DECK) has shown a similar pattern, falling 50% after lowering guidance also due to softer consumer demand and tariff-related cost pressure.
There is no dedicated apparel ETF that would serve as a straightforward tax-loss harvesting partner for LULU or DECK. While investors could simply swap one stock for the other, that approach keeps them exposed to the same narrow set of company-specific issues.
A broader and more robust alternative is XRT. The ETF holds 76 equally weighted stocks represented by the S&P Retail Select Industry Index. It includes apparel names, but expands exposure to automotive retailers, department stores, discount retailers and electronics retailers.
The equal-weight structure reduces reliance on any single large-cap retailer and increases mid-cap and small-cap representation. Because weights reset during periodic rebalancing, the ETF naturally incorporates a buy-low, sell-high discipline.
“It’s generally good practice to go directly to the fund manager’s website, since this will contain the most accurate information relevant for evaluating wash sale implications,” explains Daniel Shomper, senior associate wealth manager at Fairway Wealth Management. “If there’s concern that the holdings are similar enough to trigger a wash sale, it’s worth diving a bit deeper into the fund details”
XRT is relatively affordable at a 0.35% expense ratio and is highly liquid, with a 0.01% 30-day median bid-ask spread. The fund currently pays a 0.8% 30-day SEC yield.
Invesco Food & Beverage ETF (PBJ)
Consumer staples is usually one of the lowest-beta and most defensive among the 11 stock market sectors, but performance within the group can vary significantly. That has been the case throughout 2025, particularly for packaged food companies.
Year to date, Conagra Brands Inc. (CAG) is down 32%, Campbell’s Co. (CPB) is down 29%, General Mills Inc. (GIS) is down 24%, Hormel Foods Corp. (HRL) is down 21% and Kraft Heinz Co. (KHC) is down 16%. Several headwinds have pressured the group.
In addition to a recent lawsuit filed by the city of San Francisco alleging that multiple packaged food manufacturers violated California laws related to unfair competition and public nuisance, the industry is dealing with tariff exposure tied to ingredients and packaging materials sourced abroad.
There is also ongoing uncertainty around Supplemental Nutrition Assistance Program (SNAP) funding during periods of government shutdown, which affects demand for many lower-priced packaged goods.
While a broad consumer staples ETF is a possible tax-loss harvesting replacement, those funds also include household products, bulk retailers, and tobacco and beverage companies, which do not align directly with a packaged-foods recovery thesis.
For more targeted exposure, PBJ is a better fit. The fund tracks the Dynamic Food & Beverage Intellidex, a “smart beta” index that evaluates and weights 30 companies based on factors such as price momentum, earnings momentum, balance sheet quality and value rather than market capitalization.
“When tax-loss harvesting, you can find a suitable option by focusing on ETFs with different investment methodologies,” Murphy says. However, the more sophisticated index methodology for PBJ results in a higher 0.61% expense ratio.
VanEck Biotech ETF (BBH)
One of the most notable pandemic-era winners to fall out of favor has been Moderna Inc. (MRNA), which is down 29% year to date. The stock soared during the COVID-19 pandemic as Moderna played a central role in developing and delivering one of the first successful mRNA-based vaccines.
That surge in demand has now faded. Revenues tied to its COVID-19 franchise have declined as multiple competing mRNA vaccines entered the market. Moderna has been investing heavily in its broader drug pipeline to offset the slowdown, while also announcing layoffs to cut costs.
Sentiment weakened further after the FDA introduced a more restrictive vaccine approval process in early December, which adds additional uncertainty around future product timelines.
Some investors may be tempted to swap Moderna for another biotech stock, but stock selection in this industry is uniquely difficult. Drug development relies on unpredictable catalysts, long testing cycles and specialized scientific knowledge. Evaluating a company’s clinical pipeline often requires deep familiarity with trial design and regulatory requirements.
A more diversified approach is to maintain exposure to the biotechnology industry as a whole. Investors who sell Moderna to harvest a tax loss can redeploy the proceeds into a biotech ETF such as BBH.
“The proliferation of ETFs over the last few years has made tax loss harvesting easier than ever for investors, given the ability to find a comparable one that tracks similar exposure,” Andraos says.
The fund tracks the MVIS US Listed Biotech 25 Index, a market cap-weighted benchmark of the largest U.S.-listed biotechnology companies. This structure adds stability compared with picking individual clinical-stage names. Moderna remains a holding in the ETF at a 1.8% weight.
BBH charges a 0.35% expense ratio and pays a minimal 0.4% 30-day SEC yield, which also makes it relatively tax efficient in terms of dividend drag.
Hoya Capital Housing ETF (HOMZ)
Among the S&P 500’s year-to-date laggards are several large residential real estate investment trusts (REITs). These are specialized real estate entities that own single-family and multifamily rental properties.
For example, AvalonBay Communities Inc. (AVB) is down 18% year to date, Equity Residential (EQR) has fallen 12% and Mid-America Apartment Communities Inc. (MAA) is close behind, having lost 10%.
The residential REIT sector receives far less attention than higher-profile industries, but recent performance has been shaped by an oversupply cycle. According to Nareit, new supply has pressured rent growth, and new-lease growth rates have been weak.
Residential REITs rely on tenants moving frequently because shorter lease terms give landlords more frequent opportunities to reprice units. When tenant turnover slows and new leases are signed below expectations, revenue growth becomes harder to achieve.
One advantage of owning residential REITs through the public markets rather than through direct property ownership is liquidity. REITs can be bought and sold instantly in a brokerage account, which makes tax loss harvesting straightforward. By contrast, investors who hold rental properties with negative equity have far fewer options.
For diversified exposure to the housing ecosystem, investors can consider HOMZ. The ETF tracks 100 companies in the Hoya Capital Housing 100 Index, which includes the major residential REITs as well as homebuilders and home improvement retailers.
This broad mix allows investors to shift from a single-REIT recovery thesis to a more comprehensive view of the U.S. housing market. HOMZ delivers a 2.5% 30-day SEC yield with monthly distributions and charges a 0.3% expense ratio.
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5 Best ETFs for Tax-Loss Harvesting originally appeared on usnews.com
