Resources/Weekly Insights

Volume 14, Edition 33 | October 27 - November 2, 2025

Realizing a Potential Tax Risk

Doug Walters, CFA

Many mutual funds are signaling sizable capital gains—some near or above 10%—after the market’s run. For those with tight realized‑gains budgets, that’s a notable signal: hard caps can block needed rebalancing and quietly raise portfolio risk.

Contributed by Doug Walters, David Lemire, Max Berkovich, Matthew Johnson

For some, their tax strategy is simply: pay as little as possible. On the face it sounds sensible, but we’d advocate for a more nuanced approach. Our philosophy is to focus on improving returns after taxes. Why? Focusing only on reducing taxes can also reduce returns. If you are having déjà vu, it is because we just wrote about this in September. But something happens towards the end of the year that has us broaching the topic again.

The annual gain dump

Around this time of year, mutual funds begin publishing their estimates for their year-end capital gains distributions. After a strong market run, many mutual funds are preparing to distribute sizable capital gains. These distributions often catch investors by surprise—especially in taxable accounts—because they’re mandatory and outside your control. If you own mutual funds, expect to see estimates in the mid‑single digits, and in some cases, 10% of net asset value.

ETFs are different

Some of our clients will have mutual funds for historical reasons, but our current strategies build taxable portfolios primarily with tax‑efficient ETFs. Their structure uses in‑kind creation and redemption (you don’t need to know what this means) which helps avoid the annual “gain dump” that mutual funds face. ETFs aren’t perfect, but they’ve historically been far more tax‑friendly.

But that is not really why we are broaching the topic of taxes again today…

A gut check on gains budgets

We bring up the 10% mutual fund distributions to provide a sanity check to annual “gain budgets” that some investors use to manage their tax bills. In some cases, those gains budgets are designed to carefully manage income so as not to trigger Medicare premium surcharges or other benefit cliffs. That could make sense. The problem, though, is that if you are limiting gains, to say, 2% per year, your portfolio will likely become unbalanced over time. We can see from mutual fund distributions that a portfolio that is properly rebalancing should expect gains well above 2%.

What are some potential consequences of limiting the realization of capital gains? You will likely end up with:

Concentrated positions in risky assets like equities
Your target allocation will shift to be more risky

The bottom line is that taxes matter, but they’re one input—not the driver of every decision. Our goal is to help you keep more of what you earn after taxes while maintaining a portfolio that fits your long‑term plan. We recently laid that out in a tax philosophy document that you can access below.

For more on our tax philosophy, click below

Link: Tax Philosophy Brochure

Headline of the Week

Disharmonic Choir

In a widely anticipated move, the Federal Reserve cut its benchmark interest rate by 25 basis points last Wednesday, lowering the federal funds target range to 3.75%–4.00%. This marks the second consecutive cut aimed at supporting a cooling labor market and navigating economic uncertainty amid a prolonged government shutdown.

Powell emphasized the growing divergence within the FOMC and stressed that there is “a growing chorus” among the Governors urging a wait-and-see approach ahead of the Fed’s next policy meeting in December. Though there was one dissenter at this month’s meeting who advocated for a more aggressive 50 basis point cut, the broader committee could be inclined to pause and assess the impact of recent easing. Markets responded by dialing back expectations for further cuts this year, as Powell made clear that another move in December is “not a foregone conclusion — far from it.”

The Week Ahead

Another week without government data leaves the markets digging deep into private data. However, the Institute of Supply Management’s Purchasing Managers Index (PMI) is an important one. Even earnings reports are a little lackluster after the previous week.

On display

Monday’s Palantir earnings results carry the most interest as the artificial intelligence play has soared 170% so far this year.

Amgen, Pfizer, McDonalds, Mckesson and Qualcomm will release results during the week, but lack the investor interest that Palantir has.

Smaller pieces

The economic picture will be a little harder to piece together without the standard releases from the U.S. Government, but some information is better than none.

The PMI readings should give some sampling of information on both the Services and Manufacturing sectors.
The ADP Payroll report and Challenger Job Cuts report should provide some sense of the labor market.
The Retail Sales report should leave a few clues about the consumer and spending.

Money and banking

After other major central banks announced results the previous week, the Bank of England (BOE) has the floor.

The BOE is very unlikely to move rates, but markets anticipate a 90% chance that a cut by April is in the cards.
That probability will shift based on what Governor Bailey has to say.

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