Direct Indexing can offer tax efficiencies to investors looking for index investing strategies in their taxable accounts.
Tax-Managed Equity Indexing
Investors often focus on fees, but in many cases taxes have a greater impact on bottom line investment returns. Tax-managed separately managed account (SMA) strategies seek to track index performance before taxes, but outperform after taxes, using techniques not available with traditional mutual funds or ETFs.
The Strategy
The flexibility of the separate account structure allows the portfolio managers to use tax loss harvesting techniques to sell securities that have lost value and bank those losses. The accrued losses can then be used to offset gains in other parts of the client’s portfolio.
This explainer video elaborates on how the underlying strategy actually works. Basically, instead of investing in an index fund for broad diversification in the market, Direct Indexing is where you would directly own shares in several companies. This is because selling and trading smaller batches of shares may create opportunities to harvest losses from the newer positions to offset the taxable gains on the older shares.
Who is this right for?
- Investors who have exposure or want exposure to the S&P 500 index or major indices who want a tax-conscious approach to investing.
- Investors who have a concentrated stock position that they are looking to divest out of in a tax-conscious and scalable manner.
If you are a tax-sensitive investor, Direct Indexing strategies can help address key issues such as:
- Maximizing after-tax return
- Transitioning investment accounts
- Undwinding concentrated positions
- Estate planning
- Selling a business
Additionally, Direct Indexing accounts can be customized, using screens related to:
- Individual stocks, specific sectors, or industries
- Investment styles such as growth, value, or dividend tilt
- Environmental, Social, and Governance Criteria
- Racial Equity Investment Portfolios
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
