The longer equity portfolios experience growth over time the fewer the opportunities there are to realize the losses and take advantage. Actually quant fund AQR called these appreciated portfolio’s a ‘liability’ for tax purposes. One interesting thing they find is that tax preferred passive equity and direct indexing can develop unrealized gains rapidly. It takes only 3 years for direct indexing to have unrealized gains hit 50% of the portfolio value and 5 years for a tax preferred passive strategy. AQR offers an alternative approach, ‘enhanced indexing’ which is a tax-loss strategy they developed that can help investors. If a direct-indexing strategy already has large unrealized gains it is hard to catch up, but the enhanced indexing strategy can still generate losses for tax purposes. Enhanced indexing is the preferred option when a portfolio is already heavily appreciated.

Finsum: Direct indexing and enhanced indexing are both novel strategies in maintaining an ETF like strategy while taking advantage of tax-loss harvesting.