Wednesday, 24 May 2023 03:10

How Automation Can Enhance Direct Indexing

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One reason for the growing popularity of direct indexing is tax-loss harvesting. However, many investors fail to capture the full benefits, because they are manually reviewing their portfolio for these types of opportunities.

In an article for Vettafi’s Direct Indexing Channel, James Comtois shares why automation is essential to unlocking the full benefits of direct indexing. With direct indexing unlike investing in indexes, losing positions can be sold to reduce an investors’ tax liabilities. Then, these proceeds can be reinvested in similar assets. 

However, the more frequently these opportunities can be uncovered, then the greater the potential alpha. Therefore, investors should look to automate this process in order to capture the most benefits. Unfortunately, many advisors continue to do this process on an annual or quarterly basis which means they are missing many opportunities. 

With the right software, these scans can be conducted on a daily or weekly basis, leading to more consistency and better outcomes in terms of tax savings. Automation can also help advisors find the best rebalancing opportunities. Overall, more frequent scans can lead to between 20 and 100 basis points of additional returns. 

Finsum: Direct indexing is rapidly growing, but many advisors fail to capture its full benefits, because they are not automating the process of finding tax-loss harvesting opportunities.


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