Displaying items by tag: tax efficiency

Separately managed accounts (SMAs) are quietly transforming asset management, offering a personalized alternative to mutual funds and ETFs. With 30% growth over the past two years, SMAs are projected to reach $3.6 trillion by 2027, driven by tax advantages and lower investment minimums. 

Unlike mutual funds, SMA investors hold individual securities, allowing for tailored portfolios based on specific preferences. Customizations, such as tax optimization and covered call strategies, can enhance returns for certain investors.

While fees may be higher, SMAs offer flexibility and control, especially for high-net-worth individuals. As technology evolves, the accessibility and customization options of SMAs are expanding rapidly.

Finsum: We have seen how the technology has really lowered the fees of these more customizable asset classes and we expect this trend to continue. 

As the end of the year approaches, investors should focus on capital gains management and explore tax-smart strategies in nonqualified accounts. Active trading can significantly impact capital gains liability and improve after-tax performance. 

Moving investments into exchange-traded funds (ETFs) may offer a tax-efficient solution, with active ETFs presenting a strong option during tax loss harvesting. ETFs have been more tax-efficient than mutual funds due to their unique structure, minimizing capital gains distributions. 

Additionally, actively managed ETFs typically have lower operational costs than mutual funds, providing a more cost-effective investment option. This makes them appealing to investors looking for both performance and tax efficiency as they assess their portfolios.

Finsum: It will be critical with some potential rallies coming on for investors to maximize their tax efficiency and take advantage of the volatility in sectors of the market. 

With persistently high interest rates, investors are increasingly turning to fixed-income separately managed accounts (SMAs) for their potential tax advantages and personalized portfolio options. SMAs give investors direct ownership of underlying securities, offering greater control over capital gains, tax-loss harvesting, and tax-efficient investment selection. 

Fixed-income SMAs can minimize tax liabilities through strategies like low portfolio turnover, selective tax-loss harvesting, and investment choices based on location-specific tax exemptions. 

While tailoring portfolios for various client types, portfolio managers must balance customization with operational efficiency to meet expectations and maintain consistent performance. The key is to achieve tax efficiency without compromising on investment goals or client-specific outcomes.

Finsum: Investors should think of the tax advantages as additional returns their accounts can optimize for their portfolio.

Determining when to opt for direct indexing over ETFs depends on specific client situations, as outlined in Dr. Stephanie Lo's recent research for NDVR. She suggests that direct indexing may offer advantages only under certain conditions, particularly when considering after-tax returns over the long term. 

The key factors involve embedded capital gains in an existing ETF portfolio; transitioning to direct indexing may trigger immediate tax liabilities that could outweigh the benefits of tax-loss harvesting. However, for new investors starting from cash, direct indexing might be more advantageous, assuming the fees are competitive and the investment horizon is long enough. 

The decision also hinges on the investor's tax profile, inheritance plans, and desire for portfolio customization or specific exposures, such as building around a concentrated position. Advisors should assess each client's goals, costs, and preferences to determine if direct indexing aligns better with their investment strategy than traditional ETFs.

Finsum: As with all strategies you need determine if the tax alpha is really the advantage promised but in some cases the returns can be great. 

Direct indexing is increasingly popular as investors seek personalized options and lower costs. This method, which involves owning a representative sample of securities in an index, offers benefits like reduced costs, individual tax lot ownership, and increased tax efficiencies.

However, to fully realize these benefits, direct indexing should be implemented within a single multi-manager account (UMA) rather than standalone accounts. This approach allows for effective tax loss harvesting, consistent exposure to the reference index, and avoids disallowed losses due to wash sales. 

Managing a portfolio within a UMA also simplifies administration and enhances rebalancing and asset allocation efficiency. When switching firms, advisors can use UMAs to minimize capital gains taxes for clients by absorbing satellite holdings into the core direct index.

Finsum: We know the benefits of tax-alpha but these account types could give investors an additional edge.