Displaying items by tag: tax loss harvesting

Until recently, direct indexing has typically been applied for equities. Its benefits in terms of creating after-tax alpha and increased customization are well-known. However, advisors should also be aware that direct indexing can also be leveraged for fixed income portfolios, and it can be especially impactful for clients nearing retirement. 

Direct indexing with equities means that investors own the actual constituents of an index rather than a fund. This leads to opportunities for tax-loss harvesting and personalization. Similarly, direct indexing with fixed income means that investors own the actual bonds held by a fund which also allows for tax-loss harvesting and increased personalization.

These portfolios can be optimized based on desired characteristics of credit quality, duration, and maturity. Essentially, this creates a custom, bond ladder portfolio with various fixed income securities.

Research also shows that tax-loss harvesting has more potential benefits in a fixed income portfolio. This is because there are proceeds from maturing bonds and coupons that can be used for reinvestment or lowering a cost basis. Further, the bond ladder can also be optimized based on an investors’ tax rate and/or location, to maximize accretive, after-tax returns. 

Finsum: By now, most are familiar with direct indexing for equities. Now, we are starting to see it applied to fixed income portfolios where the benefits are possibly greater. 

Direct indexing combines the best elements of running a traditional portfolio with passively investing in indexes. This means that investors can reap the benefits of passive investing such as low costs, diversification, and proven long-term outperformance. Yet, they can still take advantage of tax loss harvesting which isn’t possible through investing in ETFs or mutual funds. 

This is because direct indexing leverages technology to recreate an index within an individual account. This technology will also regularly scan the portfolio for tax loss harvesting opportunities. Losing positions are sold and then replaced with positions that have similar factor scores to ensure that the index continues to be tracked. Over a whole year, this will lower an investors’ tax liability.

According to research, direct indexing will lead to an additional average annual return of 1.1%. Further, various direct indexing providers can optimize a portfolio according to an investors’ specific tax situation by offering various scenarios and the subsequent impact on capital gains. From an advisors’ perspective, many clients are interested in reducing taxes and aligning their investments with personal values. Direct indexing can help with both goals which means it can be quite potent in terms of recruiting and retaining clients. 

Finsum: Direct indexing can increase an investors’ average annual return by reducing tax liabilities. This is in addition to the typical benefits of passive investing such as diversification and low costs. 

Financial markets have been quite strong over the last few months on the prospects of an economy that continues to defy skeptics and evade a recession, falling inflation, and a dovish Fed. But there are some signs that the market’s ascent is being interrupted by a bout of volatility due to some high-profile earnings misses, a more hawkish than expected FOMC, and flagging momentum in the labor market. Given the uncertainty around the Fed, an upcoming election, and the importance of economic data in the coming months, this volatility is likely to persist.

This volatility is uncomfortable for investors. However, for direct indexing investors, there is a silver lining as volatility leads to opportunities to harvest tax losses. Direct indexing entails reconstructing an index within an account by owning the actual holdings rather than a fund. 

This approach combines the benefits of passive investing - low costs, diversification, and proven performance - with the ability to harvest tax losses that is possible with individual stocks but not by investing in an ETF or mutual fund. Direct indexing platforms will automatically scan portfolios on a regular basis for tax loss harvesting opportunities. These positions are then replaced with positions with similar factor scores to ensure that the index continues to be tracked.

Finsum: There are some signs that the market rally is ending and that the markets could be entering a period of volatility. One advantage of direct indexing is that it is able to harvest tax losses during this period. 

As the year comes to a close, it presents an opportune moment for financial advisors to revisit strategies and offer valuable advice to clients. A timely topic is tax loss harvesting. And direct indexing is becoming a popular way for investors to accomplish this. Therefore, now is a great time to consider introducing the concept of direct indexing to your clients.

The Value of Tax Loss Harvesting

Tax loss harvesting is a technique that can reduce taxable income by selling securities that have incurred a loss. As we approach year-end, this tax-saving tactic may be appropriate for some of your clients, yet you need a convenient way to make these trades without upsetting their entire portfolio. Direct indexing allows you to accomplish this task.

Direct Indexing: No Longer Just for the Elite

Direct indexing, which involves buying individual stocks directly rather than through a fund, enhances the ability to tax loss harvest. While it's not a new concept, it's becoming more accessible to a broader range of investors. As author Medora Lee pointed out in her recent article in USA Today, "(direct indexing) was once mostly reserved for the affluent with at least $1 million to invest." But things are changing. "With better technology and zero- or low-commission trading now the norm, more people can use direct indexing."

Embracing the potential of direct indexing and tax loss harvesting is another way to demonstrate your value to your clients.

As the year comes to a close, it presents an opportune moment for financial advisors to revisit strategies and offer valuable advice to clients. A timely topic is tax loss harvesting. And direct indexing is becoming a popular way for investors to accomplish this. Therefore, now is a great time to consider introducing the concept of direct indexing to your clients.

The Value of Tax Loss Harvesting

Tax loss harvesting is a technique that can reduce taxable income by selling securities that have incurred a loss. As we approach year-end, this tax-saving tactic may be appropriate for some of your clients, yet you need a convenient way to make these trades without upsetting their entire portfolio. Direct indexing allows you to accomplish this task.

Direct Indexing: No Longer Just for the Elite

Direct indexing, which involves buying individual stocks directly rather than through a fund, enhances the ability to tax loss harvest. While it's not a new concept, it's becoming more accessible to a broader range of investors. As author Medora Lee pointed out in her recent article in USA Today, "(direct indexing) was once mostly reserved for the affluent with at least $1 million to invest." But things are changing. "With better technology and zero- or low-commission trading now the norm, more people can use direct indexing."

Embracing the potential of direct indexing and tax loss harvesting is another way to demonstrate your value to your clients.