Wealth Management

One of the major benefits of direct indexing is that tax losses can be harvested during up and down years. This option is not available to clients who are invested in indices. This is because clients will own the actual components of an index in their account rather than an ETF or a mutual fund. With regular scans, losing positions can be sold to harvest tax losses which can then be used to offset gains in the future or other parts of the portfolio.


This is because some components of the index will be in the red even in up years. These positions are sold and then other stocks with similar factor scores are added to ensure the benchmark continues to be tracked. 


According to Vanguard, “Because investors directly own the individual securities in their direct indexing portfolios, you can harvest losses for them even in years when the index is up. You can use these losses to offset your clients’ capital gains, and help them keep more of what their portfolios earn.” Overall, it believes that the strategy can add between 1% and 2% in annual returns in after-tax alpha for clients with large capital gains in addition to helping optimize short and long-term holding periods to minimize capital gains taxes. 

Finsum: Direct indexing has several benefits for investors such as tax-loss harvesting. While many are familiar with its application during down years, less are aware that it can be used to add alpha even in up years. 


Over the last couple of years, there has been an increase in the number of actively managed funds that offer exposure to more niche areas such as collateralized loan obligations, asset-backed securities, commercial mortgage-backed securities, and agency mortgage-backed securities. The latest entrant in this space is the Janus Henderson Securitized Income ETF (JHG). 


The ETF seeks to generate high income by providing exposure to “the most attractive opportunities on a risk-adjusted basis” across the market for securitized debt. The firm believes that investors can meet their income and duration goals in this sector with lower levels of credit risk. Many of these assets have less sensitivity to interest rates unlike many parts of the fixed income market. According to Paul Olmstead, the senior manager research analyst for fixed income at Morningstar Research Services, “This is a part of the market that does require active management and specialized expertise as there’s a complexity component.” 


These funds have also outperformed amid the increase in volatility over the last couple of years. Three years ago, Janus Henderson launched the Janus Henderson AAA CLO ETF (JAAA) which currently has $4.6 billion in assets. In a validation of its premise, the fund delivered a total return of 6.9% YTD and 0.5% in 2022. To compare with a benchmark, the iShares Core US Aggregate Bond ETF (AGG) has a total return of -0.8% YTD and was down 13% in 2022. 

Finsum: Many active fixed income funds are being launched with a specialized focus on a particular niche. These funds have outperformed amid the volatility in the fixed income market. 


Equities and bonds moved higher following the October CPI report that came in much softer than expected. As a result, traders increased their bets that the Fed hiking cycle is over, while Fed fund futures showed an increase in the number of rate cuts expected in 2024. Further, odds of a hike at the December meeting went from 21% to 0%, and the market’s consensus for the Fed’s next move is now a 50-basis point cut in July of next year. 


In terms of fixed income, the 2Y Treasury note fell by 20 basis points, while yields on the long end saw similar declines. The data is also supportive that the Fed can successfully achieve a ‘soft landing’ as the economy continues to expand, while it’s managed to make significant progress in terms of battling inflationary pressures. Many market participants didn’t think it would be possible for the Fed to successfully curb inflation without throwing the economy into a recession.


Some of the key takeaways from the report were core CPI hitting a 2-year low, while headline inflation was flat on a monthly basis and up 3.2% on annual basis. Some of the biggest contributors were weakness in energy prices, shelter costs moderating, and small declines in airfare prices and vehicle costs. 

Finsum: Fixed income and equities soared higher following the October CPI report which came in much softer than expected. 


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