If there’s one thing ultra-high-net-worth investors don’t like, it’s taxes. (Well, to be fair, nobody likes taxes. But UHNW investors really don’t like them.) For those investors, direct indexing may be just what they’re looking for.
Direct indexing accounts are separately managed accounts that attempt to replicate an index. But unlike a mutual fund or an ETF, direct indexing accounts can include or exclude securities. They also provide tax-loss harvesting opportunities.
Tax-loss harvesting is when underperforming securities are sold at a loss to offset gains made elsewhere in the portfolio. The proceeds from that sale can then be used to invest in similar investments. This can dramatically reduce a client’s tax bill.
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A direct indexing service like Vanguard Personalized Indexing can automatically scan portfolios for tax-loss harvesting opportunities at a set frequency. And that frequency can be monthly, quarterly, or even daily.
The frequency at which the portfolio is scanned matters. The more frequent the scans, the higher and more consistent the tax-loss harvesting alpha. The differences in tax-loss harvesting alpha can be huge. In fact, Vanguard found that the difference can range from 20 basis points to more than 100.
Direct indexing has often been seen as a service reserved only for the UHNW investor. However, Vanguard CEO Tim Buckley said at Exchange 2023 that the company was working to change that. More information about VPI can be found online.
For more news, information, and analysis, visit the Direct Indexing Channel.