Tax-loss harvesting involves selling an investment at a loss, then reinvesting the proceeds of that sale into another asset. But since it’s often not feasible for financial advisors to manually review their clients’ portfolios every day – or even every month – for such opportunities, they often wait until the end of the year to go over such opportunities with their clients.
Plus, advisors also tend to wait until Q4 to scan for opportunities to avoid violating the wash-sale rule, which states that if an investment is sold at a loss, then repurchased within 30 days, the initial loss can’t be claimed for tax purposes.
And yet, these harvesting opportunities don’t just spring up at the end of the year. So, the frequency at which a portfolio is scanned for tax-loss harvesting opportunities matters. Fortunately, that’s where direct indexing technology can help.
Direct indexing, also known as personalized indexing, is an individual account that’s managed to track an index, like a separately managed account. While investors can’t sell individual failing stocks for tax-loss harvesting purposes within a mutual fund or ETF, they can sell securities at a loss to offset capital gains through direct indexing. And unlike a traditional SMA, direct indexing offers scalable, automatic tax-loss harvesting.
See more: “Investors Turn to Direct Indexing for Taxes and Personalization”
Direct indexing software scans the portfolio for harvesting opportunities at a set frequency (daily, quarterly, or monthly). Generally, the more frequent the scans, the higher and more consistent it is.
According to Vanguard, the differences in tax-loss harvesting opportunities alpha can range from 20 to more than 100 basis points. When considering a direct indexing strategy for its tax-loss harvesting abilities, those with daily harvesting scans “is critical to achieving the maximum harvest in ‘typical’ (non-high) volatility environments,” Vanguard added.
For high-net-worth clients with significant capital gains, Vanguard Personalized Indexing can automatically scan portfolios throughout the year for tax-loss harvesting and rebalancing opportunities. It can also help capitalize on volatile markets without violating the wash-sale rule. More information about Vanguard Personalized Indexing can be found online.
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