Tax-Loss Harvesting a Key Benefit to Direct Indexing | ETF Trends

Tax-loss harvesting involves selling an investment at a loss, then reinvesting the proceeds of that sale into another asset. It’s one of the primary benefits that direct indexing boasts.

Investors can’t sell individual failing stocks for tax-loss harvesting purposes within a mutual fund or ETF. They can, however, 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.

At Exchange 2023, Ben Hammer, head of client development for Vanguard Personalized Indexing, outlined some benefits of direct indexing. For one thing, the investor owns the individual stocks in a direct indexing account. So, the investor can tax-loss harvest any of the stocks if they go down “to offset gains somewhere else in your portfolio,” Hammer said.

Financial advisors typically wait until the end of the year to scan for such opportunities. They often do this for two reasons. One, it avoids violating the wash-sale rule. And two, most advisors can’t manually review their clients’ portfolios every day, or even every month, for opportunities.

See more: “How Tech Is Pushing Demand for Direct Indexing

However, 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 is important. A direct indexing service like Vanguard Personalized Indexing can automatically scan portfolios for tax-loss harvesting and rebalancing opportunities year-round.

So, with direct indexing, high-net-worth investors with significant capital gains can set the frequency at which their accounts scan for harvesting opportunities. That frequency can be monthly, quarterly, or even daily. In general, the more frequent the scans, the better. According to Vanguard, the differences in tax-loss harvesting opportunities alpha can range from 20 to more than 100 basis points.

Vanguard CEO Tim Buckley said at Exchange that direct indexing is something the company will “be investing heavily” in.

More information about Vanguard Personalized Indexing can be found online.

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