Though Volatility is Lower, Direct Indexing Can Help When it Rises

Since the CBOE Volatility Index spiked to over 30% in October 2022, but it’s been trending lower since. Nonetheless, volatility is ever-present, which is where direct indexing can help.

Moreover, volatility can open up opportunities whether investors seek to build their portfolios for the long-term horizon or traders seek short-term gains. Furthermore, market fluctuations can allow for opportunities in tax loss harvesting as the second half of 2023 begins.

“Volatile markets provide an abundance of opportunities for tax-loss harvesting, since periods of loss in the stock market are often quickly followed by periods of rebounds,” a Vanguard Perspective blog post noted. “In addition, when markets are in high volatility mode, volatility is likely to persist in the near term, with the best and worst days tending to cluster around each other.”

The blog post made light, in particular, to data from the S&P 500 Index daily price returns from January 1, 2020, through December 31, 2022. Direct indexing technology, which allows investors the ability to build their portfolios to match an index with their own customization touches, can suss out tax-loss harvesting capabilities.

Automated Tax Loss Harvesting Feature

This capability is an inherent feature in the Vanguard Personalized Indexing platform. Per the Vanguard product website, it allows investors to “to build the tax-efficient, customized portfolios today’s investors expect—at scale and in real time.”

This can save investors time when they’re specifically looking for opportunities that can help lessen the tax burden for 2023. This is due to an automated feature built into the Vanguard platform. It allows for “daily tax-loss harvesting,” which “has boosted certain investors’ after-tax returns by 1%–2% or more.”

As mentioned, volatility can strike at any time. When it does, the Vanguard Personalized Indexing platform can work its magic as the market fluxes. With recessionary talk still swirling in the markets, stubborn inflation and rising interest rates, a confluence of events can still trigger volatility.

“For instance, Vanguard Personalized Indexing uses sophisticated tax-lot and wash-sale management to scan daily for tax-loss harvesting opportunities,” the Vanguard Perspective blog added further. “As a result, we can help you harvest losses more aggressively during a volatile period, helping generate additional after-tax alpha for your clients without expending extra effort.”

For more news, information, and analysis, visit the Direct Indexing Channel.