A debt ceiling deal was made in time to avert a global financial catastrophe — but we’re not out of the woods just yet. Despite the U.S. suspending the debt ceiling, industry observers and analysts still believe that a recession is on its way. Whether or not that happens, markets are continuing to be volatile. So, for ultra-high-net-worth investors, direct indexing may be a way to capitalize on market volatility.
Direct indexing is a separately managed account where the investor owns individual stocks that represent a chosen benchmark index. But unlike an index fund, investors directly own each stock in a direct indexing account. This offers extra tax-efficiency opportunities that aren’t available in a mutual fund or ETF.
With direct indexing, advisors can sell individual stocks at a loss in their clients’ portfolios to offset capital gains. This can be done even when the benchmark index is up.
Shining During Market Volatility
Direct indexing services like Vanguard Personalized Indexing can automatically scan portfolios for tax-loss harvesting and rebalancing opportunities. The automatic tax-loss harvesting feature of direct indexing technology really shines during volatile markets.
“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,” according to Vanguard. “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.”
VPI uses tax-lot and wash-sale management to scan daily for tax-loss harvesting opportunities. This can help investors harvest losses more aggressively during volatile periods. It also helps generate additional after-tax alpha for investors without expending extra effort.
Vanguard CEO Tim Buckley said at Exchange 2023 that the company will “be investing heavily” in direct indexing. More information on Vanguard Personalized Indexing can be found online.
For more news, information, and analysis, visit the Direct Indexing Channel.