There are a few ways to diversify an overly concentrated portfolio. Equity derivative structures is one method. Another is through exchange traded funds. Equity collars is another option. But the most tax-efficient way for advisors to customize their clients’ portfolios is through direct indexing.
A direct indexing portfolio is a separately managed account where the investor owns individual stocks that represent a selected index. But unlike a mutual fund or an ETF, the investor directly owns each stock in their direct indexing portfolio. This gives them extra opportunities for tax efficiency that may not be available through ETFs or mutual funds.
Per Vanguard can gradually accumulate enough tax losses to offset the capital gains acquired through selling other securities. Advisors can sell off securities, then fund the direct indexing portfolio with the proceeds from the sale. That way, the investor could experience no overall tax cost as they diversify the concentrated position.
Direct indexing software can regularly harvest tax losses from the portfolio. The software scans the portfolio for tax-loss harvesting opportunities daily.
Direct indexing strategies like Vanguard Personalized Indexing let advisors customize portfolios to fit their client’s existing holdings and tax needs. VPI can help diversify concentrated positions in a tax-effective way.
Vanguard Personalized Indexing can help minimize tax costs through its tax-loss harvesting feature. Vanguard CEO Tim Buckley said at Exchange 2023 that the company will “be investing heavily” in direct indexing. More information about VPI can be found online.
For more news, information, and analysis, visit the Direct Indexing Channel.