Investors are increasingly turning to direct indexing services like Vanguard Personalized Indexing for their tax-loss harvesting capabilities.
Tax-loss harvesting involves selling investments at a loss to use the losses to offset gains in other investments. The investor uses the money from the sale to buy an investment that fills a similar role in the portfolio. It’s a process that can potentially help investors earn better returns and lower their tax bill.
Unlike a mutual fund or ETF, the investor owns the individual stocks in a direct indexing account. So, in a direct or personalized indexing account, securities that drop below their cost basis are sold. The proceeds of that sale are then used to immediately buy correlated (but not substantially identical) replacement stocks.
This process lets investors capture the chosen index’s gains while harvesting losses that can offset capital gains during tax time.
And the frequency at which the portfolios are scanned matters. Direct indexing with daily TLH abilities is critical to achieving the maximum harvest in low-volatility environments. According to Vanguard, the “differences in TLH alpha can be wide, ranging from 20 basis points to well over 100 bps.” VPI’s software can scan portfolios for TLH opportunities at a set frequency, such as quarterly, monthly, or even daily.
At Exchange 2023, Vanguard CEO Tim Buckley said direct indexing was once an option only “reserved for the ultra, ultra-high-net-worth” investor. But he noted that its use cases could be expanding to a broader investor base. Buckley added that Vanguard will “be investing heavily” in direct indexing.
More information about VPI can be found online.
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