Direct indexing is an investment approach that seeks to replicate the performance of a market index by purchasing the individual securities that comprise that index, rather than investing through a mutual fund or exchange-traded fund (ETF). This structure allows for greater customization and more precise portfolio management.
One potential benefit of direct indexing is enhanced tax management. By owning individual securities, investors may have more opportunities to implement tax-loss harvesting strategies, using realized losses to offset capital gains elsewhere in a taxable portfolio.
Direct indexing has gained increased attention in recent years as investors seek more personalized investment solutions. While mutual funds and ETFs offer broad diversification and operational simplicity, direct indexing provides a different approach by allowing investors to directly own and manage the underlying securities within a target index, potentially aligning portfolio construction more closely with individual objectives and preferences.
1Direct Indexing can be considered tax efficient because it allows investors to individually manage the components of their investment portfolios. This level of control allows the investor to implement tax-saving strategies such as tax loss harvesting potentially reducing their tax liability and optimizing after-tax returns.
2Tax alpha describes the potential value created by the effective tax management of investments, relative to an underlying index, such as the S&P500.
3A customized transition strategy is a tailored approach to transitioning an existing investment into a direct indexing structure in a way that minimizes disruptions, maximizes tax efficiency and aligns with the investor’s financial objectives. The strategy takes into account an investor’s current holdings, tax implications and desired asset allocation with the goal of efficiently migrating from traditional investments into a direct indexing strategy. Views and opinions expressed reflect the current opinions of the author and views are subject to change at any time without notice. Other industry analysts and investment personnel may have different views or opinions. There are no guarantees to the effectiveness of tax alpha in minimizing an investor’s overall tax liabilities or to the tax results of any given transaction and the performance of an account may be negatively affected by tax gain/ loss harvesting. This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. This summary is not intended to be tax or legal advice. This summary is being used to illustrate the characteristics of direct indexing. The taxpayer should consult an independent tax advisor. There are no guarantees to the effectiveness of direct indexing in minimizing an investor’s overall tax liabilities or to the tax results of any given transaction and the performance of an account may be negatively affected by tax gain/loss harvesting. All investments involve risks, including possible loss of principal. There can be no assurance that investment objectives will be achieved or that an investment strategy will be successful. Diversification does not ensure a profit or protect against loss. This material is not a recommendation as defined in Regulation Best Interest adopted by the Securities and Exchange Commission. It is provided to you after you have received Form CRS, Regulation Best Interest disclosure and other materials.
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