Highlights

  • Direct indexing is an excellent tool for improving after-tax returns, but in cases where tracking error is minimized, any potential tax benefits are constrained.
  • Systematic tax loss harvesting can contribute significantly to investors’ after-tax wealth without compromising pre-tax performance. Tax alpha is often highest during the early years after inception, stabilizes as portfolios mature, and persists over an extended period of time.
  • Higher active risk provides more opportunities to harvest losses. The value-add is usually greatest in years with large drawdowns and at the earliest stage of portfolios, when higher active risk is permitted.
  • Tax-managed portfolios tend to tilt positively to momentum and growth factors, and negatively to size, value, and dividend yield factors. The magnitude of active factor exposure is modest, however, and often not of real concern.

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