Direct indexing is growing, and it’s important to know the benefits of different tax-management variables on portfolios. We discuss three vital factors that impact after-tax efficiency: index construction, turnover, and volatility.
How do we measure tax management outcomes?
What determines tax management outcomes?
Figure 1: Distribution of holdings by weight
Source: Refinitiv, 2/28/2023. For illustrative purposes only. Not a recommendation to buy or sell any security. It is not possible to invest directly in an index.
The bottom line
The outcomes of tax management can differ for portfolios that track different indexes, and investors will get different value out of each. So it’s important to understand the circumstances that determine after-tax outcomes. Armed with these rules of thumb, investors can develop realistic after-tax expectations for their chosen benchmarks.
1 For more information, see Shomesh E. Chaudhuri, Terence C. Burnham, and Andrew W. Lo, “An Empirical Evaluation of Tax-Loss-Harvesting Alpha.” Financial Analysts Journal 76:3 (2020): 99–108. This study did not involve Parametric or its clients. There is no guarantee that a tax-management strategy will result in increased after-tax returns. Results will differ based on an individual investor’s circumstances.
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