In a year that started with volatility, direct indexing had ample opportunity to take advantage of loss harvesting opportunities.
Two kinds of volatility in the first quarter
We saw two very different kinds of volatility: Sideways markets and high stock-specific volatility in the first two months of 2026 gave way to broad market volatility in March after the US launched an offensive on Iran on February 28. The S&P 500® Index fell 4.33% in Q1 2026, and March’s -4.98% return drove most of that decline.
Looking by sector, Information Technology, which makes up more than 30% of the index, dragged down returns with a -9.13% result. In contrast, the Energy sector, at only 4% of the index, jumped 38% as the Iran conflict triggered dramatic increases in oil prices. Defensive sectors like Utilities, Consumer Staples and Materials also rose for the quarter, while Financials and Consumer Discretionary posted negative returns.
The war in Iran drove March volatility, and the markets moved daily in tandem with President Trump’s statements. Meanwhile, short-term inflation concerns rose, and the US Federal Reserve kept interest rates steady at the March meeting.
Opportunities abound to reduce taxes, regardless of market conditions
Driving strong loss harvesting
The first quarter presented robust tax loss harvesting opportunities as the CBOE Volatility Index (VIX) climbed into the thirties in March. Notably, the S&P 500 Index traded in a tight range to start the year, yet individual stock volatility reached a record high at roughly seven times that of the broader index. Overall, 55% of index constituents declined for the quarter, with an average loss of -12.84%, and nearly 30% fell more than 10%, with an average loss of -19.39%.
For the quarter, Parametric’s systematic loss harvesting approach realized more than $3.9 billion in losses across nearly 360,000 trades and delivered a potential tax benefit1 of almost $1.5 billion to Custom Core investors. Nearly half of the quarter’s harvested losses—$1.9 billion—were delivered in March alone.2
The bottom line
Q1’s mixed volatility created broad, repeatable opportunities to harvest losses in direct indexing portfolios, even as headlines drove sharp market swings. Parametric’s systematic approach helped investors capture those losses at scale, translating market dispersion into meaningful potential tax benefits. As volatility persists, disciplined tax management may help investors stay invested while potentially improving after-tax outcomes over time.
1 The potential tax benefit is calculated by applying the maximum federal rates for short-term and long-term capital gains, which are currently 40.8% and 23.8%, respectively. Quantifying the tax benefit of harvested losses assumes the taxpayer has sufficient long-term and short-term capital gains to use the harvested losses against.
2 Source: Parametric, 3/31/2026. The information is provided for illustrative purposes only. Values are aggregated across all equity direct indexing strategies. Only client positions with unverified cost basis were excluded from calculations. Loss calculation is based on the amortized book price minus the sell price, represents historical information and should not be construed as future results. Loss information illustrates the effect to a portfolio and is not representative of, and should not be construed as, performance. There is no assurance that tax loss harvesting will continue in the future. There is no guarantee that any specific account may engage in tax loss harvesting.
Parametric and Morgan Stanley Investment Management do not provide legal, tax or accounting advice or services. Investors should consult with their own tax or legal advisors prior to entering into any transaction or strategy.
This is not a recommendation to invest in a Qualified Opportunity Fund. All investments are subject to risk, including the risk of loss. The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Parametric and its affiliates disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Parametric are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Parametric strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results. All investments are subject to the risk of loss. Prospective investors should consult with a tax or legal advisor before making any investment decision. Please refer to the Disclosure page on our website for important information about investments and risks.
04.13.2028 | RO 5389299
