Another strong year for US equities in 2025 reminds us that tax loss harvesting has the potential to contribute substantial value to direct indexing portfolios—even during bull markets.
Recapping the equity market last year
Although 2025 began with significant market fluctuations, the S&P 500® Index was up for eight consecutive months to close the year with a total return of 17.88%. Heightened volatility again in the fourth quarter led to frequent shifts between gains and losses, yet the S&P 500 ultimately posted positive returns in each month, with only slight increases of 0.25% in November and 0.06% in December.
Excitement about artificial intelligence, robust corporate earnings and US monetary policy to lower the federal funds rate fueled equity market strength throughout 2025. For the third consecutive year, information technology and communication services were the leading sectors, with mega-cap technology stocks at the forefront. In the fourth quarter, by contrast, those stocks struggled at times, while cyclicals, financials and defensive sectors quietly gained ground.
Also noteworthy was the significant strength of international equity markets during the year. Developed markets in the MSCI EAFE Index and emerging markets in the MSCI Emerging Markets Index substantially outperformed US markets, with both achieving returns above 30% in 2025.
Looking back at loss harvesting over the year
It may seem counterintuitive, but tax loss harvesting has the potential to add value to direct indexing portfolios, even in an up market like 2025. Through constantly monitoring portfolios with systematic rules-based loss harvesting, our portfolio managers found opportunities throughout the year for investors in tax-managed separately managed accounts (SMAs).
In the fourth quarter, Parametric’s systematic approach to loss harvesting realized over $2.1 billion in losses across over 275,000 trades, delivering a potential tax benefit1 of more than $780 million. And for the year, Parametric harvested over $8.8 billion in losses, with a potential tax benefit of more than $3.3 billion.2
Opportunities abound to reduce taxes, regardless of market conditions
The bottom line
Even when the equity market is rising, Parametric’s systematic approach to tax management seeks to deliver potential tax benefits by looking for opportunities to realize losses on a daily basis. Investors in SMAs hold the individual securities, unlocking tax loss harvesting potential beyond what’s available in mutual funds and ETFs.
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, 12/31/2025. 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 do not provide legal, tax, or accounting advice or services. Clients should consult with their own tax or legal advisor prior to entering into any transaction or strategy described herein.
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.
01.12.2028 | RO 5116155
