Tax-Loss Harvesting
Opportunities abound to reduce taxes, regardless of market conditions
One of the biggest reasons passive investors seek out direct indexing is its ability to unlock losses at the individual security level—something a mutual fund or ETF can’t do—and potentially reduce their tax bill. How valuable is this benefit? And are the savings worth the effort?
Losses: Every investor experiences them
But not every investor—or their advisor—uses them to their full advantage. Many don’t even think about selling securities trading at a loss until December, missing out on losses that occurred earlier in the year. In our Custom Core® and laddered fixed income accounts, Parametric monitors client portfolios on a daily basis, all year long, systematically harvesting losses in a way that optimizes their value to the investor.
Are you leaving money on the table?
Even in years when the major equity indexes are broadly up, many stocks fall—some by significant percentages at certain times during the year, especially during periods of market volatility. You can use the charts below to see the number of securities that traded at a loss during different periods in two major indexes.
How does tax-loss harvesting work?
Turn your losses into wins
Why systematic, year-round tax management is so important.
Make market volatility
work for you
Price drops can happen at any time. Harvesting losses systematically means never missing out on opportunities to offset current and future realized capital gains.
Ease out of
concentrated positions
Have a lot of appreciated company stock? Diversifying to reduce risk means realizing some capital gains. Systematic loss harvesting in a direct indexing portfolio can help offset those gains—and reduce tax liability.
Carry losses
forward
Even if you can’t use losses to offset realized gains in the current tax year, US tax law allows you to hold on to those losses indefinitely for use in future tax years.
Frequently asked questions
Third-party research has shown that tax management can add 1%–2% in after-tax excess returns for equity and 0.3% for fixed income.* This is known as tax alpha.
* Shomesh E. Chaudhuri, Terence C. Burnham, and Andrew W. Lo. 2020. “An Empirical Evaluation of Tax-Loss-Harvesting Alpha.” Financial Analysts Journal 76:3, 99–108, and Andrew Kalotay. 2016. “Tax-Efficient Trading of Municipal Bonds.” Financial Analysts Journal 72:1, 48–57. These studies 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.
More to explore
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Higher starting yields may result in more attractive return profiles for fixed income investments, and elevated income could also provide a cushion to limit downside risk amid continued rate volatility.
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