Tomorrow is tax day in the United States. It may be hard to believe but paying taxes is a privilege, i.e. you have enough been lucky enough to generate enough income for the IRS to take notice. Then again, there aren’t many people who want to pay more than their fair share of taxes. In the past few years interest in tax loss harvesting, via custom or direct indexing, has gained a fair amount of attention and investment.*
In the past few weeks I have come across a number of items on direct indexing. Below you can find them organized by category.
Criticism
How wealth managers generate short term capital losses for clients while skirting wash sale rules – ProPublica
The rules on wash sales have not been updated in 100 years – ThinkAdvisor
The tax code is hackable, just like any other human-derived set of rules – Slate
ETFs vs. SMAs
A Tax-Loss Harvesting Horserace: Direct Indexing vs. ETFs (Israelov & Lu) – SSRN
You can tax-loss harvest using ETFs and lower your costs – Mark Hulbert
Why direct indexing is trumped by broad based index investing – Allan Roth
John Rekenthaler
Direct indexing is coming your way – 2022
Should you direct index? – 2022
Could direct indexing lower your taxes? – 2023
Direct indexing for the masses – 2023
When direct indexing truly pays – 2023
Research
The direct indexing landscape – Morningstar
Personalized indexing: a portfolio construction plan – Vanguard
Ten years of tax-loss harvesting – Wealthfront
Podcasts
What is direct indexing? – Peter Lazaroff
Custom indexing with Ehren Stanhope of OSAM – Excess Returns Podcast
There is more to custom indexing that just tax-loss harvesting. These tools can be used to express a values-based, i.e. ESG, approach to portfolio construction. They can help individuals with large, concentrated positions, whether they be in public or private stock, build a more risk-appropriate portfolio. So not unlike a Swiss army knife
By no means is custom indexing a one-size fits all or set-it-and-forget-it type approach. It requires a substantial work on the front end and ongoing adjustments and monitoring. Learning more about custom indexing is the very first step you need to take before moving forward. So is it for you? As with most questions in personal finance is – it depends.
*Ritholtz Wealth Management is actively involved in direct indexing for its clients through the Canvas platform. You read more about the topic in this Barry Ritholtz post.
