When Can Direct Indexing Make Sense for Your Portfolio?
Financial Decoder
Tax Loss Harvesting for Direct Indexing
Cabaret: For a lot of people, that can be off-putting. It kind of begs the question, why would I want to do that? If I could just go buy one ticker and have an ETF that gives me similar exposure. Cabaret: There's some really nice benefits to doing it, tax efficiency, chance to personalize. And with technology, we're making the experience of enrolling, investing, and monitoring it much easier.
The idea of making your portfolio your own typically involves adding and subtracting specific investments. The concept of "addition by subtraction" is a key component of an investment strategy that's been going mainstream lately. In this episode we look at one potential way you can subtract or add to your portfolio by using a method known as direct indexing. This strategy allows investors to own individual stocks that reflect the characteristics of the index they wish to track.
The main advantages of direct indexing are personalization and tax-loss harvesting. But there are some downsides as well: tax-loss harvesting is only valuable if you have gains to offset and there is the operational burden of owning individual securities compared to index mutual funds and ETFs.
To discuss the ins and outs of direct indexing, Mark Riepe is joined by DJ Tierney. DJ is a director and senior investment portfolio strategist for Schwab Asset Management. He has over 25 years of experience in institutional sales, trading, and capital markets, with an extensive background in and knowledge of ETFs and fixed income. He and Mark discuss separately managed accounts, the history of index investing, tax-loss harvesting, and many other topics.
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Important Disclosures
Investors should consider carefully information contained in the prospectus or, if available, the summary prospectus, including investment objectives, risks, charges, and expenses. Please read it carefully before investing.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.
Diversification and asset allocation strategies do not ensure a profit and do not protect against losses in declining markets.
Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. For more information on indexes please see www.schwab.com/indexdefinitions.
This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.
Investing involves risk, including loss of principal.
Neither the tax-loss harvesting strategy nor any discussion herein is intended as tax advice. Tax-loss harvesting involves certain risks including unintended tax implications. Investors should consult with their tax advisors and refer to Internal Revenue Service ("IRS") website at www.irs.gov about the consequences of tax-loss harvesting.
Strategies that use screening to exclude certain investments may not be able to take advantage of the same opportunities or market trends as strategies that do not use screens. There can be no assurance that the strategies will achieve their desired outcomes. Each investing strategy brings with it its own set of unique risks and benefits.
Schwab Asset Management™ is the dba name for Charles Schwab Investment Management, Inc. Schwab Asset Management and Schwab are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation.
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