Halls of Shrewd'm / US Policy
No. of Recommendations: 3
No. of Recommendations: 0
“Most fees for U.S. large-cap indexes start in the ballpark of 0.20% to 0.40% and fall as account balances increase. At Schwab, for example, fees fall from 0.40% to 0.35% once an account has more than $2 million. Fees can also be higher for international or more niche indexes.”
No experience with direct indexing, but am surprised at the high fees.
Tax loss harvesting soon becomes ineffective. I haven’t done any for years. 2020 was the last time, and that was simply swapping out an index ETF for Berkshire.
No. of Recommendations: 3
Here comes the rain on the parade. ;-) Sorry.
I have learned that the first thing to consider is "how can this go wrong?" When somebody is trying to sell you something, they never tell you of the problems or downsides.
" There’s no better sign of optimism for future growth than a rush of asset managers to add direct indexing to their toolkits."
No, this is just the normal behavior of asset managers swarming to do whatever people seem to be wanting. Not unlike streetwalkers. They'll happily do what you want, whether it makes sense or not.
Whatever is the latest fad, there will be plenty of companies in the industry who will provide it.
"But Telling Them Apart Can Be Difficult"
Like I said above.
"direct-index offerings to retail investors with minimum investments as low as $5,000 ... $100,000 ... $250,000"
Get real. Any account less than tens of millions is going to get a cookie-cutter portfolio, with the option of potentially naming stocks or industries to omit or overweight.
Heck off the top of my head here's a way to do it. Fred wants S&P500 but no tobacco companies. Sam wants S&P500 and double allocation to tobacco stocks for the high dividend yield. So the advisor buys S&P500 and allocates those stocks away from Fred and to Sam. Just an entry in a spreadsheet.
Look at the fees. $250,000 at 0.35% is $875 a year. What kind of personalized treatment are you going to get for $875? For comparison, that's about 1 1/2 hours of a cheap lawyer's fee.
Tax Loss Harvesting
I think Tax Loss Harvesting is largely just paper trickery to flummox people, using cherry-picked numbers. A good portfolio has very few holdings at a large loss. And for small losses, pfft, who cares? Not enough to make a difference. And now you've restarted the holding period clock and reset it to short-term.
A portfolio with stocks that have been held for several years will have almost everything being a gain.
No. of Recommendations: 4
Get real. Any account less than tens of millions is going to get a cookie-cutter portfolio, ...
Yes, the fees are low and offset partially by not having to pay a fee that the index fund will charge. Very partially, given how low the fees are on index funds. We are looking at Vanguard, which assesses a 0.2% fee, which while higher than an ETF, not by much. This is computerized, not so much run by a person, so the low fees are not surprising. You may of course pay an advisor 1-2% of your assets to have the computer run the system for you, but Vanguard will do it for you as well for much less. No doubt their desire to provide this service has less to do with the 0.2% annual fee, and more about keeping large clients. From the research I have done, it's not a new opportunity nor one without competition, and they likely saw enough outflows to realize they needed to provide this service, as does Fidelity, Schwaab, and many smaller independents.
And for small losses, pfft, who cares? Not enough to make a difference.
From what I have read, it should give you 1-2% after tax return over the index you chose. Small losses, harvested daily, while remaining fully invested have been shown to add up, just as low interest compounded daily does. Given the uncertainty in the market, I lean towards an approach that lets me benefit from the volatility.
Over roughly 5-10 years, if an account is static and receives no new money, your ability to tax loss harvest will decline. This has happened to our portfolio in positions that were taken pre-ETF availability, that we wish to unwind, as they repeatedly throw off significant taxable capital gains and dividends without notice. We want control back over our taxable events. That, along with future SS and RMDs will be a source of continuing contributions to retain TLH benefits, and at worst our kids will inherit the stock with a step up in basis on our death. This is not a strategy for everyone, but if you have the right financial conditions, it looks to have potential over a simple ETF.
It was noted on the macroeconomics board that single stock dispersion within an index is high, even while the index itself does well. This seems to me to be a great condition for daily TLH within an index. If at some point we feel the fee is not worth it, we can simply move the stocks we own, along with their cost basis to our brokerage account, which while more complicated than I wish to deal with, will allow for income by sale of stock at LT CG taxes, or charitable gifting, either of which would be better than what we have now. It seems to me that the big downside risk is a messy and complicated brokerage statement.
We have not yet talked directly to Vanguard about it, but with our situation are very interested in doing so. Since this is not a new strategy, I was wondering if anyone had actual experience they could share. For me one of the weaknesses is the ability to track actual returns of the strategy itself, given unlike an ETF, each person's account will be different based on their exclusions and timing of purchases and sales.
IP
No. of Recommendations: 5
re: Tax Loss Harvesting
From what I have read, it should give you 1-2% after tax return over the index you chose. Small losses, harvested daily, while remaining fully invested have been shown to add up, just as low interest compounded daily does. Given the uncertainty in the market, I lean towards an approach that lets me benefit from the volatility.
I first heard of Tax Loss Harvesting a long time ago and thought it interesting, especially given the claims about the benefits. An extra 1%-2% would be nice. Then read other takes saying it was just smoke & mirrors.
It seemed kind of silly. If you like the index then you just have to put up with the volatility. If you don't like the index, why would you invest in it?
Upon reading your comment I thought "This calls for spreadsheet man!!!!" So I think I'll whack together a spreadsheet to run a TLH simulation and see what pops out.
No. of Recommendations: 1
Direct indexing works, IF YOU ARE PAYING LOW ENOUGH FEES to do it.
Even 0.09% of assets (9 basis points) may be too much. But eventually you run out of losers to match with the winners and will start to pay taxes on the dividend income.
https://www.wealthfront.com/sp500-directintercst
No. of Recommendations: 2
Direct indexing works, IF YOU ARE PAYING LOW ENOUGH FEES to do it.
Even 0.09% of assets (9 basis points) may be too much. But eventually you run out of losers to match with the winners and will start to pay taxes on the dividend income.
I looked all over and couldn't find anything about the weightings. They sort of imply that it is cap weighted of the S&P500 stocks that you didn't exclude.
I wonder, couldn't you do essentially the same thing by buying VOO and shorting the stocks that you don't want?
Maybe you don't like tobacco companies. Philip Morris (#38, weight 0.42%) and Altria (#104, weight 0.18%).
On a $10,000 account that's $42 of PM and $18 of MO.
That's silly. They are insignificantly small in the S&P 500. You are just making a feel-good empty statement.
The bit about tax loss harvesting is just deluding the marks.
The fractional shares thing is just funny.
#250 is DHI at weight 0.07%. That amounts to 0.097209 shares.
I could see maybe taking the top 50 stocks (62% of the S&P500) or top 100 (74%) and excluding the rest. That's a lot of work, excluding all 450 or 400 stocks.
The bottom 300-400 stocks might as well not even be there.
No. of Recommendations: 0
https://www.wealthfront.com/sp500-directThanks for pointing out other providers. I meant to do that in my post, but frankly know nothing about Wealthfront and wanted to keep our accounts at least somewhat contained. This is a strategy that seems to take a lot of effort to unwind, so looking to use a company I feel some level of confidence in. That said, .09% vs 0.4% is worth looking at.
IP
No. of Recommendations: 1
I looked all over and couldn't find anything about the weightings. They sort of imply that it is cap weighted of the S&P500 stocks that you didn't exclude.
I wonder, couldn't you do essentially the same thing by buying VOO and shorting the stocks that you don't want?
I am not looking to run this myself, and personally stay away from shorting.
Maybe you don't like tobacco companies. Philip Morris (#38, weight 0.42%) and Altria (#104, weight 0.18%).
On a $10,000 account that's $42 of PM and $18 of MO.
That's silly. They are insignificantly small in the S&P 500. You are just making a feel-good empty statement.
I would not complicate our finances for $10K. No possible dollar amount of return premium on $10K would be worth buying large numbers of individual stocks and dealing with huge monthly statements with the trading volume.
For some people it matters. For example, our environmentalist son would like to exclude petroleum products. Or, we were always very hesitant to buy the industry we worked in because our paycheck was dependent on this very cyclical industry and we didn't want the risk of our assets declining while our paycheck was lost. That was compounded when we both worked in the same industry, for a company that is no longer around. In addition, we had a ton of stock options in one particular stock, and tried to avoid buying more. Just sold the last batch of options, so no longer an issue for us, but would have been at an earlier time of our investing life.
I could see maybe taking the top 50 stocks (62% of the S&P500) or top 100 (74%) and excluding the rest. That's a lot of work, excluding all 450 or 400 stocks.
The bottom 300-400 stocks might as well not even be there.
You seem to be looking for a DIY Mechanical Investing screen. I am looking to have it done for me. There are limits to the number of industries and number of individual stocks you can avoid. This approach gives you some choice, not total choice. If you have to make too many changes to be pleased, then you need a different index to target or a different approach altogether.
I also like that while they are trying to target the return+ of the benchmark, they are not trying to exactly replicate the holdings. IF there is a turnover in the holdings of the benchmark, unlike the ETF they are not required to buy the now spiraling up in cost new entry and sell the plunging shares of the company exiting the index. This is a partially managed fund, at least at Schwab/Fidelity.
Definitely not for everyone.
IP
No. of Recommendations: 3
This fund strikes me as a "baffle them with bulls..t" story.
Come up with a complicated strategy, toss in some cherry-picked half-believable story about avoiding or mitigating losses, great story about a new and exciting way to reduce your taxes. And see how many fish you can reel in.
It is well-known that people think a complex strategy is superior to a simple, transparent, easy to understand strategy. Sounds to me what they are doing here, making a complex, hard to understand the detailed workings of, difficult to unwind, investment.
With a sprinkling of sweet-sounding fluff (tax-loss-harvesting).
Prediction: Financially it is going be like almost all of these fund offerings. Lower performance than a broad market index, with higher costs.
You do you. I would just buy VOO or VTI and call it a day.
they are trying to target the return+ of the benchmarkHave you ever heard of a fund that is trying to do WORSE than the benchmark?
unlike the ETF they are not required to buy the now spiraling up in cost new entry and sell the plunging shares of the company exiting the indexThis is funny, in that a recent study has said that when the S&P500 drops one stock and adds another, the dropped stock does better and the new stock underperforms. !! There is a screen proposed that would buy the dropped stock and sell (short) the new stock.
Weird.
I hope that it was you saying "spiraling up" and "plunging" and not them. Although, what's the problem with selling a stock that is going down and buying a stock that is going up?
In actuality over a long term, tax-loss-harvesting is just a nit. For a one-time buy-and-hold (of a good stock) you will fairly quickly have gotten it at the lowest price it will ever be at in the future. So no more losses to harvest.
Yes, that can well be different for holdings that you DCA by buying a little bit each month. Those might well see a loss in the near future. But so what? A couple hundred bucks of loss in a $20,000 holdings is negligible.
Also the "similar" stocks are generally not similar. For example, Home Depot and Lowes are *not* similar investments. Have you seen their chart?
https://testfol.io/?s=lNAON7n4RQfThe worst part about "almost similar" stocks would be that you get stuck in the worst of the pair when the tax losses stop. Like if you switched to LOW on 2/27/2009.
Maybe you could argue that the SPY/VOO pair would work. But I understand that the IRS considers them "essentially identical" and would not allow it.
No. of Recommendations: 0
I have to say that your original post got me to seriously thinking about tax loss harvesting.
Enough so that after some 30+ years of investing that I got around to making a spreadsheet to do a backtest on it.
That was fun. And gave me something interesting to do for a few days other than watching youtube videos.
So, thanks for bringing it up.
No. of Recommendations: 1
What is direct indexing?
Personalized portfolios that can help boost after-tax returns for clients
"Unlike bundled products such as mutual funds or ETFs, personalized indexing allows investors to harvest losses at the security level. Here’s how it works: Stocks that drop below their cost basis are sold, and correlated (but not "substantially identical") replacement stocks are immediately repurchased to navigate the wash-sale rule...
[chart of Average 10-year TLH alpha by harvest frequency for High-net-worth investor: 0.34% annually, 1.03% quarterly]
One problem that can arise with systematically harvesting tax losses is that, eventually, you will have sold all the losing stocks in the portfolio. Because of the potential capital gains that would result from selling those low-cost-basis stocks, switching to another investing strategy could be costly. For this reason, tax-loss harvesting in a personalized index is more effective when there is regular cash flow (to purchase new securities)"
https://advisors.vanguard.com/investments/personal...
No. of Recommendations: 2
...unlike the ETF they are not required to buy the now spiraling up in cost new entry and sell the plunging shares of the company exiting the index
...
This is funny, in that a recent study has said that when the S&P500 drops one stock and adds another, the dropped stock does better and the new stock underperforms. !!
Yes, I think we are saying the same thing. Direct indexing doesn't require that you jump on the band wagon and follow the new formation of the index.
IP
