Benefits of Direct Indexing

Direct indexing seeks to closely track the performance of a market index while creating tax savings to increase returns in taxable accounts. The potential tax savings can offset capital gains anywhere in a taxable portfolio. Portfolios can be customized to reflect investors’ goals and values in taxable and non-taxable accounts. Investors own individual securities in a direct indexing portfolio via a separately managed account (“SMA”). Holding individual securities rather than a single fund is what allows investors to customize their exposure while providing greater tax efficiency. The direct index SMA can be funded with an existing portfolio of securities, including appreciated stock.

Custom Index Tracking

Our analytics and optimization platform creates a Direct Indexing portfolio that closely mimics the index, minimizes tracking error, and eliminates unwanted risk exposures.

Portfolio Optimization

Provides optimized portfolios, sensitive to after-tax returns, while personalizing to reflect a client's investment goals.

Intra-Day Tax Management

Harvest losses at the individual security level throughout the year. First Trust Direct Indexing SMAs offer continual portfolio review with intra-day tax-loss harvesting to provide a greater ability to generate tax alpha.

Customization

Portfolios can be customized to reflect an investor’s goals and values in taxable and non-taxable accounts.

Mutual Funds, ETFs, and Direct Indexing - What's the Difference?

There are many similarities among mutual funds, exchange-traded funds (ETFs) and direct indexing. Typically, investors use ETFs and mutual funds to gain indirect exposure to the securities in a benchmark. Although ETFs and mutual funds can deliver broad market exposure, direct indexing does so with a key difference: a portfolio can be tailored to an investor's specific needs and tax loss harvesting strategies. This portfolio of the optimal component stocks of a benchmark, held directly in an SMA, can be funded with either cash or with an existing portfolio of securities (in-kind), including appreciated stock, which provides the potential to create tax alpha beyond what ETFs and mutual funds may offer.

TAX-ADVANTAGED INVESTING

Enhanced After-Tax Returns

TAX ALPHA = EXCESS AFTER-TAX RETURN – EXCESS PRE-TAX RETURN

Direct indexing provides an enhanced ability to generate tax alpha, which optimizes after-tax returns. While alpha is a measure used to evaluate portfolio returns in excess of a benchmark index, tax alpha is a measure of after-tax account return that exceeds pre-tax return in excess of a benchmark. The example shown here illustrates the tax alpha that may be achieved by the growth of an initial investment over a 25-year period.

Tax-Efficient Transitions of Appreciated Securities

TRANSITION ALPHA = TRANSITION TAX SAVINGS vs. LIQUIDATION

Proper tax management is especially important when exiting securities with appreciated gains. When transitioning securities into a Direct Index SMA, the account can be funded in-kind without creating a taxable event. The tax management tools available through direct indexing can be used to achieve a tax-efficient portfolio transition and potentially minimize, delay, or avoid net taxes.

FT TAX-ADVANTAGED STRATEGY SIMULATOR

Assumptions: Initial Investment Amount: $1 Million | Annualized Equity Market Return: 8% | Dividend Tax Rate: 23.80% | Long-Term Capital Gains Tax Rate: 23.80% | Short-Term Capital Gains Tax Rate: 40.80%. This sample provided does not reflect the investment results of actual securities and is not a guarantee of future results. Changes to the assumptions will drastically change the results. Chart Methodology: The sample provided assumes a starting basket of 300 equally-weighted hypothetical securities. Returns are randomly simulated monthly with the annualized mean chosen above and annualized standard deviation of 30%. It is assumed that the portfolio's 2% annualized dividend yield is subject to income tax and is reinvested monthly into a new tax lot. The "Passive" strategy simulates a buy-and-hold strategy over the investment horizon. The "Tax-Advantaged" strategy simulates a tax-loss harvesting strategy. In any period that a tax lot's cumulative loss exceeds 5%, the tax lot is sold, and the proceeds are immediately reinvested, plus any tax benefit, into a new tax lot. Tax benefit calculations assume that the capital gains offset by the harvested loss are 50% short-term and 50% long-term. The Monte Carlo simulation takes an average across 2000 iterations for each set of return, risk, and tax assumptions. The sample presented does not represent actual trading of securities and is not indicative of actual investment strategy performance. The impact of market factors is not included in this simulation which may cause the results to be over-or-under stated. This should not be construed as a representation that any account will, or is likely to, achieve profits, losses or tax savings similar to those reflected in this example.

CUSTOMIZATION

Investors can express their view through traditional factors, risk management strategies, or values-based investing. Our platform offers a vast amount of preset options to add or eliminate companies, industries and sectors. We also offer the ability to blend indexes and build custom solutions.