Displaying items by tag: tax efficiency

Separately managed accounts (SMAs) are gaining traction among investors, offering personalized portfolios with features like tax optimization and tailored investment preferences. Once reserved for the wealthy, advancements in technology have made SMAs more accessible, with minimum investments as low as $5,000 through platforms like Fidelity. 

While SMAs allow for benefits such as tax-loss harvesting and charitable stock donations, they often come with higher fees compared to ETFs, which can make them less cost-effective for many retail investors. 

Critics argue that customization can lead to active management pitfalls, with most SMAs historically underperforming benchmarks after accounting for fees. 

Finsum: Innovations in AI and portfolio management tools are enabling financial advisors to efficiently manage larger numbers of accounts with greater precision. 

Direct indexing allows investors to own individual stocks in a customized portfolio, offering tailored market exposure, tax-loss harvesting, and alignment with personal goals. Unlike ETFs, which can only tax-loss harvest during broad market declines, direct indexing captures tax benefits throughout the year. 

Advisors increasingly use it as a core strategy for U.S. equity exposure, leveraging its tax advantages to offset gains from other parts of a client’s portfolio. Technology enables the efficient management of thousands of unique accounts, optimizing trades daily for greater customization and tax efficiency. 

It is also a powerful tool for diversifying concentrated stock positions or preparing for future liquidity events by accumulating tax-loss reserves. 

Finsum: When choosing a provider, factors such as investment performance, tax alpha, and client service are critical to the goals of direct indexing. 

Actively managed ETFs combine the flexibility of active management with the tax efficiency of ETFs, making them a compelling option for taxable portfolios. Unlike mutual funds, ETFs often use in-kind redemptions to minimize taxable capital gains, helping investors defer taxes and achieve greater compounded returns over time. 

While tax efficiency is a significant advantage, investors should also evaluate the manager’s skill, market opportunities, and the cost-effectiveness of these strategies when selecting active ETFs. 

Incorporating active ETFs into a portfolio can be a strategic way to balance the potential for alpha with reduced tax drag, particularly in equity strategies where minimizing distributions is key. 

Finsum: A thoughtful approach to selecting active ETFs can enhance after-tax returns and align portfolios with long-term investment goals.

Active exchange-traded funds (ETFs) have become a major focus in the investment world this year, drawing significant attention from top fund companies. With over $800 billion in assets and an influx of approximately $250 billion in 2024, their growth is undeniable. 

Unlike mutual funds, active ETFs often capitalize on tax-efficient structures, such as in-kind transactions, which allow them to manage gains without triggering taxable events. Recent data indicates that only a small fraction of active ETFs distribute capital gains, making them attractive for tax-conscious investors compared to mutual funds, which tend to have higher payouts. 

Notably, many new active ETFs and clone strategies, launched alongside mutual fund versions, have kept capital gains distributions minimal. 

Finsum: This is a good sign of the trend in the regulatory environment and could pave the way for more efficient portfolio solutions.

Asset managers are increasingly rolling out tax-managed products, with investments in these vehicles seeing notable growth. Assets in tax-managed separately managed accounts (SMAs) surged to over $500 billion, a 67% increase within 18 months, while tax-managed mutual funds grew by 22% to $73 billion, according to Morningstar. 

Direct indexing dominates tax-managed SMA assets, offering customized tax management by investing in individual stocks within an index, though other strategies like ETF model portfolios and active equity are gaining traction. 

Morgan Stanley’s Parametric leads this area, managing $245 billion, mainly through direct indexing. Morningstar anticipates direct indexing will stay prevalent, but asset managers like JP Morgan’s 55ip and AB are exploring alternatives, focusing on model portfolios and municipal bonds for tax advantages. 

Finsum: We may see more unified managed accounts, which integrate various investment types, creating more comprehensive tax management options.