Tax Aware Investing Through Direct Indexing

Using tax-advantaged strategies in the right
accounts may add meaningful value.

 

By Erik S. Clay, CFP®, CPFA®, CRPC™
10.05.26

Taxes shouldn’t drive your investment strategy, but using tax-advantaged strategies in the right accounts may add meaningful value and flexibility to your financial plan.

Direct indexing seeks to replicate an index, such as the S&P 500 or Nasdaq 100, by owning the underlying stocks in proportions similar to the index. The stocks are typically held in a separately managed account (SMA).

The goal isn’t necessarily to outperform the index, but to track it while providing additional tax and customization benefits, including:

  • Tax-loss harvesting: Individual positions may be harvested for losses, which may help offset capital gains, subject to applicable tax rules and an investor's individual tax situation
  • Managing concentrated positions: Specific securities can be excluded or reduced to help diversify an existing portfolio.
  • Customization: The portfolio can be tailored to overweight or underweight certain sectors, styles, or securities.
  • Gradual diversification: Large single-stock positions can potentially be reduced over time while managing the associated tax impact.

An Example

Suppose you own a large NVDA position with significant unrealized gains and want to reduce the position while moving toward an S&P 500-like portfolio. One approach is to place the NVDA position in a direct-indexing SMA and add cash or other securities. The manager may harvest available losses from other positions, when available, to help offset gains realized from gradually selling NVDA, subject to applicable tax rules. Over time, this can allow you to diversify the concentrated position and move toward an S&P 500-like portfolio while seeking to manage the associated tax impact.

Direct indexing isn’t appropriate for every investor, but when used thoughtfully, it can combine index-based investing, tax management, and portfolio customization in a single strategy.

Important Considerations

  • Do you have a large concentrated stock position with substantial unrealized gains?
  • Would direct indexing make sense specifically for your portfolio?
    • Our team can help you weigh the risk vs. reward and optimize your decision.

The views expressed herein are those of the author and do not necessarily reflect the views of Steward Partners or its affiliates. All opinions are subject to change without notice. Neither the information provided, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. All investing involves risk, including the potential loss of principal. Past performance is not indicative of future results. Please consult with a qualified financial, legal, or tax professional before making any financial decisions. Steward Partners, its affiliates, and its Wealth Managers do not provide tax advice.

Direct indexing involves risk and may not be appropriate for all investors. Tax-loss harvesting and other tax-management strategies do not guarantee a tax benefit and are dependent upon an investor's individual tax circumstances. Diversification and asset allocation do not ensure a profit or protect against loss. References to NVIDIA (NVDA) are for illustrative purposes only and are not recommendations to buy, sell, or hold any security. The S&P 500 Index is an unmanaged index generally considered representative of the U.S. large-cap equity market. The Nasdaq-100 Index is an unmanaged index composed of 100 of the largest non-financial companies listed on the Nasdaq Stock Market. Indexes are unmanaged and cannot be invested in directly. AdTrax 9098647.1 Exp 8/27