Jacob Greene, Head Strategist at Neuberger Berman Custom Direct Indexing, joined Keith Black, Managing Director of RIA Channel, to discuss direct indexing.
Direct indexing allows clients to customize portfolios and move away from an index in a way that can add an ESG preference or exclude specific stocks. Direct indexing can also add the ability to manage taxes.
Greene notes that performance should be evaluated on an after-tax basis when investing for taxable clients. A key part of improving after-tax returns is tax loss harvesting, which sells positions that have declined in value to realize capital losses. Capital losses can offset the tax liability of realized capital gains. Tax alpha may provide an annualized 1% to 2% benefit in more passive strategies and direct indexing. Tax alpha can potentially reach 3% or more annually when applied in an active equity strategy.
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