RT Journal Article
SR Electronic
T1 The Benefits of Direct Indexing for Transitioning Portfolios
JF The Journal of Beta Investment Strategies
FD Institutional Investor Journals
SP 90
OP 100
DO 10.3905/jbis.2022.1.008
VO 13
IS 2
A1 Jim Cracraft
A1 Srinivas Vemparala
A1 Scott Kuldell
A1 Neil Constable
YR 2022
UL https://pm-research.com/content/13/2/90.abstract
AB Direct indexing can provide substantial tax benefits over ETFs for a variety of common transitioning activities, such as repositioning and rebalancing. The authors show examples where common style or capitalization rotations can be performed at a fraction of the tax cost with direct indexing, using the concept of weighted name overlap to illustrate the weight of holdings that would not need to turn over and could thereby avoid incurring realized gains. The authors then introduce the concept of optimizing a transition from an appreciated direct index to another direct index by allowing tracking error to reduce turnover. To help advisors decide when to use direct indexing over straightforward index ETF vehicles, the authors describe key considerations, including client tax rate, holding period, name or factor overlap, index cross-sectional dispersion, and the frequency of active repositioning.