Direct Indexing: Mutual Funds & ETFs without the Fees
By Nicholas Guido, CFP®
December 12, 2019
Estimated Reading Time: 4 minutes
Direct Indexing: Mutual Funds & ETFs without the Fees
200 years ago, the first stock traded New York Stock Exchange. 95 years ago, the first modern-day mutual fund was created. 43 years ago, Jack Bogle created the first index mutual fund. Now, in 2019, beginning its advance towards one of the top investment strategies available to investors.
You have heard or invested in mutual funds and ETF’s, but direct indexing is a lesser-known investment strategy, which probably leads you to ask, “why have I not heard of this?” “what are the benefits?” or “is it just another trend?”
It's Not Just Another Trend
We believe that direct indexing will allow investors to better optimize their most important business – the management of their wealth.
First, I would like to cover what direct indexing actually is, and then we can dive into the benefits of direct indexing on your overall tax liability, because ties into last month’s blog post on tax-loss harvesting.
Directing indexing is a newer strategy that involves replicating the performance of an index by purchasing the underlying constituents of an ETF or mutual fund. This strategy has been around in varying degrees for a while as a more tax-efficient alternative to index-based mutual funds and ETFs, but until recently was only available to the ultra-wealthy due to the intensive manual labor, trading costs, or asset-based pricing fees. Now, we can offer this strategy to any of our clients through Orion’s Advisor Strategy & Tax Return Optimization platform.
Benefits to Investors
- Tax-Loss Harvesting: In a traditional ETF or mutual fund in a year of positive returns there may be little to no ability to harvest losses. But if you own the underlying constituents there may be anywhere from 1 to 100 names that are at a loss even though your overall strategy is positive for the year.
- Replication: The Orion’s Advisor Strategy & Tax Return Optimization platform allows Chicago Partners to replicate any ETF, index, and mutual fund without the client incurring any cost.
- Zero-Cost Trading: In order to optimize these strategies to the fullest and take advantage of the tax-loss harvesting opportunities a lot of trades can be required. With trading cost on equities going to zero for our custodians we can now deliver this to our clients at no cost.
- Align Client Values with Investment Strategies: We help our socially and environmentally-responsible clients achieve their goals by enacting ESG (Environmental, Social and Governance) factors into their direct index.
- Legacy & Concentrated Positions: Direct indexing will allow us to realize losses over time to help offset the gains of a legacy or concentrated stock position. We feel this is important because a general guideline and goal is to reduce legacy or concentrated positions down to less than 15% of your overall portfolio.
All of the above factors are just the beginning of how direct indexing can help to optimize your portfolio and allow you to take advantage of strategies that were not available to you in the past.
For more information on Direct Indexing please contact me via email or phone at your convenience.
Nicholas Guido, CFP is a Wealth Advisor at Chicago Partners. He helps clients build great custom portfolios, plan their taxes, and create financial plans that align them with their goals and objectives.
Important Disclosure Information
Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.
December 12, 2019
Estimated Reading Time: 4 minutes
Direct Indexing: Mutual Funds & ETFs without the Fees
200 years ago, the first stock traded New York Stock Exchange. 95 years ago, the first modern-day mutual fund was created. 43 years ago, Jack Bogle created the first index mutual fund. Now, in 2019, beginning its advance towards one of the top investment strategies available to investors.
You have heard or invested in mutual funds and ETF’s, but direct indexing is a lesser-known investment strategy, which probably leads you to ask, “why have I not heard of this?” “what are the benefits?” or “is it just another trend?”
It's Not Just Another Trend
We believe that direct indexing will allow investors to better optimize their most important business – the management of their wealth.
First, I would like to cover what direct indexing actually is, and then we can dive into the benefits of direct indexing on your overall tax liability, because ties into last month’s blog post on tax-loss harvesting.
Directing indexing is a newer strategy that involves replicating the performance of an index by purchasing the underlying constituents of an ETF or mutual fund. This strategy has been around in varying degrees for a while as a more tax-efficient alternative to index-based mutual funds and ETFs, but until recently was only available to the ultra-wealthy due to the intensive manual labor, trading costs, or asset-based pricing fees. Now, we can offer this strategy to any of our clients through Orion’s Advisor Strategy & Tax Return Optimization platform.
Benefits to Investors
- Tax-Loss Harvesting: In a traditional ETF or mutual fund in a year of positive returns there may be little to no ability to harvest losses. But if you own the underlying constituents there may be anywhere from 1 to 100 names that are at a loss even though your overall strategy is positive for the year.
- Replication: The Orion’s Advisor Strategy & Tax Return Optimization platform allows Chicago Partners to replicate any ETF, index, and mutual fund without the client incurring any cost.
- Zero-Cost Trading: In order to optimize these strategies to the fullest and take advantage of the tax-loss harvesting opportunities a lot of trades can be required. With trading cost on equities going to zero for our custodians we can now deliver this to our clients at no cost.
- Align Client Values with Investment Strategies: We help our socially and environmentally-responsible clients achieve their goals by enacting ESG (Environmental, Social and Governance) factors into their direct index.
- Legacy & Concentrated Positions: Direct indexing will allow us to realize losses over time to help offset the gains of a legacy or concentrated stock position. We feel this is important because a general guideline and goal is to reduce legacy or concentrated positions down to less than 15% of your overall portfolio.
All of the above factors are just the beginning of how direct indexing can help to optimize your portfolio and allow you to take advantage of strategies that were not available to you in the past.
For more information on Direct Indexing please contact me via email or phone at your convenience.
Nicholas Guido, CFP is a Wealth Advisor at Chicago Partners. He helps clients build great custom portfolios, plan their taxes, and create financial plans that align them with their goals and objectives.
Important Disclosure Information
Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.