The S&P 500® index, which consists of the largest companies driving the US stock market, represents a benchmark of success for many investors—and it has delivered an average annualized return of 10.26% since its 1957 inception through the end of 2023. The index is so popular that it is the basis for the three largest ETFs by assets under management.
S&P 500® ETFs are a perennial investor favorite, but Wealthfront has built an even better way to get exposure to this iconic index. Wealthfront’s S&P 500 Direct offers similar performance to an S&P 500® ETF, plus valuable tax savings—all for a 0.09% management fee. This is the same as the cost to own SPY, the most popular S&P 500® ETF.
Wealthfront’s S&P 500 Direct can be especially valuable if you have capital gains to offset from selling company RSUs or other stock.
How does Wealthfront’s S&P 500 Direct work?
S&P 500 Direct works by directly holding many of the individual stocks that make up the S&P 500® index in your Wealthfront account, hence its name. It then applies Wealthfront’s automated Tax-Loss Harvesting, which turns losses into future tax savings. The minimum investment to get started with S&P 500 Direct is $20,000—but the more you invest, the more individual stocks you will hold and the more opportunities our software will have to harvest losses on your behalf. You can learn more about the portfolio composition and strategy in our white paper.
Tax-loss harvesting is a strategy long favored by wealthy and institutional investors that involves selling investments that have declined in value, “harvesting” the loss, and then buying a similar investment to ensure a portfolio maintains its strategy, including appropriate levels of expected risk and return. For example, even if the S&P 500® were to increase in value by 1% on a given day, Coca-Cola may drop in value because it missed its earnings guidance. With tax-loss harvesting you could sell Coca-Cola and then use the proceeds to temporarily buy a similar dollar amount of PepsiCo. The loss you take on Coca-Cola can then be used to offset taxable gains.
You can use harvested losses to offset capital gains (like gains from stock you have sold) as well as up to $3,000 of ordinary income (like the money you earn from your paycheck). Can’t use all of your losses this year? No problem. Any unused losses carry over indefinitely to future years.
S&P 500 Direct’s ability to conduct tax-loss harvesting using individual stocks within an index constitutes a major advantage relative to investing in an ETF like SPY. That’s because ETFs are prevented by the Internal Revenue Code and the Investment Company Act of 1940 from passing on tax losses to investors.
S&P 500 Direct, similar to an ETF that tracks the S&P 500®, is designed to minimize performance difference from that of the index—this is known as “tracking difference.” This happens because S&P 500 Direct portfolios will generally not hold all of the stocks in the index (this is especially true of smaller accounts), and Tax-Loss Harvesting can also cause small, temporary weight deviations for certain stocks. Tracking difference in your S&P 500 Direct could be positive or negative.
Tax benefits of S&P 500 Direct
To understand the potential tax benefits of S&P 500 Direct, we think it’s helpful to look at the Tax-Loss Harvesting results of our US Direct Indexing product, which uses the same Tax-Loss Harvesting methodology and software as S&P 500 Direct and applies it to a similar large cap index. We calculate “harvesting yield” by taking daily losses and dividing them by daily balances, aggregated over a given period.
Our S&P 500 Direct white paper provides analysis related to the harvesting yield for our US Direct Indexing product. In this analysis, we estimate the economic benefit of harvested losses, assuming there are short-term losses or ordinary income to offset. The estimated economic benefit of these harvested losses, based on typical tax (marginal and combined) rates between 18% and 44%, is worth between 0.73% and 7.69% of holdings. Given that S&P 500 Direct is managed by the same methodology and software as US Direct Indexing, we believe S&P 500 Direct could offer significant value in excess of what an investor could get from just owning an S&P 500® ETF or index fund.
Build long-term wealth on your own terms
As we’ve said many times over the years, we believe the surest way to build long-term wealth is through passive investing, while keeping your costs low and and optimizing your after-tax returns. This is exactly what S&P 500 Direct does—it passively invests in the index, is offered for a low fee of just 0.09%, and uses our Tax-Loss Harvesting software to help you keep more of what you earn.
S&P 500 Direct, in combination with Wealthfront’s Automated Bond Ladder, even allows you to implement the investing strategy that legendary investor Warren Buffett said in a 2013 shareholder letter is laid out in his will. Buffett’s advice to his heirs was to invest 10% in short-term government bonds and 90% in a low-cost S&P 500® index fund. You can now get this exposure to the S&P 500® and US Treasuries at Wealthfront with the further benefit of additional tax savings.
This new product is yet another example of how Wealthfront automates powerful investing strategies to make them easy, accessible, and inexpensive. Implementing this strategy manually on your own would be time-consuming and extremely boring. Meanwhile, direct indexing (the industry term coined by Wealthfront in 2013 for directly owning the stocks that comprise an index fund to enable tax-loss harvesting) products offered by high-end investment managers can come with hefty minimums and substantial fees. But our focus on automation allows us to offer it to you for the same fee as SPY, making it one of the lowest cost direct indexing products on the market.* We do this because we want to help you build long-term wealth on your own terms, and we’re thrilled to offer you a new way to do that.
Disclosure
The information contained in this communication is provided for general informational purposes only, and should not be construed as investment or tax advice. Nothing in this communication should be construed as a solicitation, offer or recommendation to buy or sell any security. Any links provided to other server sites are offered as a matter of convenience and are not intended to imply that Wealthfront Corporation (“Wealthfront”) or any affiliate endorses, sponsors, promotes and/or is affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise.
All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future success. Securities investments are not bank deposits, are not bank guaranteed or FDIC-insured, and may lose value. Please see our Full Disclosure for important details.
The S&P 500® (the “Index”) is a product of S&P Dow Jones Indices LLC and/or its affiliates
(“S&P DJI”) and/or their third-party licensors and has been licensed for use by Wealthfront. S&P®, S&P 500®, US 500™, The 500™, are trademarks of S&P Global, Inc. or its affiliates (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); third party licensor trademarks in the Index, if any, are trademarks of the respective third party licensors. The S&P 500 Index and S&P 500® have been licensed for use by S&P DJI and sublicensed for certain purposes by Wealthfront. Wealthfront’s statements are not endorsed by and Wealthfront’s products are not sponsored, endorsed, sold or promoted by S&P DJI, Dow Jones, S&P, their respective affiliates, or their third-party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Index.
S&P 500 Direct invests in many of the stocks in the S&P 500®, but it may not invest in all 500 stocks. As a result, its performance may deviate from that of the S&P 500® index due to tracking error, market conditions, and the limitations of Tax-Loss Harvesting. Customization options, such as excluding individual stocks, may affect your portfolio’s ability to track the S&P 500® index. The S&P 500® index has delivered an average annualized return of 10.26% since its inception in 1957 through the end of 2023, but this does not guarantee future performance and actual investment outcomes may vary. The index performance referenced does not reflect the impact of fees, expenses, or taxes that may apply to an investor’s actual investments.
Neither Wealthfront nor any of its affiliates guarantees the performance of the S&P 500 Direct or any other investment product. Returns are subject to market fluctuations and cannot be predicted or guaranteed. Investment management and advisory services – which are not FDIC insured – are provided by Wealthfront Advisers LLC (“Wealthfront Advisers”), an SEC-registered investment adviser, and brokerage related products, including the Cash Account, are provided by Wealthfront Brokerage LLC (“Wealthfront Brokerage”), a Member of FINRA/SIPC. Financial planning tools are provided by Wealthfront Software LLC (“Wealthfront Software”).
The effectiveness of the Tax-Loss Harvesting strategy to reduce the tax liability of the client will depend on the client’s entire tax and investment profile, including purchases and dispositions in a client’s (or client’s spouse’s) accounts outside of Wealthfront Advisers and type of investments (e.g., taxable or nontaxable) or holding period (e.g., short-term or long-term).
Wealthfront Advisers’ investment strategies, including portfolio rebalancing and Tax-Loss Harvesting, can lead to high levels of trading. High levels of trading could result in (a) bid-ask spread expense; (b) trade executions that may occur at prices beyond the bid ask spread (if quantity demanded exceeds quantity available at the bid or ask); (c) trading that may adversely move prices, such that subsequent transactions occur at worse prices; (d) trading that may disqualify some dividends from qualified dividend treatment; (e) unfulfilled orders or portfolio drift, in the event that markets are disorderly or trading halts altogether; and (f) unforeseen trading errors. The performance of the new securities purchased through the Tax-Loss Harvesting service may be better or worse than the performance of the securities that are sold for Tax-Loss Harvesting purposes.
Tax-Loss Harvesting may generate a higher number of trades due to attempts to capture losses. There is a chance that trading attributed to Tax-Loss Harvesting may create capital gains and wash sales and could be subject to higher transaction costs and market impacts. In addition, Tax-Loss Harvesting strategies may produce losses, which may not be offset by sufficient gains in the account and may be limited to a $3,000 deduction against income. The utilization of losses harvested through the strategy will depend upon the recognition of capital gains in the same or a future tax period, and in addition may be subject to limitations under applicable tax laws, e.g., if there are insufficient realized gains in the tax period, the use of harvested losses may be limited to a $3,000 deduction against income and distributions. Losses harvested through the strategy that are not utilized in the tax period when recognized (e.g., because of insufficient capital gains and/or significant capital loss carryforwards), generally may be carried forward to offset future capital gains, if any.
The Tax-Loss Harvesting results presented for the USDI product are extracted from portfolios offered by Wealthfront Advisers. Upon written request, Wealthfront Advisers will promptly provide results of the total portfolios from which the performance was extracted.
Wealthfront provides the necessary tax forms for reporting harvested losses, but it is your responsibility to ensure accuracy and compliance when filing your taxes. Wealthfront is not responsible for any errors in tax reporting or potential penalties incurred. Clients should consult a qualified tax professional to understand their specific tax situation.
Wealthfront’s 0.09% management fee applies to S&P 500 Direct. The comparison to SPY assumes that SPY has no additional transaction costs, which may not always be the case. Fees and costs may vary over time and by provider.
*The “one of the lowest cost direct indexing on the market” claim is as of December 10, 2024, and subject to change. Data sourced from https://www.morningstar.com/funds/direct-indexing-landscape-3-charts and internal research.
The reference to SPDR® as the most popular ETF that tracks the S&P 500® comes from VettaFi: https://etfdb.com/compare/market-cap/.
Wealthfront Software, Wealthfront Advisers, and Wealthfront Brokerage are wholly owned subsidiaries of Wealthfront Corporation.
© 2024 Wealthfront Corporation. All rights reserved.
About the author(s)
Dave Myszewski is the Vice President of Product at Wealthfront where he oversees product development, consumer research, and client support. Prior to Wealthfront, Dave worked at Apple for 12 years including an engineering role on the first iPhone. Dave holds an MS and BS in Computer Science from Stanford University. View all posts by Dave Myszewski
