Wealthfront's Tax-Optimized Direct Indexing is the next step in index investing — an easy way to replace the U.S. stock investment pieces of a diversified portfolio while permitting for an enhanced form of Tax-Loss Harvesting and lowering investment costs.
Instead of using a single ETF or Index Fund to invest in U.S. stocks, Wealthfront's Tax-Optimized Direct Indexing directly purchases up to 1,001 individual securities on your behalf — up to 1,000 stocks from the S&P 500® and S&P 1500® Indices and an ETF of much smaller companies.
This allows us to take advantage of the countless opportunities for tax-loss harvesting presented by the movement of individual stocks, to further improve your investment performance. Combined with our Daily Tax-Loss Harvesting service, we believe this could add as much as 2.03% to your annual investment performance. Read Our White Paper.
That’s right. We’re able to do it because we are the largest automated investment service. Our software algorithms are able to efficiently trade and tax-loss harvest all of the hundreds of stocks we buy on your behalf commission-free – something that is incredibly challenging and expensive to do in any other way.
As a result, we’re able to bring a service that has normally only been available to investors with $5 million or more to investors like you.
What’s more, with the added tax-loss harvesting opportunities of individual stocks, our research shows that incorporating Tax-Optimized Direct Indexing into your Wealthfront portfolio could potentially add an average of 2.03% to your annual after-tax returns. Read Our White Paper.
Low-cost ETFs and Index Funds are very good investments and form the core of every Wealthfront portfolio.
However, ETF and Index Funds have one disadvantage – legally they are not able to pass on tax-losses to their investors.
So while ETFs such as SPY or VTI are able to use the movements of their individual component stocks and their own cash in-flows and out-flows to minimize or eliminate any taxable gain passed on to you, they are never able to pass on any tax losses that you’re able to write off against gains in other assets or your regular income.
Thus, an ETF or index fund investment is never able to generate a tax-loss harvesting benefit from the movement of its individual component stocks.
This is the reason why the back-tested performance of Tax-Optimized Direct Indexing consistently outperforms a broad U.S. market ETF such as VTI. See the chart here.
Indeed, Wealthfront believes that attempting to time the market or to pick individual stocks are some of the biggest mistakes that investors can make.
That's why the Tax-Optimized Direct Indexing position in your Wealthfront portfolio is meant to replicate and track the performance of the broad U.S. market.
For example, a Tax-Optimized Direct Indexing position owns stocks from the S&P 500® Index. For a larger account, that position also includes stocks from the broader S&P 1500® Index. Even when one or more stocks are sold for tax-loss harvesting reasons, they are immediately replaced with a collection of stocks meant to ensure that the performance of Tax-Optimized Direct Indexing is still consistent with the broad U.S. market. What's more, the rest of your Wealthfront portfolio continues to hold all the passive index ETFs we typically recommend, with only the U.S. allocation replaced partially with an individual stock position.
Any Wealthfront Taxable account with over $100,000 to invest is eligible for Tax-Optimized Direct Indexing.
Tax-Optimized Direct Indexing is available for any Taxable Wealthfront account with more than $100,000 in assets at no additional charge.
You’ll also pay no commissions on any trades generated by Tax-Optimized Direct Indexing.
If you actively trade any U.S. stocks in another account, trades in the same stocks in Tax-Optimized Direct Indexing portfolio may result in wash sales as defined by the IRS.
Wash sales are not illegal and do not result in any additional tax liability but they may reduce the tax-loss harvesting benefits of Tax-Optimized Direct Indexing.
Therefore, we recommend that you add any of the stocks you hold or trade in other accounts to the Exclusion List you’re able to set-up when adding Tax-Optimized Direct Indexing to your account.
If you’re married, you should also add any stocks that your spouse may trade in other accounts.
Absolutely. When you add Tax-Optimized Direct Indexing to your Wealthfront portfolio you’ll be asked to set-up an Exclusion List of stocks that we should never trade on your behalf.
Please add the stock ticker for your employer and any other stocks you are restricted from owning/trading to the list and we’ll make sure to never buy or sell those stocks as part of Tax-Optimized Direct Indexing within your portfolio.
If you’re married, then please also add any stocks that your spouse is restricted from trading to the list.