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Index / ETFs — March 24, 2021

Generating Tax Alpha with Optimized Index Tracking

Direct indexing continues to gain momentum as an investment strategy for its potential to provide higher post-tax returns and portfolio customization. Direct indexing strategies with active tax management target higher post-tax portfolio returns by achieving pre-tax investment goals with lower tax costs. In this paper, we investigate the benefit of active tax management for direct indexing strategies tracking broad cap-weighted equity market indices. Our simulations with historical market data show that tax loss harvesting with the Axioma Portfolio Optimizer can deliver substantial tax savings at low or moderate tracking error levels.

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Sercan Yıldız, PhD

Research, Manager