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Tracking preference for Classic Direct indexing

How tracking preference works

Tracking preference is an index-level setting that controls how your direct index balances two goals: tracking its benchmark closely, and harvesting tax losses.

To change it:

  1. Select Edit next to "Your direct index."
  2. Select Edit next to "Tracking preference”.
  3. Review the estimated tax impact of the new setting before confirming.

Default: tracks the benchmark closely, unless there's potential for significant gains

By default, Frec prioritizes tracking your index while still harvesting tax losses where possible.

This changes if you seed or move stocks or ETFs into your portfolio that would trigger $1,000 or more in capital gains if sold, then the default setting shifts its focus to prioritize harvesting tax losses over tracking. This can mean your portfolio drifts further from the index, over- or under-performing it, in exchange for harvesting losses and avoiding forced gains on overweight positions.

These settings do not turn tax-loss harvesting off completely—only its priority level changes.

Prioritize tracking your index over harvesting tax losses

The algorithm focuses on tracking your index closely, even if that means realizing capital gains, for example, selling overweight positions at a gain to stay close to the benchmark. It will still harvest losses when it can do so without hurting tracking; it just won't sacrifice tracking accuracy to chase additional losses.

This preference is for customers who'd rather seek the performance of the index they're tracking than maximize tax losses.

Prioritize harvesting tax losses over tracking your index

The algorithm focuses on harvesting losses as the top priority, even if that means drifting further from your index's performance (over- or under-performing it) in order to capture losses and avoid triggering gains.

This preference suits customers who'd rather harvest tax losses from their portfolio than have it seek to track the performance of the index.

Keep in mind

  • Customizations made to your index can widen the gap further between your portfolio and its benchmark, regardless of which tracking preference you choose.
  • None of these settings turn tax-loss harvesting off completely. Only its priority level changes.