Frec allows you to adjust the way you want your direct index strategies to perform by either adjusting it to focus more on tracking the index closely or more on harvesting tax losses. This is an index-level setting that can be changed by going to your direct index page, clicking on “Edit” next to the “Your direct index” section, and then clicking “Edit” next to the “Tracking preference” section. You’ll be able to see the estimated tax impact of your new selection before you confirm your new tracking preference setting.
Default Setting - focus on tracking unless potential significant gains
On the default setting, the direct indexing algorithm will prioritize tracking the index of your portfolio strategy while tax loss harvesting unless there is a significant capital gain caused by moving stock or ETFs into your portfolio.
Let’s break down how the default setting switches its focus:
If you set up your direct index portfolio with cash and don’t seed with any stocks or move any stocks or ETFs into your direct index, then our algorithm will attempt to track the index as closely as possible while also seeking tax losses to harvest. This is the default setting that attempts to obtain a similar performance to the index you’re tracking.
Additionally, the focus of the default setting will change if you seed or move a position into your direct index that when sold would result in a capital gain of $1,000 or more. If this occurs, the default setting will change its focus to harvesting tax losses over tracking your portfolio’s index. This will cause you to move further away from the index your tracking, either outperforming or underperforming, but with the goal of harvesting tax losses and avoiding selling out of positions that are overweight that could cause gains.
Prioritize tracking your index over harvesting tax losses
Selecting this preference will have our algorithm focus on having your portfolio track the index closely even if it results in capital gains. At times, your portfolio may outperform your index and our algorithm may want to sell out of overweight positions at a gain to bring it closer to the performance of the index it's tracking. Such sales may cause capital gains that will reduce the capital losses you harvest. This preference is for customers who would prefer to seek the performance of the index they’re tracking instead of maximizing tax losses.
Prioritize harvesting tax losses over tracking your index
Selecting this preference will have our algorithm focus on harvesting losses from your portfolio as the priority over your portfolio tracking the index. This may cause your portfolio to outperform or underperform the index you're tracking in order to harvest losses and avoid selling out of positions that may cause a capital gain. This preference is for customers who would prefer to harvest tax losses from their portfolio over their portfolio seeking to track the performance of the index.
Keep in mind that alterations such as customizations made to your index may cause an even larger difference in performance between your portfolio and the index you’re tracking regardless of the setting you choose above.
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