Part III: Values Investing & Taxes
In previous posts, we have identified the overwhelming benefit of direct indexing for an individual investor is enhanced customization. This can be realized in the form of leveraging tax efficiencies, but can also be an attractive solution for investors who want to express personal preferences or values such as adopting ESG strategies or pursue specific investment opportunities like Factor tilts.
Direct Indexing & Values-Based Investing
Direct indexing can be an excellent solution for those who wish to express specific values, such as incorporating environmental, social, and governance (ESG), or socially responsible investing (SRI). For example, an investor can adopt a strategy that either screens out certain securities (fossil-fuel producers, big tobacco, gun manufacturers, etc.), or overweight companies that have adopted certain standards and practices (diversity focused hiring, beneficial corporate ethics, social change).
Direct indexing can also be utilized to help facilitate charitable giving. In lieu of identifying and harvesting losses from stocks that have declined in value, an investor can focus instead on identifying highly appreciated securities and harvest those to donate to a specific charity or donor-advised fund, where the investor might be able to direct funds to multiple charities.
Direct Indexing & Factor-Tilts
For investors who have a desire to integrate high conviction strategies in their portfolios, direct indexing can also play a role. For instance, tilting an index to overweight specific risk factors such as value, momentum or minimum volatility with the potential to capture the long-term benefits identified by academic research, can be accomplished while tailoring those exposures to the investor’s specific tax and values preferences.
Source: Vanguard
Ultimately, direct indexing offers investors greater flexibility to choose specific strategies that can enhance their tax management, or better express their values and preferences.
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