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What is Advanced Indexing?

Advanced Indexing – an improved version of what’s more commonly known as “Smart Beta” – is an investment feature designed to increase your expected returns by weighting the securities in your portfolio more intelligently. It’s available to clients with taxable account balances of $500k or more.

Most index funds (like S&P 500 index funds) weight the stocks in the funds in direct proportion to each company’s market capitalization. In other words, the larger the company, the more of the fund is invested in that company’s stock. This has been the traditional approach to tracking the index. 

There have been decades of research on using factors, other than market capitalization, to track the performance of a collection of stocks. Advanced Indexing uses multiple factors to determine the weighting of stocks in your portfolio. In addition to market capitalization, it also analyzes five other factors - value, momentum, dividend yield, market beta and volatility. Multi-factor models have been used by institutional investors since the 1970s and more recently were recognized by the Nobel Prize awarded in 2013. Firms like Dimensional Fund Advisors (DFA) have employed multi factor models to attract assets in excess of $500 billion.

The primary benefits of Advanced Indexing are:

  • Tax-efficient: By pairing it with Direct Indexing, we’re able to minimize the impact of taxes on your excess returns. No other Smart Beta service or fund is able to do this.
  • Multifactor: While there are many investment factors that can be considered when assessing an individual security, 95% of Smart Beta ETFs only use one factor. But our research team has analyzed the data and determined that five factors most efficiently optimize your portfolio.
  • No fee: Advanced Indexing is available for no additional fee above and beyond the standard Wealthfront advisory fee. This is significant, as no other issuer of a factor weighted index funds does this. In fact, they often charge an incremental fee at least equal to the benefit of the feature. All of the benefit goes to you with Advanced Indexing.

Advanced Indexing is part of PassivePlus®, our signature suite of investment features designed to deliver more returns without more risk, applied to your account at no additional cost.

For more details, see our Advanced Indexing White Paper.

 

PassivePlus® is a registered trademark and property of CSSC Investment Advisory Services, Inc. (“CSSC”) and is used under license. CSSC and Wealthfront are not affiliated companies.

Nothing in this blog should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. Financial advisory services are only provided to investors who become Wealthfront Inc. clients pursuant to a written agreement, which investors are urged to read carefully, that is available at www.wealthfront.com. All securities involve risk and may result in some loss. For more information please visit www.wealthfront.com or see our Full Disclosure. While the data Wealthfront uses from third parties is believed to be reliable, Wealthfront does not guarantee the accuracy of the information.

PassivePlus® is a registered trademark and property of CSSC Investment Advisory Services, Inc. (“CSSC”) and is used under license. CSSC and Wealthfront are not affiliated companies.

When Wealthfront replaces investments with “similar” investments as part of the tax-loss harvesting strategy, it is a reference to investments that are expected, but are not guaranteed, to perform similarly and that might lower an investor’s tax bill while maintaining a similar expected risk and return on the investor’s portfolio. Wealthfront assumes no responsibility to any investor for the tax consequences of any transaction.

Tax loss harvesting may generate a higher number of trades due to attempts to capture losses. There is a chance that Wealthfront trading attributed to tax loss harvesting may create capital gains and wash sales and could be subject to higher transaction costs and market impacts. In addition, tax loss harvesting strategies may produce losses, which may not be offset by sufficient gains in the account and may be limited to a $3,000 deduction against income. The utilization of losses harvested through the strategy will depend upon the recognition of capital gains in the same or a future tax period, and in addition may be subject to limitations under applicable tax laws, e.g., if there are insufficient realized gains in the tax period, the use of harvested losses may be limited to a $3,000 deduction against income and distributions. Losses harvested through the strategy that are not utilized in the tax period when recognized (e.g., because of insufficient capital gains and/or significant capital loss carryforwards), generally may be carried forward to offset future capital gains, if any.

Wealthfront’s investment strategies, including portfolio rebalancing and tax loss harvesting, can lead to high levels of trading. High levels of trading could result in (a) bid-ask spread expense; (b) trade executions that may occur at prices beyond the bid ask spread (if quantity demanded exceeds quantity available at the bid or ask); (c) trading that may adversely move prices, such that subsequent transactions occur at worse prices; (d) trading that may disqualify some dividends from qualified dividend treatment; (e) unfulfilled orders or portfolio drift, in the event that markets are disorderly or trading halts altogether; and (f) unforeseen trading errors. The performance of the new securities purchased through the tax-loss harvesting service may be better or worse than the performance of the securities that are sold for tax-loss harvesting purposes.

Wealthfront only monitors for tax-loss harvesting for accounts within Wealthfront. The client is responsible for monitoring their and their spouse's accounts outside of Wealthfront to ensure that transactions in the same security or a substantially similar security do not create a “wash sale.” A wash sale is the sale at a loss and purchase of the same security or substantially similar security within 30 days of each other. If a wash sale transaction occurs, the IRS may disallow or defer the loss for current tax reporting purposes. More specifically, the wash sale period for any sale at a loss consists of 61 calendar days: the day of the sale, the 30 days before the sale, and the 30 days after the sale. The wash sale rule postpones losses on a sale, if replacement shares are bought around the same time.

The effectiveness of the tax-loss harvesting strategy to reduce the tax liability of the client will depend on the client’s entire tax and investment profile, including purchases and dispositions in a client’s (or client’s spouse’s) accounts outside of Wealthfront and type of investments (e.g., taxable or nontaxable) or holding period (e.g., short- term or long-term). Except as set forth below, Wealthfront will monitor only a client’s (or client’s spouse’s) Wealthfront accounts to determine if there are unrealized losses for purposes of determining whether to harvest such losses. Transactions outside of Wealthfront accounts may affect whether a loss is successfully harvested and, if so, whether that loss is usable by the client in the most efficient manner.

A client may also request that Wealthfront monitor the client’s spouse’s accounts or their IRA accounts at Wealthfront to avoid the wash sale disallowance rule. A client may request spousal monitoring online or by calling Wealthfront at 844-995-8437. If Wealthfront is monitoring multiple accounts to avoid the wash sale disallowance rule, the first taxable account to trade a security will block the other account(s) from trading in that same security for 30 days.

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