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Wealthfront’s US Direct Indexing
US Direct Indexing is designed to be an enhanced form of Tax-Loss Harvesting that looks for movements in individual stocks to harvest more tax losses and help lower your tax bill even more. US Direct Indexing is available for taxable Automated Index Investing accounts of at least $100,000. You can also enable Smart Beta to weight your investments more intelligently. If enabled, it activates when your balance approaches $500,000. If you add US Direct Indexing to your account and your account balance is under $100,000, you’ll hold VTI (or ITOT) until your account balance reaches the minimum.
How does it work?
Instead of using a single ETF (such as VTI) or index fund to invest in US stocks, US Direct Indexing purchases up to 100 or 600 (depending on your account size) of the individual stocks with the largest market capitalizations in the US equity market on a market-weighted basis, along with a completion ETF of smaller companies, to follow the behavior of an ETF that seeks to represent the total market of US stocks (VTI). This allows us to take advantage of the countless opportunities for tax-loss harvesting presented by the movement of individual stocks, in an attempt to further improve your investment performance.
What does it cost?
The annual advisory fee for an Automated Index Investing Account is 0.25%. US Direct Indexing and Smart Beta are available at no additional cost.
Why is US Direct Indexing only available for taxable accounts?
The primary benefit of US Direct Indexing is the ability to harvest losses on individual stocks that can be used to help reduce your tax liability. Because IRAs are tax-deferred accounts, you don’t owe taxes on gains and aren’t allowed to apply realized losses to reduce your taxes. This means Tax-Loss Harvesting and US Direct Indexing are of no value in IRA accounts. The same goes for Smart Beta, which is built on top of our US Direct Indexing service.
Why can’t I gain the benefits of US Direct Indexing from holding a broad US market ETF?
Low-cost ETFs and index funds are very good investments and form the core of every Wealthfront recommended portfolio. However, ETF and index funds have one disadvantage — legally, they can’t pass on tax losses to their investors.
So while an ETF such as VTI is able to use the movements of individual component stocks and its own cash inflows and outflows to minimize or eliminate any taxable gain passed on to you, it is never able to pass on any tax losses that you’re able to write off against gains in other assets or your regular income.
Thus, an ETF or index fund investment is never able to generate a tax-loss harvesting benefit from the movement of its individual component stocks.
To learn more, watch this video or read our US Direct Indexing white paper.
What is the minimum for Wealthfront’s US Direct Indexing product?
Wealthfront’s US Direct Indexing product is available for Automated Index Investing Accounts of at least $100,000.
Wealthfront also offers two standalone direct indexing portfolios: S&P 500 Direct and Nasdaq-100 Direct, which both have a minimum of $5,000.
| US Direct Indexing | S&P 500 Direct | Nasdaq-100 Direct | |
| Minimum | $100,000 | $5,000 | $5,000 |
Investment management and advisory services are provided by Wealthfront Advisers LLC (“Wealthfront Advisers”), an SEC-registered investment adviser, and brokerage related products are provided by Wealthfront Brokerage LLC ("Wealthfront Brokerage"), a Member of FINRA/SIPC. Financial planning tools are provided by Wealthfront Software LLC (“Wealthfront Software”).
The information contained in this communication is provided for general informational purposes only, and should not be construed as investment or tax advice. Nothing in this communication should be construed as a solicitation or offer, or recommendation, to buy or sell any security.
Tax-Loss Harvesting benefits vary depending on the client's entire tax and investment profile. The performance of new securities purchased may be better or worse than those sold. The strategy could introduce portfolio tracking error, meaning the portfolio's performance might slightly diverge from its intended benchmark. There may also be unintended tax implications. Wealthfront does not provide tax advice. Consult a tax professional for your specific situation.
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