Tax management or tax-loss harvesting is not a new concept to the investment world. What is commonly referred to as "direct indexing," a popular equity implementation, in many cases seeks to closely replicate the performance and risk profile of a specific index by investing directly in the underlying securities.
In this article, researchers with Fidelity Investments examine the effectiveness of tax management overlayed on various equity factor portfolios.
They found that applying a tax management framework to smart beta or factor portfolios provides beneficial after-tax outcomes. Among the factor portfolios tested, a tax management framework generally resulted in a less desirable pre-tax portfolio but is compensated for on an after-tax basis.
Of the portfolios tested, a Momentum factor portfolio was the strongest candidate for delivering tax alpha, while a multi-factor approach provided the strongest overall results on an after-tax risk-adjusted basis.
Read the article by Fidelity Investments and published in The Journal of Beta Investment Strategies HERE.
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