Generating tax alpha with optimized index tracking

Much of the discussion on portfolio management still focuses on pre-tax returns

Despite the significant impact of taxes on the growth of wealth held in taxable accounts, much of the research and discussion about portfolio management is based on pre-tax returns.  

This paper presents our empirical investigation into how tax-aware portfolio optimization can systematically improve the post-tax returns of equity investment strategies for wealth managers tracking broad market indices within their portfolios. Our focus is on wealth managers who look after portfolios of individual investors and households subject to the US tax code as of September 2024, but similar results do also hold true with analogous tax regulations.  

In this analysis, you will learn about:  

• How much tax alpha you can harvest if you have capital gains outside your portfolio 
• The impact of benchmark choice and portfolio inception date on tax alpha  
• Tax-managed direct indexing strategies and buy-and-hold ETF strategies