Introducing the Next Level of Direct Indexing: The Wealthfront 100

In December 2014, Wealthfront announced the next generation of index investing, our new Tax-Optimized Direct Indexing platform. A replacement for the US stock portion of a Wealthfront portfolio, Direct Indexing allows Wealthfront clients to participate in the US stock market not just by owning an ETF, but through direct ownership of many of the underlying US stocks.

The result is a portfolio of individual US stocks and one or two complementary ETFs that’s optimized to track the overall performance of the broad US market but is also capable of harnessing the countless opportunities of tax-loss harvesting enabled by the movement of individual stocks.

Many of our clients have already taken advantage of the power of Direct Indexing. In fact, since its launch in December 2013, Direct Indexing clients have harvested nearly $30 million in tax-losses. This will likely generate a tax savings of nearly $13 million.

Today, we’re bringing the power of Direct Indexing to many more Wealthfront clients.

Introducing The Wealthfront 100

Now, Wealthfront clients with a minimum of $100K in a taxable account can enjoy the benefits of Direct Indexing.

With this change, Wealthfront clients can now access Direct Indexing at three levels:

  • The Wealthfront 100, available to taxable accounts with a minimum of $100K, uses individual stocks in up to 100 of the largest US companies and two smaller-sized company ETFs to represent the broad US stock market.
  • The Wealthfront 500, available with a minimum of $500K, uses up to 500 individual large company stocks and a single ETF of smaller-sized companies to represent the broad US stock market.
  • Finally, the Wealthfront 1000, available with a minimum of $1 million, uses up to 1,000 stocks in large and mid-sized companies as well as an ETF of small companies to represent the broad US stock market.

The chart below demonstrates the 10-year historical additional return (as measured by IRR) for these three Direct Indexing levels across a range of different time periods.

Wealthfront_Tax-Optimized_Direct_Indexing

As you can see, the Wealthfront 100  version of Direct Indexing generated an average additional after-tax return (IRR) of 1.77% over these periods. The higher levels of Direct Indexing generated even higher numbers due to their access to more individual stocks.

You can learn more about the performance of the Wealthfront 100 and Direct Indexing in general by reading our updated white paper.

Bring Direct Indexing to Your Portfolio

Starting today, you can select your desired level of Direct Indexing (including the Wealthfront 100 ) by opening a new account with Wealthfront or by upgrading an existing account through your account dashboard.  We’ll be rolling out the service to clients over the next few weeks.

The only thing Wealthfront enjoys more than being the first to bring new features to our clients is leveraging our technology to bring them to an even broader audience.

Join us.


Disclosure

Nothing in this article should be construed as a solicitation or offer, or recommendation, to buy or sell any security. The information provided here is for educational purposes only and is not intended as investment or tax advice. Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. The projected results are hypothetical only, and do not take into consideration the effect of tax rate changes, changing risk profiles, or future investment. To calculate the potential after tax savings of a typical Wealthfront client we assume a married couple filing jointly in California, combined federal and state short-term capital gain tax rate of 44.5%, combined federal and state long-term capital gain tax rate of 24.7%, and a risk score of 7. Actual investors on Wealthfront may experience different results from those shown. There is a potential for loss as well as gain that is not reflected in the information portrayed.

The S&P 500 (“Index”) is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Wealthfront. Copyright © 2015 by S&P Dow Jones Indices LLC, a subsidiary of the McGraw-Hill Companies, Inc., and/or its affiliates. All rights reserved. Redistribution, reproduction and/or photocopying in whole or in part are prohibited Index Data Services Attachment without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

Disclosure

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. To calculate the potential after tax savings of a typical Wealthfront client we assume a married couple filing jointly in California, combined federal and state short-term capital gain tax rate of 44.5%, combined federal and state long-term capital gain tax rate of 24.7%, and a risk score of 7 across multiple 10 year holdings periods. For more information on this calculation, please see our Tax-Optimized Direct Indexing Whitepaper. Hypothetical performance is not an indicator of future actual results. Hypothetical results are calculated by the retroactive application of a model constructed on the basis of historical data and based on assumptions integral to the model which may or may not be testable and are subject to losses. Wealthfront assumed we would have been able to purchase the securities recommended by the model and the markets were sufficiently liquid to permit all trading. Hypothetical performance is developed with the benefit of hindsight and has inherent limitations. Specifically, hypothetical results do not reflect actual trading or the effect of material economic and market factors on the decision-making process. Actual performance may differ significantly from hypothetical performance. There is a potential for loss as well as gain that is not reflected in the hypothetical information portrayed. Investors evaluating this information should carefully consider the processes, data, and assumptions used by Wealthfront in creating its historical simulations. Hypothetical results are adjusted to reflect the reinvestment of dividends and other income and, except where otherwise indicated, are presented net of fees.

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.

The S&P 500 (“Index”) is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Wealthfront. Copyright © 2015 by S&P Dow Jones Indices LLC, a subsidiary of the McGraw-Hill Companies, Inc., and/or its affiliates. All rights reserved. Redistribution, reproduction and/or photocopying in whole or in part are prohibited Index Data Services Attachment without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.


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