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The Tax Alpha That Decays

Direct indexing is sold as ongoing tax alpha. It produces tax alpha for a defined window, after which the sleeve hardens into a position whose harvestable losses thin to near zero. The question is not whether it works. The question is whether the structure that follows the window has been planned.

Direct indexing is most often introduced as a perpetual source of after-tax improvement, on the order of a half to one percent a year, for a portfolio at five million dollars. The number, taken in isolation, is real for the early years and decays over the ones that follow. As successful harvests retire underwater names and replace them with higher-basis lots, the sleeve's gross loss-generation capacity thins toward zero. The question worth asking is rarely whether the sleeve works; it is what job the holder is asking the sleeve to do, and what shape the holder accepts the sleeve to be in once the work is done.