Elm Wealth revisits long/short direct indexing tax loss harvesting and finds the economics are weaker than the sales pitch suggests. In its base case, expected after tax returns are 2.05% a year versus 2.16% for simply selling, paying tax, and reinvesting in an index fund.
Robbing Peter to Pay Paul: A(nother) Look at Long/short Direct Index Tax-Loss Harvesting
Elm Wealth
Victor Haghani
Article
10 Pages
Key Takeaways
Fees Eat Benefit: Over 20 years, Elm estimates investors pay $2.7 million in fees to defer $3.7 million of capital gains tax, leaving expected returns 0.11% a year lower.
Alpha Must Be Real: Even with 0.5% annual stock picking alpha, Elm says there is still only about a 50 50 chance the strategy beats the simple sell and reinvest approach.
Use Case Is Narrow: Elm says the case improves mainly when alpha is much greater than 0.5% a year, step up in basis is near, or a move to a low tax state is imminent.
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