Separate Account Index Portfolios

Abstract

This article examines separate account index portfolios defined here as index replicating portfolios with a systematic tax loss harvesting overlay, as an off-the-shelf product, and, more importantly, as an active, problem solving solution. The authors start with a general overview of separate account index portfolios versus exchange-traded funds shares. Then, they look at the decision of chosing one strategy versus the other in four different asset locations, each possessing different income tax attributes. Finally, they show how separate account index portfolios have the potential to be an active, problem-solving arrow in the advisor's quiver: how it can be integrated with a low-basis diversification strategy; how it fits with hedge funds; and how it is possible to realize the loss-harvesting benefits of separate account index portfolios while, at the same time, reducing downside market volatility.