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Overview

We examine the tax efficiency of an indexing strategy and six factor tilts. Between June 1995 and March 2018, average value added by tax management exceeded 1.50% per year at a 10-year horizon for all the strategies we considered. Tax-managed factor tilts that are beta 1 to the market generated average tax alpha between 1.59% and 1.89% per year, while average tax alpha for the tax-managed indexing strategy was 2.26% per year. These remarkable results depend on the availability of short-term capital gains to offset. To a great extent, they can be attributed to loss harvesting and the tax rate differential.

About the Author(s)

Lisa R. Goldberg

Lisa R. Goldberg is an adjunct professor of statistics at the University of California, Berkeley, and director of research at Aperio Group, Sausalito, California.

Pete Hand

Pete Hand is director of quantitative strategies at Aperio Group, Portland, Oregon.

Taotao Cai

Taotao Cai is a research associate at Aperio Group, Sausalito, California.