Couldn’t you accomplish something similar by buying the index outright, selling covered calls, and then rolling the position forward if the index goes up?
Not exactly. Covered calls is an income generation strategy, while direct indexing is a tax deferral strategy. Broadly different. There is an options strategy that could work here, called variable pre-paid forwards. But I am not an expert here, and because my partner works at the company we hold the concentrated positions in, we can't utilize.
Love the transparency (though I think I only made it halfway down the rabbit hole).
Zeroing in on "Why would you want to do this?" - reason #1 makes complete sense, and at this expense ratio is quite compelling.
I think there's actually 2 parts to reason #2 : using tax losses to de-concentrate other positions (good for many people) and using tax losses to decrease taxes owed today. For that second part, there's clear value in offsetting $3k in income, but that only goes so far. Going beyond that, I think this is accidentally a bad strategy for some people as it lowers your cost basis and potentially increases future capital gains. This comes with a TON of caveats and complexity - what is your future tax bracket, will you be in a position to never sell so your heirs can benefit from step up in cost basis, etd etc etc. So, lots of situation-specific considerations and analysis to look at there.
So curious - did your resulting cost basis go down by $45k as a result of Frec's tax loss harvesting? I may have missed it but didn't see that in your analysis.
Napkin math:
* Simple VTI / VOO buy+hold strategy would give you a cost basis of $355k (plus some, assuming you are reinvesting dividends)
* Frec's TLH would give a cost basis of $355k - $45k of tax losses == $310k (again, adjusted for dividend reinvestment)
Am I understanding that right?
Just curious - does Frec allow for transfers-in-kind in funding or contributing to accounts?
You are understanding perfectly. I think understanding the cost basis is really important. In a vacuum it is a tax deferral strategy, not a free lunch. If you don't have a use for the losses, or don't anticipate having a use, the ROI becomes much lower. In the section https://www.faangfire.com/i/197409939/should-you-explore-direct-indexing I was more explicit in how I have specific gains I am offsetting right now.
You can bring in shares in-kind into Frec. Lots of ways to go about it depending on what you are trying to do. Two quick examples I have seen:
I have seen multiple people move from other direct index providers to Frec to lower fees.
Use an existing handful of stocks they already have + new cash to get things going.
Woah - the transfer-in-kind could be a game changer (combined with low fees). I know someone that has highly appreciated position that is over 50% of taxable portfolio. Thanks for sharing this info!
So you can’t turn the concentrated position into a diversified position (that would be like an exchange fund or 351 exchange). They do have a “diversify” product, but that is beyond comment scope!
Couldn’t you accomplish something similar by buying the index outright, selling covered calls, and then rolling the position forward if the index goes up?
Not exactly. Covered calls is an income generation strategy, while direct indexing is a tax deferral strategy. Broadly different. There is an options strategy that could work here, called variable pre-paid forwards. But I am not an expert here, and because my partner works at the company we hold the concentrated positions in, we can't utilize.
Love the transparency (though I think I only made it halfway down the rabbit hole).
Zeroing in on "Why would you want to do this?" - reason #1 makes complete sense, and at this expense ratio is quite compelling.
I think there's actually 2 parts to reason #2 : using tax losses to de-concentrate other positions (good for many people) and using tax losses to decrease taxes owed today. For that second part, there's clear value in offsetting $3k in income, but that only goes so far. Going beyond that, I think this is accidentally a bad strategy for some people as it lowers your cost basis and potentially increases future capital gains. This comes with a TON of caveats and complexity - what is your future tax bracket, will you be in a position to never sell so your heirs can benefit from step up in cost basis, etd etc etc. So, lots of situation-specific considerations and analysis to look at there.
So curious - did your resulting cost basis go down by $45k as a result of Frec's tax loss harvesting? I may have missed it but didn't see that in your analysis.
Napkin math:
* Simple VTI / VOO buy+hold strategy would give you a cost basis of $355k (plus some, assuming you are reinvesting dividends)
* Frec's TLH would give a cost basis of $355k - $45k of tax losses == $310k (again, adjusted for dividend reinvestment)
Am I understanding that right?
Just curious - does Frec allow for transfers-in-kind in funding or contributing to accounts?
You are understanding perfectly. I think understanding the cost basis is really important. In a vacuum it is a tax deferral strategy, not a free lunch. If you don't have a use for the losses, or don't anticipate having a use, the ROI becomes much lower. In the section https://www.faangfire.com/i/197409939/should-you-explore-direct-indexing I was more explicit in how I have specific gains I am offsetting right now.
You can bring in shares in-kind into Frec. Lots of ways to go about it depending on what you are trying to do. Two quick examples I have seen:
I have seen multiple people move from other direct index providers to Frec to lower fees.
Use an existing handful of stocks they already have + new cash to get things going.
Woah - the transfer-in-kind could be a game changer (combined with low fees). I know someone that has highly appreciated position that is over 50% of taxable portfolio. Thanks for sharing this info!
So you can’t turn the concentrated position into a diversified position (that would be like an exchange fund or 351 exchange). They do have a “diversify” product, but that is beyond comment scope!