Wealthfront is built on the philosophy that passive investing is the key to long-term success. But we always try to go above and beyond to help your portfolio perform better. In other words, we try to give you an edge.
To do that we first launched Tax-Loss Harvesting, which takes advantage of movements in the market to lower your tax bill without disrupting your overall investment strategy. Then we built Direct Indexing, an enhanced form of Tax-Loss Harvesting that looks for movements within individual stocks to lower your tax bill even more. Today we’re excited to announce our newest investment feature: Advanced Indexing.
An improvement on a strategy commonly referred to as “Smart Beta”, Advanced Indexing works to increase your returns by weighting the individual securities in your portfolio more intelligently. Academic research shows that stock returns are determined by their exposure to “factors,” or common sources of risk. By optimizing the portfolio’s exposure to a collection of time-tested factors, our research team was able to deliver a strategy that can improve returns, while closely tracking the performance of the broad index. And our expert technology enables this to happen automatically, without any effort on your part.
Advanced Indexing is available now to clients with at least $500,000 in their Wealthfront taxable investment account. Here are the primary benefits of Advanced Indexing:
Because Advanced Indexing is paired with Direct Indexing, we’re able to minimize the impact of taxes on your excess returns. No other Smart Beta service or fund is able to do this.
While there are many investment factors to consider when assessing an individual security, 95% of Smart Beta ETFs only use one factor. But our research team analyzed the data and determined that by diversifying across factors, you can improve your returns, keep the risk of your portfolio unchanged, and maximize the chances of outperforming a simple, cap-weighted index.
It has no fee
Advanced Indexing is available for no additional fee above and beyond the standard Wealthfront advisory fee. This is significant, as no other issuer of a factor weighted index funds does this. In fact, they often charge an incremental fee at least equal to the benefit of the feature. With Advanced Indexing all of the benefit goes to you.
Putting it all together
With the addition of Advanced Indexing, we now have three unique value added investment features that you can’t find combined anywhere else. So today we’re also excited to announce that these features now live under the name PassivePlus®.
The PassivePlus signature suite of investment features can substantially improve the value of your portfolio over time. As you can see in the example below, if you invest $100,000 today (assuming a risk score of 7 and quarterly deposits of $10,000 and a market return of 5.3%), you can expect the value of your portfolio to grow to $3.27 million over 30 years. But your account value jumps to $4.82 million over the same time period if you add the power of PassivePlus.
When we launched Wealthfront our goal was to democratize access to sophisticated financial services. With PassivePlus, we’re over-delivering on that promise so you can live the life you want to live.
 MorningStar, 2016
The projected returns for the account are based on an inception value of $100,000 and reflect projections based on backtesting of Direct Indexing. To arrive at the displayed average benefit of 0.20% from Direct Indexing, we performed a simulation of the 10 year differential internal rate of return (IRR) of Direct Indexing from the Wealthfront WF100 portfolio. The simulation compared the potential additional return achieved through six (6) distinct 10-year periods from 2000 through 2014 using IRR (Internal Rate of Return) and assumed a Wealthfront risk score 7 portfolio and a married couple with a combined federal and state short-term capital gain tax rate of 42.7% and a combined federal and state long-term capital gain tax rate of 24.7% We also assumed an initial deposit of $100,000 followed by add-on deposits of $10,000 every quarter. Dividends, earnings and interest were not considered and results are presented net of fees. Review further details in our Direct Indexing Whitepaper.
The additional projected benefits of Advanced Indexing are applied beginning at the $500,000 account value, and based on backtesting of a model investment account with a Wealthfront risk score of 7. To arrive at the additional average benefit of 0.30% from Advanced Indexing, we studied historical and back-tested data for the model account between January 2000 and December 2014, and assumed an initial deposit of $500,000 and additional quarterly deposits of $10,000. The results of our research were adjusted to reflect the reinvestment of dividends, income, and other earnings and are presented net of fees. Review further details in our Advanced Indexing Whitepaper.
Taxes and fees
For the annual net-of-fees after-tax benefit of Direct Indexing and Advanced Indexing, we assumed an annual net of fee after tax benefit estimate of 42.7% combined federal plus state income tax rate (assumed for joint income of $250-400K in California). Our standard annual advisory fee is 0.25% of assets under management. In some circumstances, Wealthfront offers its clients the opportunity to have a portion of their account managed for free. However, this amount can vary. For the purposes of this calculation, we have assumed the standard 0.25% advisory fee applies to the full account size.
Hypothetical calculations and backtested projections are not an indicator of any investor’s actual current or future experience and are provided for illustrative purposes only. Hypothetical performance is developed with the benefit of hindsight and has inherent limitations. Specifically, hypothetical results do not reflect actual trading or the effect of material economic and market factors on the decision-making process. Wealthfront assumed we would have been able to purchase the securities recommended by the model and the markets were sufficiently liquid to permit all trading. Investors evaluating this information should carefully consider the processes, data, and assumptions used by Wealthfront in creating its simulations.
Nothing in this blog should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. Financial advisory services are only provided to investors who become Wealthfront Inc. clients pursuant to a written agreement, which investors are urged to read carefully, that is available at www.wealthfront.com. All securities involve risk and may result in some loss. For more information please visit www.wealthfront.com or see our Full Disclosure. While the data Wealthfront uses from third parties is believed to be reliable, Wealthfront does not guarantee the accuracy of the information.
This blog is not intended as tax advice, and Wealthfront does not represent in any manner that the tax consequences described here will be obtained or that Wealthfront’s investment strategy will result in any particular tax consequence. The tax consequences of this strategy and other Wealthfront strategies are complex and uncertain and may be subject to challenged by the IRS. Wealthfront’s investment strategies, including portfolio rebalancing and tax loss harvesting, can lead to high levels of trading. High levels of trading could result in (a) bid-ask spread expense; (b) trade executions that may occur at prices beyond the bid ask spread (if quantity demanded exceeds quantity available at the bid or ask); (c) trading that may adversely move prices, such that subsequent transactions occur at worse prices; (d) trading that may disqualify some dividends from qualified dividend treatment; (e) unfulfilled orders or portfolio drift, in the event that markets are disorderly or trading halts altogether; and (f) unforeseen trading errors.
Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. The effectiveness of the tax-loss harvesting strategy to reduce the tax liability of the client will depend on the client’s entire tax and investment profile, including purchases and dispositions in a client’s (or client’s spouse’s) accounts outside of Wealthfront and type of investments (e.g., taxable or nontaxable) or holding period (e.g., short- term or long-term). The performance of the new securities purchased through the tax-loss harvesting service may be better or worse than the performance of the securities that are sold for tax-loss harvesting purposes.
There is a chance that Wealthfront trading attributed to tax loss harvesting may create capital gains and wash sales and could be subject to higher transaction costs and market impacts. In addition, tax loss harvesting strategies may produce losses, which may not be offset by sufficient gains in the account and may be limited to a $3,000 deduction against income. The utilization of losses harvested through the strategy will depend upon the recognition of capital gains in the same or a future tax period, and in addition may be subject to limitations under applicable tax laws, e.g., if there are insufficient realized gains in the tax period, the use of harvested losses may be limited to a $3,000 deduction against ordinary income and distributions.
Wealthfront only monitors for tax-loss harvesting for accounts within Wealthfront. The client is responsible for monitoring their and their spouse’s accounts outside of Wealthfront for “wash sales.” A client may request spousal monitoring online or by calling Wealthfront at (844) 995-8437 If Wealthfront is monitoring multiple accounts to avoid the wash sale disallowance rule, the first taxable account to trade a security will block the other account(s) from trading in that same security for 30 days. A wash sale is the sale at a loss and purchase of the same security or substantially similar security within 30 days of each other. If a wash sale transaction occurs, the IRS may disallow or defer the loss for current tax reporting purposes.