u/ByzGen

One thing I don't really understand from what I've read so far: If you do not have direct indexing (you have ETFs) then TLH works by selling one ETF to harvest the loss and buying another that is a different ETF but tracks the same index or something. So far so good, but what if you have direct indexing (account over 100k) instead?

Somebody in another thread gave me the example that it might sell Coke and buy Pepsi but that doesn't seem nearly as straightforward. Even those two might be quite different businesses even if their products are quite similar, and of course the decision wouldn't be based on product per se.

What I'm wondering is how the algorithm would actually decide what to buy instead. For the main Automated Index Investing accounts, I think there also wouldn't be an index to help guide that decision either.

I'm interested in the SP500 Direct Indexing offering. One thing I don't feel like I have a handle on, though, is how tax-loss harvesting might affect how well the product actually tracks the SP500.

For example if a stock is down, the algorithm may sell it to realize a loss. That also means though that you won't own that stock anymore, or at least not as much of it. So then if it goes up by a lot later (or, of course, down further later), that will not register in your portfolio.

So, it seems that as a consequence of this, SP500 Direct Indexing will not track the SP500 as well as a pure ETF, though you do get the benefit of tax loss harvesting.

What I was hoping was to understand what this might really look like in practice. One might imagine that the effect is greater for smaller accounts than larger ones (assuming it doesn't attempt to harvest more than X in losses), but I don't really know. I also don't know if there are any guardrails or limitations that might help limit the effect. Maybe there is a better way to think about this than I have so far.

I emailed support like this a while back but I didn't really get as good of an answer as I was hoping for. It might be good if there were a one-pager or whitepaper about this, or at least more FAQs.