Weathering market volatility with loss harvesting

Key Takeaways

• The first three weeks of April 2025 were plagued by volatile financial markets featuring a CBOE volatility index spike to more than 50 and a decline in the S&P 500 Index of 8.02%.¹
• Aperio Direct Indexing accelerated its loss harvesting program during the volatile period, harvesting $600 million in losses for its investors.²
• The volatile period featured an increase in loss harvesting efficiency and vigilant risk control.

April 2025 may be remembered for financial turbulence. The CBOE Volatility Index (VIX), a standard measure of the stock market’s expectation of volatility, spiked to more than 50 on Tuesday April 8, a level not seen since the March 2020 Covid crisis.¹ While a volatile market environment can be devastating for some investors, it is ideal for loss harvesting, the realization of capital losses, in combination with other financial objectives. Realized losses are the lifeblood of tax-aware investing. When they are harvested by direct indexing in a separately managed account (SMA), an investor may benefit by using realized losses to offset capital gains elsewhere in their portfolio. This generates a financial tax benefit, the amount by which realized losses may lower an investor’s tax bill. Between April 1 and April 21, Aperio Direct Indexing traded more than $13.2 billion, harvesting losses in excess of $600 million. As a baseline, we harvested just over $100 million in losses during the entire month of January.²

Loss harvesting strategies are option-like. They provide value when the market price of an asset falls below its original purchase price, which acts as a strike price. Many option-like strategies, including loss-harvesting, tend to increase in value as turbulence increases, since turbulence improves the chances that the market price will breach the strike price. This explains, in part, the phenomenal performance of Aperio Direct Indexing strategies amid the tariff volatility. Decomposing the cumulative losses in daily losses illustrates the positive association between loss harvesting and volatility. Between April 1 and April 21, Aperio Direct Indexing realized an average of $43 million per day. As a benchmark, we realized a little over $6.5 million per day in January.²

A performance highlight is provided by our long/short tax-aware strategies which we launched in January 2023. The leverage in these strategies materially increases an investor’s gross exposure to the market, leading to substantially greater loss-harvesting capabilities. As of April 21st, roughly 7% of the $1.3 billion in realized losses were generated by long/short portfolios, which account for a much smaller percentage of our $110 billion in equity under management.²

There is more, however, to tax-aware investing than simply harvesting losses. Like a champion cyclist in a windstorm, an effective loss harvesting program increases its efficiency and risk control during bouts of market turbulence. Losses tend to be more abundant and deeper in volatile periods, facilitating more efficient harvesting of losses, even in portfolios that are older or in wash sale. This efficiency enables Aperio Direct Indexing to customize and control risk, even as we accelerate the delivery of losses.

Using the metric of losses harvested per $100 dollars traded, we see a positive association between Aperio Direct Indexing’s efficiency and the level of market turbulence. In January 2025, we harvested between $2 and $4 dollars in losses for every $100 dollars traded. In the first three weeks of April, the corresponding value grew to between $5 and $7 dollars for every $100 dollars traded. This increase is for long-only, long-short, index-tracking, values-aligned, factor-tilted, young and old portfolios alike.²

Risk control is an essential feature of tax-aware investing. Especially in turbulence, loss harvesting that is too aggressive may increase tracking error to a benchmark, exposing investors to the possibility of substantial underperformance in the future. To work against this unwanted outcome, Aperio Direct Indexing carefully and systematically evaluates the trade-offs between tax benefit and tracking error. While risk control in some portfolios may be more challenging in turbulence, the median change in tracking error due to rebalancing was stable and close to zero this year through April 21, 2025.

Effective tax-aware investing is a delicate balance between the realization of capital losses and the pursuit of other financial objects, such as tracking a benchmark. Aperio Direct Indexing achieves this balance for its clients in individually customized portfolios, in calm and turbulent markets.

Bouts of market turbulence may feel unsettling as they unfold, but they are endemic to financial markets. While we cannot predict the timing or duration of turbulence, it can provide material advantages to well-positioned investors. Loss harvesting in an SMA may provide substantial financial benefit to a taxable investor with realized capital gains currently in their portfolio or the expectation of capital gains in the future. Over the last few years, the adoption of loss-harvesting strategies in public equities has grown appreciably. This has led to more varied offerings, including tax-aware active strategies, and greater customization to investors’ needs and wishes. The performance of tax-aware strategies in the 2025 tariff volatility provides concrete evidence of the value of loss harvesting. To learn more about direct indexing and tax-aware investing, visit the Aperio Direct Indexing page.

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