Harvesting Losses in a Strong Market: a Story of Success in 2025

Key Takeaways:

• As the S&P 500® soared 17.88% in 2025, Aperio Direct Indexing harvested approximately $3B in losses across all tax-managed accounts.¹
• Scale and speed, dispersion, and long/short extensions are the elements of a successful loss harvesting program.
• With a systematic approach, tax-loss harvesting can be a year-round opportunity regardless of market conditions.

It is conventional wisdom that the benefits of loss harvesting stem largely from market downturns, but 2025 told a different story. As the S&P 500® soared 17.88% and set a new high on Christmas Eve, Aperio Direct Indexing clients quietly realized approximately $3 billion in losses across all tax-managed accounts. How did this happen in a year when the market was mostly climbing? The answer starts with how loss harvesting works within a Direct Indexing portfolio and the disciplined process required to execute it effectively.

Realized losses are the lifeblood of tax-managed investing. When harvested through direct indexing in a separately managed account (SMA), those losses can potentially be used to offset capital gains elsewhere in an asset allocation to lower an investor’s tax bill. There are three elements to capturing the benefits of loss harvesting: having the scale and speed to act when brief opportunities appear, following a systematic process that taps into stock-level dispersion, and, for eligible investors, incorporating long/short extensions that broaden the set of harvestable positions. These elements shaped Aperio’s 2025 results and underscore what robust direct indexing capabilities look like in practice.

1. Scale and speed are crucial, especially in volatile markets.

A successful loss harvesting program must be ready to capitalize on opportunities as they present themselves. In recent years, market pullbacks have often been followed by rapid rebounds, leaving only short windows to capture losses. These V-shaped patterns mean that a Direct Indexing manager must be able to move quickly and have systems capable of operating on a large scale.

April 2025 was a prime example. It stands out in Figure 1, which shows the relationship between losses harvested in Aperio accounts and the CBOE Volatility Index (VIX), a standard measure of expected volatility in the US market, over calendar year 2025. When fluctuations increased in April, stock prices moved far enough from their original purchase prices to create loss harvesting opportunities. During this brief bout of volatility, Aperio Direct Indexing set internal all-time records for trades, trade programs, accounts traded, and dollars traded. This short window of turbulence created an exceptional opportunity for loss harvesting.

2. Dispersion powers systematic loss harvesting in calm markets.

Despite the record-setting internal activity during that brief period of volatility in April, those Aperio losses accounted for only 25% of the total in 2025. In other words, most loss harvesting occurred in calmer periods. This is possible because systematic loss harvesting takes advantage of cross-sectional stock return dispersion. Even when the market is up, many individual stocks can be down. For example, in May, the S&P 500 Index increased by 6.29%, while approximately 30% of its constituent stocks declined in value. In each of four separate months in 2025, more than half the index constituents were in the red. By consistently scanning for losses across all holdings, managers can capture opportunities that might otherwise be missed. Figure 2 illustrates how dispersion created opportunities for loss harvesting, even in a strong market.

3. Long and short extensions enhance loss harvesting in all markets.

While systematic loss harvesting may be effective in all market environments, there is enhanced opportunity for investors who lever by creating long and short extensions. We name these levered strategies in terms of the (typically equal) sizes of the extensions as a percentage of dollars invested. For example, 140/40 refers to a strategy with long and short extensions that are 40% of dollars invested. These strategies allow managers to harvest losses not only from long positions in declining stocks but also from short positions in rising stocks. This dual approach can significantly increase the capacity to harvest losses relative to a long-only portfolio. Figure 3 illustrates how leverage amplified loss harvesting.

Successful loss harvesting is more than reacting to market downturns or realizing losses at the end of the year. It requires operational scale and a systematic approach that takes advantage of stock dispersion in all market environments. We are ready to harvest losses for taxable investors no matter what 2026 brings. To learn more about direct indexing and tax-managed investing, visit the Aperio Direct Indexing page.