Investment Process

First Trust Direct Indexing provides exposure to a variety of benchmarks through direct ownership of individual securities in a portfolio via a tax-advantaged SMA. These SMAs offer continual portfolio review with intra-day tax-loss harvesting to provide a greater ability to generate tax alpha. They can be customized based on factor tilts or personal values while keeping tracking error in line with a specified target.
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Potential to Maximize After-Tax Returns

Tax-Advantaged Investing

Assumptions: Initial Investment Amount: $1 Million | Annualized Equity Market Return: 8% | Dividend Tax Rate: 23.80% | Long-Term Capital Gains Tax Rate: 23.80% | Short-Term Capital Gains Tax Rate: 40.80%. This sample provided does not reflect the investment results of actual securities and is not a guarantee of future results. Changes to the assumptions will drastically change the results. Chart Methodology: The sample provided assumes a starting basket of 300 equally-weighted hypothetical securities. Returns are randomly simulated monthly with the annualized mean chosen above and annualized standard deviation of 30%. It is assumed that the portfolio's 2% annualized dividend yield is subject to income tax and is reinvested monthly into a new tax lot. The "Passive" strategy simulates a buy-and-hold strategy over the investment horizon. The "Tax-Advantaged" strategy simulates a tax-loss harvesting strategy. In any period that a tax lot's cumulative loss exceeds 5%, the tax lot is sold, and the proceeds are immediately reinvested, plus any tax benefit, into a new tax lot. Tax benefit calculations assume that the capital gains offset by the harvested loss are 50% short-term and 50% long-term. The Monte Carlo simulation takes an average across 2000 iterations for each set of return, risk, and tax assumptions. The sample presented does not represent actual trading of securities and is not indicative of actual investment strategy performance. The impact of market factors is not included in this simulation which may cause the results to be over-or-under stated. This should not be construed as a representation that any account will, or is likely to, achieve profits, losses or tax savings similar to those reflected in this example.

Enhanced After-Tax Returns

Direct indexing provides an enhanced ability to generate tax alpha, which optimizes after-tax returns. While alpha is a measure used to evaluate portfolio returns in excess of a benchmark index, tax alpha is a measure of after-tax account return that exceeds pre-tax return in excess of a benchmark. The example shown here illustrates the tax alpha that may be achieved by the growth of an initial investment over a 25-year period.


Tax-Efficient Transitions of
Appreciated Securities

Proper tax management is especially important when exiting securities with appreciated gains. When transitioning securities into a Direct Index SMA, the account can be funded in-kind without creating a taxable event. The tax management tools available through direct indexing can be used to achieve a tax-efficient portfolio transition and potentially minimize, delay, or avoid net taxes.


First Trust Direct Indexing provides comprehensive and flexible options to allow your portfolio to reflect your values.

Portfolios can be constructed to align with specific objectives or values, such as Environmental Social Governance (ESG), Socially Responsible Investing (SRI), faith-based values or United Nations Sustainable Development Goals (UN SDGs).
Unlike broad index funds which may own companies involved in activities that violate an investor’s conscience, a Direct Indexing portfolio can be built to align with specific objectives or values. One’s personal values can be applied by excluding companies to avoid owning “undesirable” companies or to tilt the portfolio toward owning “desirable” companies.

An Alignment of Strengths

Over its 30-year history, First Trust has worked alongside financial professionals to provide tools, resources, and trusted investment products, many of which are designed to minimize the effect taxes have on a portfolio. In July 2022, First Trust expanded on this mission by adding an affiliate, First Trust Direct Indexing L.P. (formerly Veriti Management LLC), a direct indexing asset technology company that delivers customized investment solutions with more opportunity for tax-efficiency and values-based personalization. This combination of strengths provides a platform that allows advisors to align the investment objectives, values, and interests of their clients with tried-and-true methodologies offered by First Trust and its affiliates.

Contact Us

To ask a question or to schedule a demonstration of our direct indexing solutions please call or fill out the form below.


33 Arch Street, Suite 1700, Boston MA 02110


(866) 848-9727