- The race to $0 commissions for Stocks and ETFs.
- New Fin Tech platforms like M1 Finance that simplify portfolio management.
- Wide-array of ETFs that sample different parts of the market.
- Large charitable contributions create tax opportunity with appreciated shares.
- High state and federal tax brackets create tax-loss harvesting opportunities.
Caveats: Do keep in mind I'm in the early stages of exploring this strategy. There are unknowns that are yet to be found. It also requires $100,000+ taxable portfolio and high tax brackets to start providing some meaningful tax benefits.
### Direct Indexed Portfolio ###
A key metric was to minimize tracking-error against US Total Stocks. I found the S&P 100 index to be a good replication target as it hops a bit around the top 250 stocks by market-cap. Then I paired with Vanguard mid/small cap ETFs to match the rest of VTI. Vanguard's use of CRSP indexes helps here as mid-cap is higher up the market-cap chain than other mid-cap indexes.
Next, a sanity check in Portfolio Visualizer for the following two portfolios shows near-identical performance. It remains to be seen whether tracking error can be significantly overcome with tax-efficiency.
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### 70/30 Three-fund Portfolio ###
42% - Vanguard Total Stock Market ETF (VTI)
28% - Vanguard Total International Stock ETF (VXUS)
30% - Vanguard Total Bond Market ETF (BND)
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### 70/30 Slice-and-dice Portfolio ###
25% - S&P 100 Individual Stocks (OEF)
11% - Vanguard Mid-Cap ETF (VO)
6% - Vanguard Small-Cap ETF (VB)
28% - Vanguard Total International Stock ETF (VXUS)
30% - Vanguard Total Bond Market ETF (BND)
The other key metric was managing complexity. Here is a sample 70/30 M1 Direct Index Portfolio which is easy to understand and rebalance. At the top level, it looks like a classic three-fund portfolio.
Under the hood, the Total US Stock Market Pie is a slice-and-dice of mid/small cap ETFs and the direct-indexed S&P 100. For this pie, I grouped the top 90+ S&P 100 stocks into sectors and then grouped them into a single S&P 100 pie all weighed by Market-cap.