A Silver Lining of Volatility? Dimensional UMAs at Work
Stock market volatility has risen in recent weeks, reaching levels not seen in nearly five years.1 The S&P 500 Index was down 11.2% month-to-date through April 8, before springing back on April 9. Amid the tumult, Dimensional UMAs were able to capture meaningful opportunities for tax loss harvesting. Accounts applying active tax management approaches harvested over $12 million in losses from the start of the month through April 8.
Dimensional UMAs allow investors to customize their level of tax management (see Exhibit 1) with three active tax management approaches (Light, Standard, and Aggressive). Each strategy is designed with broad diversification and low turnover, aiming to systematically pursue higher expected returns while enhancing tax efficiency.
Customized Tax Management Levels in a Dimensional UMA
Market volatility presents a potential opportunity for accounts applying active tax management to systematically tax loss harvest, while seeking to use turnover to enhance portfolio positioning. Accounts applying the Light tax management approach may use harvested losses to reduce highly overweight positions. Accounts applying Standard and Aggressive tax management approaches aim to actively harvest losses for investors to offset gains outside of the account.
Accounts deploying these active tax management approaches (see Exhibit 2) were able to harvest meaningful losses over the first six trading days of April, with 71 basis points (bps) of loss harvested on average in standard accounts and 115 bps in aggressive accounts. This means that, on average, every $1 million invested meant harvested losses of $7,100 in standard accounts and $11,500 in aggressive accounts. These losses give investors the flexibility to potentially reduce their tax burdens by offsetting gains realized in other parts of their portfolio or offsetting current or future income up to $3,000 a year per IRS rules.
Losses Harvested in Standard and Aggressive Accounts
April 1, 2025–April 8, 2025
Contrary to a rigid indexed approach, Dimensional’s approach to loss harvesting considers the overall size, value, and profitability characteristics of the portfolio, aiming to effectively balance tax considerations and expected returns so that portfolios remain positioned to capture premiums when they materialize. And unlike direct indexing, we allocate proceeds from harvested losses to securities with higher expected returns based on the latest information in company prices and fundamentals.
While market volatility can make for a bumpy ride, it can also present an opportunity for systematic tax loss harvesting. Dimensional UMAs evaluate daily opportunities for tax loss harvesting, giving investors confidence that even on volatile days, their portfolio is working for them.
Glossary
Basis point: One basis point equals 0.01%.
Expected return: an estimate of average anticipated returns informed by historical data.
Size premium: The return difference between small capitalization stocks and large capitalization stocks.
Value premium: The return difference between stocks with low relative prices (value) and stocks with high relative prices (growth).
Profitability premium: The return difference between stocks of companies with high profitability versus those with low profitability.
Direct indexing: An investment strategy where investors own the individual stocks that make up a specific index, like the S&P 500 Index.
Footnotes
- 1. As measured by the CBOE Volatility Index (VIX). On April 8, 2025, the VIX reached 52.33. On April 21, 2020, the VIX was at 45.41. The CBOE Volatility Index, or VIX, is a real-time market index representing the market’s expectations for volatility over the coming 30 days.
Disclosures
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
Dimensional does not provide any investment, tax, or financial advice. Investors should consult with their financial advisors and tax professionals about their individual circumstances. There is no guarantee strategies will be successful.
Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
Dimensional may be directed to manage separate accounts in a predetermined tax sensitive manner by utilizing certain measures including, but not limited to, tax loss harvesting, seeking to minimize short-term capital gains, maximizing the qualified portion of dividend income, applying a tax-efficient lot selection methodology, and considering tradeoffs among premiums, costs, diversification, wash-sale rules, and capital gains in daily portfolio management. Additionally, certain events (including, but not limited to, client requests to update custodians, strategies, or client-directed restrictions; ongoing client activities like contributions, redemptions, and gifts; incorrect custodian account settings; and advisor direction) may limit Dimensional’s ability to engage in tax loss harvesting and to evaluate the tradeoffs outlined above. While Dimensional will regularly monitor accounts for tax loss harvesting opportunities, Dimensional might not engage in daily tax loss harvesting. For accounts that select Light tax management, Dimensional will seek to reduce highly overweight positions if there are losses available to offset any potential gains. If losses are not available, Dimensional may not sell down the overweight positions unless directed.
Dimensional will generally seek to limit potential wash sales in all accounts. “Wash sales” relate to a tax regulation that seeks to prevent investors from selling securities at a loss and then repurchasing the same or a substantially identical security in a span of 30 days before or after the sale. Dimensional may be unable to avoid wash sales or other tax consequences, particularly around client cash flows, corporate actions, or when clients hold substantially identical securities in accounts that are not managed by Dimensional or in accounts that are not linked to the separate accounts Dimensional manages (external accounts).
Certain UMA account types such as IRAs, solo 401(k)s, and other non-ERISA tax-advantaged accounts may only select no tax management when choosing a tax management approach.
Dimensional is solely reliant on accurate, thorough, and timely tax lot reporting from custodians. Should custodians fail to provide accurate, thorough, and timely tax lot data, Dimensional may be unable to transact in those accounts. The tax consequences of tax loss harvesting, including wash-sale rules, are complex and uncertain and subject to rulings by tax authorities. Dimensional does not provide tax advice, and each client should consult their own tax advisor or accountant. As such, Dimensional will not be responsible for any tax consequences of such transactions. Dimensional does not guarantee any particular tax outcome.