Equity SMAs, explained.

An equity separately managed account (SMA) is a professionally managed portfolio in which the investor directly owns the individual stocks — not shares of a fund. The manager builds and rebalances the portfolio on the investor's behalf, typically against a benchmark such as the S&P 500 or Russell 3000, while the holdings sit in the investor's own custodial account.

Because you directly own each security, the manager can selectively sell positions that have declined in value to realize capital losses. Those losses can offset capital gains elsewhere in your portfolio — including gains from other asset classes — or, up to $3,000 per year, offset ordinary income. Losses in excess of that limit carry forward to future years. Advisors must navigate the wash-sale rule, which disallows a loss if a substantially identical security is repurchased within 30 days before or after the sale.

Direct indexing is an equity SMA strategy that seeks to replicate the holdings of a market index — such as the S&P 500 — by holding the individual constituent stocks directly in the client's account, rather than through an ETF or mutual fund wrapper. Owning the stocks individually enables security-level tax-loss harvesting, custom screens, and factor tilts that a pooled fund cannot accommodate.

Traditional equity SMA minimums commonly range from $100,000 to $250,000, with some strategies — particularly complex fixed-income or hybrid mandates — requiring $500,000 or more. Technology has compressed minimums over time; some simplified direct-indexing models now start at lower thresholds, though fully customized solutions generally remain at $100,000 and above. Confirm the specific minimum for any strategy you are evaluating.

In an ETF you own shares of a pooled fund alongside other investors, absorbing embedded capital gains from the fund's activity and holding a standardized basket with no individual customization. In an equity SMA you own each stock directly, which enables security-level tax-loss harvesting, personal screens (such as ESG exclusions or employer-stock restrictions), factor tilts, and greater transparency — at the cost of a higher minimum and an advisory fee rather than a disclosed expense ratio.

Lot-level (or security-level) tax-loss harvesting means the manager can sell individual positions — or even individual tax lots within a position — that are showing an unrealized loss, without disturbing the rest of the portfolio. An ETF or mutual fund cannot do this for you: the fund may harvest internally, but you as a shareholder have no control over the timing. In an equity SMA the manager typically scans the portfolio on a daily or weekly basis, sells any lot that crosses a loss threshold, replaces it with a correlated but not substantially identical security to preserve market exposure, and books the capital loss in your account. Those losses can then offset gains from other securities, other asset classes, or — up to $3,000 per year — ordinary income. The wash-sale rule (IRC § 1091) requires a 30-day window before the sold security can be repurchased. Individual tax situations vary; consult a qualified tax adviser.

Primarily deferral. When a position is sold at a loss and a substitute is purchased, the substitute carries a lower cost basis — meaning gains are larger when that substitute is eventually sold. The economic benefit is the time value of the deferral, roughly an interest-free loan on the deferred tax amount. The deferral becomes a permanent benefit when: (1) appreciated positions are donated to charity or a donor-advised fund (removing embedded gains entirely), (2) the investor's estate receives a step-up in cost basis at death (IRC § 1014, which as of mid-2026 remains law), or (3) positions are held until a year when the investor is in a lower tax bracket. Past tax outcomes are illustrative — not a forecast of future results. Individual circumstances vary materially; consult a qualified tax adviser.

A factor tilt systematically overweights securities with characteristics historically associated with return premia — value (low price-to-book or price-to-earnings), quality (high return on equity, low leverage), momentum (recent price leadership), low volatility (low beta), or size (smaller companies). In an equity SMA the optimizer adds factor exposure as an additional objective alongside benchmark tracking and tax management, producing a portfolio that leans toward the desired factor while still broadly resembling the index. Unlike a one-size-fits-all factor ETF, the tilt is applied within the specific constraints of your existing holdings, tax lots, and any screen requirements. Factor tilts increase turnover and tracking error relative to a pure market-cap-weighted benchmark and do not guarantee outperformance.

Because you own each stock directly, the manager can apply exclusions or inclusions at any time without selling an entire fund. Common customizations include negative screens (removing tobacco, civilian firearms, fossil-fuel producers, or private prisons), positive best-in-class screens (retaining only companies above a minimum ESG score within each sector), norms-based screens (excluding UN Global Compact violations), and single-company exclusions (such as a current employer's stock). An off-the-shelf ESG ETF is locked into its fund's methodology; your direct-indexed portfolio's screens can be updated whenever your preferences or circumstances change. Removing large-cap names introduces sector-level tracking error; the manager's optimizer typically substitutes other names within the sector to partially offset the deviation.

Yes. The most common approach is a completion portfolio: the concentrated position is maintained (often in a separate account or as a large sleeve), while the direct-indexed portion excludes that stock and underweights its sector, so that the investor's combined holdings more closely resemble a diversified index. The manager can also execute systematic lot sales — selling small amounts of the concentrated position each year within a capital-gains budget — to gradually reduce concentration without triggering a large single-year tax event. Donating the highest-gain lots from either the concentrated position or the broader SMA to a donor-advised fund is another strategy; direct ownership of individual lots makes identifying the optimal lot for a charitable contribution straightforward. This is educational context, not tax advice; a qualified tax and financial adviser should evaluate your specific situation.

An equity SMA is most likely to justify its higher cost — typically 0.15%–0.45% per year versus 0.03%–0.07% for a broad-market index ETF — when several conditions are present together: (1) the account is in a taxable (non-IRA) account, since tax-loss harvesting has zero value inside a tax-deferred account; (2) the investor is in a high marginal tax bracket (combined federal and state rate above roughly 30% on capital gains); (3) the portfolio is large enough ($250,000 or more) for the absolute-dollar tax savings to meaningfully exceed the fee premium; and (4) the investor has real customization needs — ESG constraints, factor preferences, or concentrated-position management — that no available ETF can accommodate. Conversely, a low-cost index ETF is generally the better choice for tax-deferred accounts, lower-bracket investors, small portfolios, or investors who simply prefer a single-fund approach with no tracking error. These are general principles; specific outcomes depend on individual tax circumstances, market conditions, and time horizon.