Investment gains are a double-edged sword.

The good news: good decisions and good market conditions created a great outcome. The bad news: the portfolio is now overweighted in the holdings that have outperformed.

Anyone who has allocated a portfolio, only to see a handful of holdings significantly outperform, is faced with a familiar choice…

Option 1: Leave the portfolio off-balance, with an overweight to potentially overvalued positions.

Option 2: Rebalance, and trigger capital gains in the process. We call this Tax Drag – Capital that remains invested incurs a tax liability caused by portfolio management.

Before making the decision, there are plenty of variables to consider: What if the realized gains are short term? What if those gains increase Medicare premiums due to IRMAA (Income-Related Monthly Adjustment Amount)? What if they are selling other appreciated assets this year, and these gains push them into a higher bracket?

After evaluating all of these factors, having multiple conversations (including at least one involving a tax professional), a final decision is reached. Either the portfolio remains off balance, or taxes are voluntarily triggered.

But what if there was an Option 3?

We explored every tax-efficient portfolio solution we could find: Direct indexing. Tax-loss harvesting SMAs. Managed portfolios with long / short overlays. They all have one thing in common: They generate, then harvest, tax losses to offset gains.

None of them structurally remove the taxes created by rebalancing portfolios.

That is why we created OTAX.

Wrapping a disciplined, broad market equity sleeve inside a single ETF moves the rebalance transactions that create Tax Drag out of individual client accounts and into the ETF. The same ETF tax efficiency we all know and love is now brought directly into client accounts, which effectively eliminates ongoing Tax Drag on invested equity.

Since this is a structural solution, it compounds in effectiveness over time. The other solutions, which rely on offsetting gains with losses actually lose effectiveness over time if markets rise.

With OTAX, structure compounds alpha.

To see a case study with specific examples of how this solution integrates into a private wealth practice, please contact us: austin@optimaltaxinc.com