While the market was rising…
Earnings surprises, upbeat guidance from retailers and the Fed rate cut in September led the stock market steadily higher over the period. The S&P 500® Index delivered a positive return each month, ending up 8.12% for the quarter. That gain comes on top of the rally following the volatility around the “Liberation Day” tariff announcements on April 2. Since the market closed at a low on April 8, the S&P 500 was up over 35% through the third quarter.
Of particular note was the breadth of the rally: Smaller caps outpaced the larger issues, and growth stocks once again dominated the landscape. Nearly one third of the S&P 500 constituents ended the quarter with double-digit gains. All sectors but Consumer Staples posted solid returns, led by Information Technology and Communication Services at 13.19% and 12.04%, respectively.
… Parametric could still harvest losses
Despite the rising markets, losses could still be found in Custom Core portfolios. An investor owns the underlying securities of their Custom Core benchmark, so the whole market doesn’t have to decline to benefit from active tax management. As long as individual securities or sectors are down, there are still opportunities to capture losses.
During the third quarter, tax loss harvesting opportunities were less abundant than in the more volatile quarters earlier in the year. Yes, market breadth was strong—63% of the S&P 500 constituents posted positive returns. Yet the depth of losses among the index decliners was surprisingly acute, with an average loss of -9.10%. In every sector, the average loss of the decliners exceeded -6%, and three sectors posted double-digit average declines among their losing stocks. That turned out to be beneficial for finding losses available to harvest.
For the quarter, Parametric’s systematic approach to loss harvesting realized almost $1.5 billion in losses across over 235,000 trades, delivering a potential tax benefit1 of more than $540 million. Through the first three quarters, Parametric has harvested over $7 billion in losses, with a potential tax benefit of more than $2.5 billion.2
The bottom line
Even in periods when the market is climbing, Parametric’s systematic approach to tax management can deliver tax benefits by looking for opportunities to realize losses on a daily basis. Investors in an SMA hold the individual securities, unlocking tax loss harvesting potential beyond what’s available in mutual funds and ETFs.
1 The potential tax benefit is calculated by applying the maximum federal rates for short-term and long-term capital gains, which are currently 40.8% and 23.8%, respectively.
2 Source: Parametric, 9/30/2025. The information is provided for illustrative purposes only. Values are aggregated across all equity direct indexing strategies. Only client positions with unverified cost basis were excluded from calculations. Loss calculation is based on the amortized book price minus the sell price, represents historical information and should not be construed as future results. Loss information illustrates the effect to a portfolio and is not representative of, and should not be construed as, performance. There is no assurance that tax loss harvesting will continue in the future. There is no guarantee that any specific account may engage in tax loss harvesting.
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Parametric and Morgan Stanley do not provide legal, tax, or accounting advice or services. Clients should consult with their own tax or legal advisor prior to entering into any transaction or strategy described herein.
The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Parametric and its affiliates disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Parametric are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Parametric strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results. All investments are subject to the risk of loss. Prospective investors should consult with a tax or legal advisor before making any investment decision. Please refer to the Disclosure page on our website for important information about investments and risks.
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