Tax management

Don’t sleep on the S&P 1500^® direct indexing strategy

August 21, 2025 - 10 min

The S&P 1500®: A tax-efficient alternative to the S&P 500®

Vice President, Investment Strategist – Natixis Investment Managers Solutions

As direct indexing continues to gain traction among investors seeking personalized and tax-efficient exposure to equity markets, the S&P 500^® remains the default index investors select to track. At Natixis, nearly two-thirds of our assets under management are tied to the familiar S&P 500^® large-cap index. However, the AIA S&P 1500^® strategy offers a compelling alternative that deserves closer attention – especially for those looking to optimize after-tax returns.

Why the S&P 1500^®?

The S&P 1500^® is considered an “all-cap” index that combines the S&P 500^® (large-cap), S&P 400^® (mid-cap), and S&P 600^® (small-cap), resulting in a broader and more diversified investment universe. While the S&P 500^® typically accounts for over 90% of the S&P 1500^®’s weight, the inclusion of small- and mid-cap stocks introduces some interesting advantages:

Expanded opportunity set: The allocation to small- and mid-cap stocks within the S&P 1500^® provides an additional 1,000 stocks to the investable universe to select from. The portfolio managers generally include about 50 of these names, which results in an approximately a 200-stock direct indexing portfolio compared to an approximately 150-stock direct indexing portfolio for the AIA S&P 500^® strategy.
Tax-efficiency potential: Smaller stocks tend to exhibit greater volatility and return dispersion, potentially creating more opportunities for tax loss harvesting. This has translated into consistently higher tax alpha for the S&P 1500^® strategy across multiple time horizons.
Upside potential: As small- and mid-cap companies grow and graduate into larger indices, they can contribute significantly to returns without triggering capital gains. That’s because in a discrete index such as the S&P 400^®, the mid-cap stock that grows and moves up to the large-cap S&P 500^® index may have to be sold at a gain when it’s no longer an index holding. Within the S&P 1500^®, the mid-cap stock would remain an index holding as it grows and may only need to be trimmed.
Sector diversification: The S&P 1500^® provides some differentiated sector exposure, particularly in information technology and communication services, where the weight to those sectors is less than the S&P 500^®. We know many clients have overweight positions in these areas due to outsized gains but are hesitant to add more at current valuations.

Although small- and mid-cap stocks have lagged large-caps for an extended period, several factors could shift the tide, such as potential Fed rate cuts, improving risk appetite, the removal of worst-case tariff scenarios, and a rebound in earnings. Fortunately, the performance impact of smaller companies in the S&P 1500^® has been muted, resulting in similar pretax returns to the S&P 500^® but with potentially more tax loss harvesting opportunities that can result in superior after-tax performance, making it a strong consideration for tax-aware investors.

Composition comparison as of 6/30/2025

Performance data shown represents past performance and is no guarantee of future results.

Gross performance does not take into account transaction costs, investment advisory fees, custody fees, or other expenses that were charged to clients’ accounts or deductions for income taxes. The pure gross of fees returns are supplemental information. After-tax returns are only applicable to taxable accounts. The net performance reflects the deduction of investment advisory fees charged to client accounts, as well as transactional fees. Such fees will reduce investment performance over time. Indexes are not investments and do not incur fees and expenses and are not professionally managed. It is not possible to invest directly in an index.

Price/earnings ratio is the price of a stock divided by its earnings per share. Price/book ratio is the ratio of a stock's price to its book value per share. The projected characteristics are based upon estimates and reflect subjective judgments and assumptions. The dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price.

Sector comparison as of 6/30/2025

Source: FactSet

Performance data shown represents past performance and is no guarantee of future results.

Gross performance does not take into account transaction costs, investment advisory fees, custody fees, or other expenses that were charged to clients’ accounts or deductions for income taxes. The pure gross of fees returns are supplemental information. After-tax returns are only applicable to taxable accounts. The net performance reflects the deduction of investment advisory fees charged to client accounts, as well as transactional fees. Such fees will reduce investment performance over time. Indexes are not investments and do not incur fees and expenses and are not professionally managed. It is not possible to invest directly in an index.

Period returns (gross %) – Maximum federal and state tax rate as of 6/30/2025

Period returns (net %) – Maximum federal and state tax rate as of 6/30/2025

Tax-managed investment strategies

Natixis Investment Managers Solutions provides design, development and execution of portfolio strategies tailored to clients’ specific investment objectives and unique portfolio constraints.

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Holdings and characteristics for the above hypothetical representative account are presented for illustrative purposes only and do not represent an actual client account. Client portfolios are constructed by applying a multi-factor algorithm that seeks to replicate the sector exposure of the S&P 500^® Index. There can be no assurance that developments will transpire as forecasted and that the estimates are accurate. The characteristics shown are for illustrative purposes only.

Natixis Investment Managers does not provide tax or legal advice. Please consult with a tax or legal professional prior to making any investment decisions.

The after-tax returns shown are subject to the limitations of the specific calculation methodology applied. Since the client's actual circumstances and tax rates determined after the fact may differ from the anticipated tax rates used in this process, the reported returns may not equal the actual after-tax returns for specific clients. After-tax returns are calculated using both the maximum federal tax rate and maximum state tax rates for dividends, short-term capital gains and long-term capital gains.

CFA^® and Chartered Financial Analyst^® are registered trademarks owned by the CFA Institute.

Investment Risks: All securities are subject to risk, including possible loss of principal. Please read the risks associated with each investment prior to investing. Detailed overview of each investment's risks are included in Part 2A of the firm's respective Form ADV. The investments highlighted here may be subjected to certain additional risks.

Diversification does not guarantee a profit or protect against a loss.

Equity securities are volatile and can decline significantly in response to broad market and economic conditions. There is no assurance that an investment will meet its performance objectives or that losses will be avoided.

Management Risk: A strategy used by the investment manager may fail to produce the intended result. All securities are subject to risk, including possible loss of principal.

Tax loss harvesting is a strategy for selling securities that have lost value in order to offset taxes on capital gains.

The AIA S&P 500^® Cash Funded After-Tax Composite includes all fully discretionary, taxable, fee-paying portfolios that invest in the AIA S&P 500^® strategy and that have initially been funded with cash. This strategy seeks to track the S&P 500^® Index on a pretax basis by investing in a subset of securities from within the index, while utilizing loss harvesting and tax-management techniques to outperform on an after-tax basis. The AIA S&P 500^® Cash Funded After-Tax Composite is a subcomposite of the AIA S&P 500^® Pre-Tax Composite. The composite was created in November 2007, and the composite inception date is November 1, 2002. Effective April 1, 2024, the composite was modified to include one or more accounts that were previously part of the AIA S&P 500^® Optimized After-Tax Composite. The inclusion of these account(s) does not affect the investment objective, policy, or strategy of the composite.

The model fee is deducted 1/12th per month from the pure gross composite return. The assumed model bundled fee used is 3.0% and has been retroactively applied since inception. Pure gross-of-fees returns are supplemental information and do not reflect the deduction of transaction costs or fees that are included within bundled fees. Trading costs that are incurred on a per transaction basis by nonbundled fee accounts have been deducted from pure gross-of-fees returns. Effective January 2006, accounts with significant cash withdrawals are temporarily removed from the composite during the month that the withdrawal was taken. Currently, significant cash withdrawals are defined as cash withdrawals that are greater than 10% of an account's market value.

The AIA S&P 1500^® Cash Funded After-Tax Composite includes all fully discretionary, taxable, fee-paying portfolios that invest in the AIA S&P 1500^® and that have initially been funded with cash. This strategy seeks to track the S&P 1500^® Index on a pretax basis by investing in a subset of securities from within the index, while utilizing loss harvesting and tax-management techniques to outperform on an after-tax basis. The AIA S&P 1500^® Cash Funded After-Tax Composite is a subcomposite of the AIA S&P 1500^® Pre-Tax Composite. The composite was created in November 2007. The benchmark used is the S&P 1500^®, an index representing large-, mid-, and small-cap US stocks.

Tax alpha is the benefit of loss harvesting, which is assumed to be used to offset gains inside or outside the portfolio in the period they are incurred, and thus credited to the portfolio returns. The after-tax benchmark is an estimate based upon the average capital gains realization rate and dividend yield of the index. Both after-tax calculations using the maximum federal tax rate and 0% state tax, and the maximum federal and state tax rates for dividends and capital gains are displayed.

Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Natixis Investment Managers or any of its affiliates. There can be no assurance that developments will transpire as forecasted and actual results will be different.

This material is provided for informational purposes only and should not be construed as investment or tax advice. Investors should not make investment or tax advice choices solely on the content contained herein, nor should they rely on this information to apply to their specific situation or any specific investments under consideration. This is not a solicitation to buy or sell any specific security. Although Natixis Investment Managers Solutions believes the information provided in this material to be reliable, it does not guarantee the accuracy, adequacy, or completeness of such information.

The S&P 500^® Index is a widely recognized measure of US stock market performance. It is an unmanaged index of 500 common stocks chosen for market size, liquidity, and industry group representation, among other factors. It also measures the performance of the large-cap segment of the US equities market.

The S&P 1500^® is an investable US equity benchmark, the S&P Composite 1500^® combines three leading indices, the S&P 500^®, the S&P MidCap 400, and the S&P SmallCap 600, to cover approximately 90% of the U.S. market capitalization. It is designed for investors seeking to replicate the performance of the US equity market or benchmark against a representative universe of tradable stocks.

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