Which Frec investing strategy is right for me?

Frec has three investing strategies: Direct indexing, Long short direct indexing, and Diversify.

Some of these strategies are used by hedge funds and require deeply technical white papers to fully explain, so it’s normal if you are wondering: Which strategy is right for me? 

This guide may help you answer that question.

Our strategies are designed to help you generate tax alpha. Why? Because unnecessary tax drag can shave millions off your long-term returns. While the market can’t be controlled, investors can take steps to manage taxes more intentionally. Over time, using tax-aware investing strategies may help reduce tax costs and enhance long-term, after-tax wealth.

Which Frec strategy may be right for you

Our strategies are not all mutually exclusive, and in some cases, you may benefit from using a combination of them. But if you only have a few moments, below is a simple guide to choosing.

If you…	Start with…
Invest in index funds and expect capital gains in the future	Direct indexing
Want to tilt your portfolio towards a factor to boost market return while also harvesting more losses	Long short direct indexing
Have concentrated position(s) and want to turn them into a broad market index	Diversify

Direct indexing

What if you could capture the returns of an index, like the S&P 500, while also generating capital losses? This is the goal of our direct indexing product. When you direct index on Frec, you track an index (we currently offer 16) by owning its underlying stocks. Frec’s algorithm aims to track the index to get similar returns while capturing tax losses along the way.

A capital loss is the money you lose any time you sell an asset for less money than you bought it for. Direct indexing can generate losses while still tracking your target index, which means you may be able to capture index returns while stacking up capital losses. You can use these losses to offset both short-term and long-term capital gains elsewhere in your portfolio (learn more here).

Classic direct indexing is our flagship product at Frec. Why?

• Direct indexing can be a more tax-efficient alternative to investing in ETFs
• Capital losses only expire at death, so the losses you can’t use now can be used in the future.
• With Frec, direct indexing can be just as affordable as investing in an ETF

Fees and minimums: You only need $20,000 to start direct indexing with Frec. That can be $20,000 in stocks somewhere, $20,000 in cash, or some mix of the two. Our direct indexing product has a fee of between 0.09% and 0.35% per year, depending on the index.

You can read more about the benefits of direct indexing here.

Long short direct indexing

What if you want your portfolio to reflect your personal investment views? 

For example, what if you want to invest in the U.S. large cap market, and tilt your portfolio toward high-growth stocks like NVDA?

This is the type of situation that our Long short direct indexing product is designed to solve.

By using long and short positions on top of a core index portfolio, long short direct indexing lets you tilt toward specific investment factors while attempting to stay close to the benchmark and seeking to reduce unintended risk. Doing so allows you to potentially capture 3-10x¹ more capital losses than a classic direct index.

At Frec, you can choose between a 140/40 structure (140% long, 40% short), 200/100, and 250/150.

With long short direct indexing:

• You can express your investment thesis with ‘factor tilts’. Frec lets you choose between growth, value, and quality—factors defined and measured by the Barra Global Total Market Equity Model for Long-Term Investors. Adding a tilt could lead to potential excess returns if your factor outperforms the market.

• You could potentially generate more capital losses than with long only direct indexing. When markets decline, the long side of the portfolio may accumulate losses that can be harvested. When markets rise, short positions can generate losses as prices move against them. This ‘dual-action’ loss harvesting is powerful: in our simulations, a 140/40 direct index can harvest roughly 130% of invested capital over 10 years, a 200/100 about 265%, and a 250/150 up to 337%, all tilted toward quality. A traditional Russell 1000 direct index harvests roughly 30% over the same period.²

Fees and minimums: The annual fee to have a long short portfolio with Frec is between 0.50% and 1.30%, plus between 0.23% and 0.86% in post-tax financing costs.³ The minimum investment is between $100K and $500K (as compared with $1M+ at some hedge funds). 

You can get the longer crash course on long short direct indexing here, or get technical here.

Diversify

You may be, or someday wind up in, a situation where you hold a significant percentage of your portfolio in one or a few stocks. If you prefer an index-based approach, you may be thinking about how to diversify.

The traditional problem with diversifying your portfolio is that it often requires selling some or all of your concentrated position. If that position has increased in value since you acquired it, e.g. if you acquired a large amount of AAPL many years ago and sold it all today, a chunk of your return would go to capital gains tax. 

So how do you diversify while also managing your tax impact?

Enter: Frec Diversify. It works by building long and short overlays around your concentrated stock(s). The portfolio is designed to move your exposure closer to that of a broad market index. 

How it works:

• The long and short overlays aim to track a target index’s asset allocation and factor exposures. If your concentrated position is a growth stock, your Frec Diversify portfolio will design its overlays to reduce the portfolio’s overall growth exposure. 
• The portfolio aims to track a target index’s asset allocation and factor exposures. If your concentrated position is a growth stock, your Frec Diversify portfolio will design its extensions to reduce the portfolio’s overall growth exposure.

Over time, the portfolio becomes more diversified and closer to the target index, while also reducing your potential tax bill. 

Fees and minimums: There is a 0.60% management fee and a 0.23% post-tax financing cost.⁴ The minimum investment is $100k which is based on the value of your concentrated stock(s).

You can learn more about Diversify in this technical white paper.

What about other ways I can use Frec products?

Each of the products we described above can be combined. You could, for example, have:

• S&P Developed Markets ADR (Frec Direct indexing)
• 140/40 Russell 1000 direct index (Frec Long short direct indexing)

Or 

• S&P Emerging ADR index (Frec Direct indexing)
• $500k position in AAPL (Frec Diversify)

You can learn more about how to combine strategies and limitations on the individual product pages. 

You can also take out a line of credit for up to 70% of the value of marginable assets on Frec (such as long only indices and self-managed positions). You can use it for anything, it’s low interest, and it has a flexible repayment schedule.⁵

We’re happy to help you think things through 

There are a lot of ways to use Frec products. What works best for you may not be what works best for people you know. You can always transition between strategies, and you can even have multiple going at once with a portfolio of indices. 

If you have questions, schedule a call with our team. And if you are ready to get started, create an account.