Commentary · Tax Strategy
The Architecture of Efficiency: Navigating the 2026 Tax Landscape with Direct Ownership
Written by the William Allan team · Published
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Portfolio structure can affect taxes, diversification, cost, and the degree of control an investor has over individual holdings. Exchange-traded funds and direct ownership each offer useful features, and neither is automatically the better choice.
The Role of ETFs
ETFs can provide diversified market exposure, daily liquidity, transparent holdings, and low operating expenses. Their in-kind redemption mechanisms may reduce some taxable distributions, although investors can still realize gains when selling shares and may incur fund expenses, bid-ask spreads, and tracking differences.
For many investors, those features make an ETF an efficient core holding. A pooled fund also means that the investor generally cannot customize each underlying position or harvest a loss in one constituent while retaining exposure to the rest of the fund.
What Direct Ownership Can Provide
Holding individual securities may permit position-level tax-loss harvesting, charitable gifts of selected appreciated lots, or restrictions based on concentration and personal preferences. These are potential planning tools, not guaranteed sources of additional return.
Tax-loss harvesting normally defers rather than eliminates tax. Its value depends on available gains, future tax rates, wash-sale rules, replacement investments, trading costs, and tracking differences. Selling one security and buying another can change the portfolio's risk, and frequent harvesting can create administrative complexity.
Donating appreciated securities may avoid recognition of embedded gain and may produce a charitable deduction when the legal requirements are met. Deduction limits, holding periods, adjusted-gross-income thresholds, substantiation, and state treatment can affect the result. A donor-advised fund also has fees and places donated assets beyond the donor's control. Consult a qualified tax professional before acting.
Customization and Its Limits
Direct ownership can accommodate security exclusions or portfolio tilts, but customization can cause performance to differ from a benchmark and may reduce diversification. Excluding an industry does not assure lower risk, and values-based criteria require clear definitions and ongoing review.
Individual-security portfolios may also involve company-specific losses, concentration, more trading, and higher advisory or implementation costs than a broad-market fund. Investors should compare total cost and expected service rather than assuming that removing a fund expense makes the overall approach less expensive.
Choosing a Structure
The appropriate structure depends on portfolio size, tax circumstances, existing gains and losses, investment restrictions, time horizon, risk tolerance, and the value the investor places on customization. A combination of funds and individual securities may be appropriate.
William Allan may use ETFs and other funds as well as directly owned securities. Any recommendation is based on the client's circumstances; the firm does not represent that direct ownership will outperform a fund, generate tax savings, or be appropriate for every investor.
This commentary is for informational purposes only and is not investment, tax, or legal advice. All investing involves risk, including the possible loss of principal, and past performance does not guarantee future results.