How SMAs Can Help You Achieve Your Impact Goals
Tuesday, June 6, 2023
June 2023
How SMAs Can Help You Achieve Your Impact Goals

Strategies for navigating market turbulence while seeking to optimize investment outcomes

By Kelly Mahoney

In the world of investing, navigating the ups and downs of the market can be a challenge. Yet two investment approaches — exchange-traded funds (ETFs) and separately-managed accounts (SMAs) —  can help investors maximize their potential during market volatility and enable investors to make a positive impact by aligning their values with their portfolios. 

Both SMAs and ETFs have their advantages, but in this article, I will focus on how SMAs in particular may be better suited to help investors achieve their impact goals, align values, and help to manage risk while navigating the ever-changing investment landscape and highlight strategies that can be used within an SMA to help meet these goals. 

Greater Personalization Helps Investors Align Portfolios with Values

What are the key differences between an ETF and an SMA? While investors can use ETFs to make a positive impact, they may become constrained by this investment approach, as ETFs represent a basket of securities and offer passive exposure by tracking market indices or asset classes. SMAs, however, are individually managed portfolios tailored to investors' specific objectives, values, and risk tolerance, and they may offer a higher degree of customization and control over the investment process, allowing for more flexibility and adaptability during volatile market conditions. What’s more, a more personalized approach (via SMAs) helps investors stay true to their values and long-term vision even during times of turbulence. . 

At Ethic, we provide wealth advisors with our Values Mapping Exercise (VME), an interactive digital tool that allows their clients to clearly express their values across our 19 Sustainability Pillars, including Biodiversity & Ecosystems and Women’s Rights. The result is a clear framework they can reference when advising their clients on specific stocks they may, or may not, want to include in their portfolios.

This deep level of personalization ensures that investment decisions align closely with an investor's specific needs, allowing for greater control over asset allocation, sector exposure, and overall risk management. 

Tax-Loss Harvesting

In addition to greater personalization, SMAs offer some great tax advantages that help investors reach their long-term impact goals. Investors own the underlying shares within an SMA, meaning they can capitalize on individual stocks that underperform by using a strategy called tax-loss harvesting (TLH). 

TLH helps optimize tax benefits and align investments with impact objectives by gradually transitioning appreciated portfolios over time, strategically capturing tax losses to offset capital gains. This allows investors to manage their tax liabilities while maintaining their desired impact exposure. By combining the benefits of SMAs and TLH, investors can better manage their portfolios during times of market volatility, maximize investment potential, and achieve their impact goals in a tax-efficient manner. 

It’s important to note that while ETFs can also achieve tax-loss harvesting, SMAs offer a higher degree of customization and control over the process, allowing for more effective tax management tailored to each investor's specific values. 

Proxy Voting and Achieving Greater Impact

Shareholders have a fundamental right to influence decision-making within the companies they invest in by voting on important matters, such as corporate governance and environmental or social policies. Within an SMA, investors can actively engage in proxy voting and align their voting decisions with their impact goals. It is a way for investors to voice their concerns, support resolutions that promote sustainability and responsible business practices, and hold companies accountable for their actions.

By voting in favor of resolutions that align with their values, investors can drive change, encourage transparency, and foster greater corporate responsibility. This active engagement enhances the power of SMAs as a tool for investors to achieve their impact goals and contribute to a more sustainable and equitable future.

Navigating Market Volatility with Confidence While Meeting Impact Goals

In times of market volatility, investors seek approaches that can weather the storm while still providing growth opportunities. SMAs offer a comprehensive solution through their personalized approach, impact investing potential, and tax efficiency. By leveraging SMAs, investors can confidently navigate market downturns while tailoring their portfolios to align with their goals and impact objectives.

By incorporating TLH, investors can strategically realize capital losses to offset taxes on gains and income. This approach reduces tax liabilities and unlocks the potential for long-term tax benefits and improved after-tax returns. It empowers investors to optimize their investment strategies, navigate market volatility with confidence, and make a deeper impact.

To sum up, SMAs provides a holistic approach to wealth management by offering a powerful combination of personalization, impact, and tax efficiency, which help investors effectively navigate market volatility while aligning their investments with their unique values, circumstances, and investment goals. 

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Sources and footnotes

Ethic Inc. is a Registered Investment Adviser located in New York, NY. Registration of an investment adviser does not imply any level of skill or training. Information pertaining to Ethic Inc’s registration or to obtain a copy of Ethic Inc.’s current written disclosure statement discussing Ethic Inc.’s business operations, services and fees is available on the SEC’s Investment Adviser Public Information website –www.adviserinfo.sec.gov or from Ethic Inc. upon written request at support@ethicinvesting.com. Information provided herein is for informational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Any subsequent, direct communication by Ethic Inc. with a prospective client shall be conducted by a representative of Ethic Inc. that is either registered or qualifies for an exemption or exclusion from registration in the state where a prospective client resides. Information contained herein may be carefully compiled from third-party sources that Ethic Inc. believes to be reliable, but Ethic Inc. cannot guarantee the accuracy of any third-party information.

Ethic Inc. does not render any legal, accounting, or tax advice. Ethic Inc. recommends all investors seek out the services of competent professionals in any of the aforementioned areas. Ethic Inc. cannot provide any assurances that any investment strategies, simulations, etc. will perform as described in our materials. ALL INVESTMENTS INVOLVE RISK, ARE NOT GUARANTEED, AND MAY LOSE VALUE. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER AND/OR TAX PROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGY. 

Contributors

Kelly Mahoney is Director of Growth at Ethic. Kelly works closely with Ethic’s clients and internal team to enhance the client experience, with a focus on product marketing, go-to-market strategies, advisor education, and operations. Kelly joined the Ethic family in 2018 and has close to 10 years of experience working in various roles across the financial services space.

Melissa Banigan is a content strategist with over 15 years of communications experience working with global companies and nonprofits. Also a journalist and author, her work appears in The Washington Post, CNN, the BBC, NPR, and the Independent, among other publications, and she's written three books for youth.

Travis Korte is the associate director of Sustainability Research & Data at Ethic. Previously, Travis organized civic-minded technologists at Hack for LA and advised a wide range of clients on data science, data policy, and quantitative methods. You can follow him on Twitter at @traviskorte.