Why was the second quarter so volatile?
The second quarter of 2025 started out even more stressful than the first but ended on a much happier note. After a sharp selloff across financial markets in April that nearly touched bear market territory, the S&P 500® Index recovered from the Liberation Day trade policy announcements to post a 10.94% return for the quarter—notching new all-time closing highs along the way.
In addition to unexpectedly high tariff rates, investors dealt with two escalating wars and a murkier monetary policy outlook. Yet the combination of renewed investor confidence and a strong corporate earnings season boosted US mega-cap stocks back to dominance. Despite the first quarter GDP decline of 0.5%, US employment and consumer spending data has shown resilience. All this news led the markets to a volatile start in April before climbing higher at the end of the month and continuing upward in May and June.
We believe it’s crucial to monitor direct indexing accounts regularly for loss harvesting opportunities, which helps us find a silver lining during periods of volatility when losses present themselves. At the same time, we constantly balance the potential benefits of loss harvesting opportunities with the tracking error of the portfolio relative to its benchmark.
How can investors take advantage of volatility?
Capturing potential losses even in short-lived periods of market volatility is important to the success of direct indexing portfolios. Tax loss harvesting opportunities were abundant in April as markets sold off in the wake of the Liberation Day tariff hikes. The first four trading days of the month were particularly volatile, with the VIX index jumping above 52—its third highest level in over 20 years—and 497 stocks in the S&P 500 declining by an average of -8.33%.
Although the S&P 500 was up sharply in May and June, we continued to systematically harvest losses while also tightly managing the risk of the portfolios to deliver on the dual mandate of direct indexing. By June 30, the S&P 500 results for the quarter were notably more muted, with 218 stocks declining by an average of -8.16%. Of those, 70 stocks declined by more than 10% for an average loss of -16.03%.
As a result of the volatility, we harvested over $3.4 billion in losses across approximately 230,000 trades during the second quarter, delivering a potential tax benefit over $1.3 billion2 to Custom Core investors. For the first half of 2025, we harvested over $5.5 billion in losses, with a potential tax benefit of over $2 billion.
The bottom line
Volatility in April followed by a rapid market recovery over the rest of the second quarter was a reminder of the power of a systematic rules-based approach to tax management. Monitoring for potential losses on a daily basis allowed Parametric to capture losses—even in a quarter that finished up almost 11%. The tax benefit would have been largely missed in strategies using calendar-based loss harvesting that looked at accounts on a monthly or quarterly loss basis.
We’ve always believed that the success of active tax management may depend on finding a direct indexing partner who’s managed portfolios through up and down market cycles. Parametric’s dual mandate seeks to track an index on a pretax basis and outperform on an after-tax basis—intentionally designed to help investors ride out this volatility storm.
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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, 6/30/2025. 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.
3 Source: Parametric, 6/30/2025. 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.
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.
Investment advisory services offered through Parametric Portfolio Associates LLC ("Parametric"), an investment advisor registered with the US Securities and Exchange Commission (CRD #114310). Parametric is also registered as a portfolio manager with the securities regulatory authorities in certain provinces of Canada (National Registration Database No. 42850) with regard to specific products and strategies. Parametric provides advisory services directly to institutional investors and indirectly to individual investors through financial intermediaries. The information on this website does not constitute an offer to sell, or a solicitation of an offer to purchase, securities in any jurisdiction to any person to whom it is not lawful to make such an offer. Investing entails risks, and there can be no assurance that Parametric (and its affiliates) will achieve profits or avoid incurring losses. All investments are subject to potential loss of principal. Parametric does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision. Please refer to the disclosure page for important information about investments and risks.
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