SMA vs. mutual fund for client portfolios

Separately managed accounts (SMAs) are becoming increasingly popular as investors place more focus on customization, tax efficiency, and cost clarity. Once reserved for institutional clients, SMAs are now more widely available to affluent investors seeking greater control and personalization in their portfolios. These accounts offer direct ownership of securities, enabling tailored strategies that align with investor goals, values, and tax situations.

Here, we’ll discuss what SMAs are, how they compare to mutual funds and exchange-traded funds (ETFs), and why they may be a compelling option.

Key takeaways:

• SMAs provide personalized investing through direct ownership of securities, allowing tailored portfolios and tax strategies for high-net-worth investors.
• Direct indexing can improve tax efficiency by enabling stock-level loss harvesting and values-based customization.
• SMAs are now more accessible with lower minimums and flexible fees, giving advisors more opportunities to deliver customized solutions.

What is an SMA?

An SMA is a professionally managed portfolio built around an investor’s specific financial goals, risk tolerance, and preferences. Unlike mutual funds or ETFs, SMAs offer direct ownership of individual securities, which enables greater customization, transparency, and tax efficiency. 

Investment advisors manage these accounts for high-net-worth clients who want more control over their holdings. SMAs allow investors to target specific sectors or companies, align portfolios with personal values, and apply tax strategies such as tax loss harvesting to help reduce taxable gains.

SMA vs. mutual fund vs. ETF: Which is best?

Each investment vehicle has advantages, but it's important to understand their structural and strategic differences.

Sources: MMI, Cerulli, FUSE Research, "Managers Prepare for SMA Growth" issue brief, March 2025.

Core tax advantages of SMAs

Tax efficiency is one of the most compelling reasons to choose an SMA. Because investors own individual securities, the tax liabilities can be actively managed in several ways:

• Tax loss harvesting – Selling underperforming stocks to offset gains elsewhere. This strategy is especially powerful when applied systematically throughout the year, enabling continual tax mitigation. 
• Capital gains deferral – Unlike mutual funds, which pass capital gains to shareholders even if they haven’t sold their shares, SMAs don’t trigger taxable events unless trades are made in your account.
• Customized tax-efficiency strategies – As opposed to mutual funds or ETFs, SMAs offer direct ownership of individual securities, making it possible to align with personal tax situations and goals.
• Tax alpha potential – Strategic tax management – especially through direct indexing – may pursue excess returns by improving after-tax outcomes rather than relying solely on market performance.

Who should have an SMA?

Historically, SMAs have been well suited for high-net-worth individuals ($250,000 or more in investable assets); however, in recent years, many SMAs have lowered minimum investment requirements and management fees, making them accessible for more investors.

SMAs are particularly well suited for investors with tax-sensitive situations, such as concentrated stock holdings, significant unrealized gains, or complex estate plans. These accounts allow for gradual asset transitions, helping to minimize tax impact while maintaining diversification. For those seeking more control and personalization than pooled investment funds typically offer, SMAs provide a flexible and strategic alternative.

Why use a direct indexing SMA?

Direct indexing within an SMA combines tax efficiency, personalization, and broad market exposure in a single strategy. Unlike pooled vehicles such as ETFs or mutual funds, direct indexing SMAs give investors ownership of the individual securities that make up an index – such as the S&P 500^®. This structure enables stock-level tax loss harvesting, allowing investors to sell underperforming holdings to offset gains elsewhere and potentially improve after-tax returns.

Direct indexing SMAs also offer flexibility to exclude specific sectors or companies, align portfolios with personal values, and unwind concentrated positions without compromising diversification. For high-net-worth investors or those with complex tax needs, direct indexing SMAs provide a tailored solution that merges the simplicity of passive investing with the precision of active tax management.

SMA fee structure and costs

SMA fees are typically based on assets under management (AUM), strategy complexity, and scope of bundled services. While fees are often expressed as a percentage of AUM, structures can vary by provider.

Direct indexing investing strategies

Direct indexing can play a valuable role in a tax-efficient investment strategy, especially for high-net-worth investors. Let us help you create portfolios that put taxes first.

Tailored SMAs to align with investor objectives

Natixis delivers SMA strategies through affiliated and external managers, providing custom solutions for high-net-worth investors and multi-manager portfolios. Partner with us to meet your clients’ goals.