Don’t sleep on the S&P 1500® direct indexing strategy
August 21, 2025
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5 min
As direct indexing continues to gain traction among investors seeking personalized and tax-efficient exposure to equity markets, the S&P 500® remains the default index investors select to track. At Natixis, nearly two-thirds of our assets under management are tied to the familiar S&P 500® large-cap index. However, the AIA S&P 1500® strategy offers a compelling alternative that deserves closer attention – especially for those looking to optimize after-tax returns.
Why the S&P 1500®?
The S&P 1500® is considered an “all-cap” index that combines the S&P 500® (large-cap), S&P 400® (mid-cap), and S&P 600® (small-cap), resulting in a broader and more diversified investment universe. While the S&P 500® typically accounts for over 90% of the S&P 1500®’s weight, the inclusion of small- and mid-cap stocks introduces some interesting advantages:
- Expanded opportunity set: The allocation to small- and mid-cap stocks within the S&P 1500® provides an additional 1,000 stocks to the investable universe to select from. The portfolio managers include about 50 of these names, which result in a 200-stock direct indexing portfolio compared to 150 stocks for the AIA S&P 500® strategy.
- Tax efficiency: Smaller stocks tend to exhibit greater volatility and return dispersion, creating more opportunities for tax loss harvesting. This has translated into consistently higher tax alpha for the S&P 1500® strategy across multiple time horizons.
- Upside potential: As small- and mid-cap companies grow and graduate into larger indices, they can contribute significantly to returns without triggering capital gains. That’s because in a discrete index such as the S&P 400®, the mid-cap stock that grows and moves up to the large-cap S&P 500® index may have to be sold at a gain when it’s no longer an index holding. Within the S&P 1500®, the mid-cap stock would remain an index holding as it grows and may only need to be trimmed.
- Sector diversification: The S&P 1500® provides some differentiated sector exposure, particularly in information technology and communication services, where the weight to those sectors is less than the S&P 500®. We know many clients have overweight positions in these areas due to outsized gains from stocks such as NVIDIA, Broadcom, Alphabet, and Netflix but are hesitant to add more at current valuations.
Although small- and mid-cap stocks have lagged large-caps for an extended period, several factors could shift the tide, such as potential Fed rate cuts, improving risk appetite, the removal of worst-case tariff scenarios, and a rebound in earnings. Fortunately, the performance impact of smaller companies in the S&P 1500® has been muted, resulting in similar pretax returns to the S&P 500® but with more tax loss harvesting opportunities, resulting in consistently superior after-tax performance, making it a strong candidate for tax-aware investors.
