Direct indexing is a type of indexing where investors (or their advisors on their behalf) buy individual stocks in an index. The theory behind direct indexing is to mimic the risk and returns of the S&P 500 or DJA without buying the entire index. Direct indexing has become cheaper due to advancing technology, making it available to most investors. Direct indexing enables the customization of portfolios versus a fund product portfolio with limitations. Why would investors choose direct indexing?

Personalized portfolios- Direct indexing allows the personalization of portfolios through individual stock purchases versus index fund products containing many stocks not personalized to the investor. Index funds are a take-all or none product.

Tax-loss harvesting- Tax-loss harvesting can be done more frequently with stocks versus index funds. Underperforming stocks can be sold off independently and replaced with another to position the portfolio for market gain. Index funds sell off entirely when underperforming since investors can’t separate the losers from winners.

Of course, market conditions determine the optimal time for tax-loss harvesting and the tax consequences to the investor. Maximize tax efficiency with AdvisorPeak’s household-level rebalancing, buy location preferences, tax-loss harvesting, and buy replacement capabilities.

Ability to select ESG and SRI- Direct-indexing ensures that only ESG and SRI meet the investor’s goals and values add to the portfolio. Advisors and clients can screen companies based on how well they score on third-party data for environmental, societal, and governance policies and behavior. If the company falls out of popularity, the stock can be sold off. ESG and SRI index funds are an all-in or out product and often contain stocks that don’t entirely meet the investor’s goals of “doing good through investing.”

What clients can benefit from direct indexing?

  • Clients that have a significant capital gains tax liability
  • Those with philanthropic goals
  • Clients that are in a high tax bracket
  • Clients that want a customized portfolio aligned with their goals and personal values
  • Those with additional money to invest outside of traditional retirement savings vehicles
  • More experienced investors

At AdvisorPeak, our team includes the most experienced support and development team in the industry. We encourage you to contact us for a demo of our direct-indexing feature.