What is Direct Indexing?

Direct indexing is a strategy used by investors to build a customized portfolio of individual stocks. This investment approach has gained popularity in recent years due to advancements in technology that have made it easier and more cost-effective to implement. In this article, we will explore the concept of direct indexing and provide sources for further reading.

What is Direct Indexing?

Direct indexing is an investment strategy where investors buy individual stocks instead of investing in a mutual fund or an exchange-traded fund (ETF). Essentially, the goal is to recreate the performance of a specific market index by recreating it with individual stocks. By owning individual stocks, investors have the ability to customize their portfolio to align with their investment objectives, risk tolerance and values.

One of the key benefits of direct indexing is the ability to harvest tax losses. Tax-loss harvesting, a common tax mitigation strategy, is the process of selling losing stocks to offset gains in other areas of the portfolio. With direct indexing, investors can sell individual stocks that have declined in value, which may allow them to realize a tax loss that can be used to offset gains or reduce their tax bill. Investors may claim up to $3,000 in losses per year, and losses can carry into future years.

Another benefit of direct indexing is the ability to exclude certain stocks from the portfolio. For example, investors who are concerned about environmental, social and governance (ESG) issues can exclude companies that do not meet their standards. This approach is known as socially responsible investing (SRI). To learn more about ESG investing, click here.