March 30, 2026
Over the years, many of our clients have used index funds and ETFs to get broad market exposure. These have been, and continue to be, excellent tools because they’re low cost, diversified, and efficient.
Recently, however, we’ve been implementing something more refined for many families: direct indexing.
What’s the difference? Let me explain.
Direct Indexing vs. Traditional Indexing
Traditionally, if you wanted to track the S&P 500, you would buy an ETF or mutual fund that owns all the stocks inside the fund.
With direct indexing, instead of buying the whole fund as a single entity, you buy many of the individual stocks on their own. The goal is still to track the market—we are not trying to outguess it—but owning the individual stocks directly gives us some important strategic advantages.
Here is an example:
Let’s say you want to own the S&P 500. In a direct indexing portfolio, you might actually own 350 individual stocks. On any given day, some of those stocks are trading at a profit, and others are trading at a loss.
Imagine Coca-Cola is selling at a loss today. We might sell it, recognize the loss for tax purposes, and then buy Pepsi so we have the same exposure to that sector of the market. Similarly, we might sell General Motors when it’s trading at a loss, recognize the loss for tax purposes, and then buy Ford so we have the same exposure to the automotive sector.
Traditional index funds generally don’t give us this level of control and personalization.
Why We Like Direct Indexing for Our Clients
1. Better Tax Management
This is the biggest benefit. Because we own the individual positions, we can selectively harvest losses during the year and use them to offset gains elsewhere in your portfolio, as demonstrated in the examples above.
Over time, this can meaningfully improve after-tax results, particularly for higher-income investors in taxable accounts.
2. Greater Flexibility
Direct indexing also allows us to be more thoughtful and precise with our investment strategy. Depending on the situation, we can:
- Work around concentrated stock positions
- Coordinate across household accounts
- Adjust exposures when appropriate
- Exclude specific companies if a client prefers
In other words, looking at the broad picture of your portfolio and preferences, we can invest more or less in certain stocks or sectors than the index would otherwise allow.
Most investors have never needed this level of customization before, but for many of our clients, it’s very useful.
3. Still Disciplined and Diversified
Importantly, direct indexing is not about timing the market and it is not about picking “winners” in the traditional sense. Our objective is the same as it is when investing in an index fund. We still want to:
- Maintain a diversified portfolio
- Keep costs reasonable
- Improve tax efficiency where possible
Direct indexing essentially builds on the core principles of index investing, while allowing for a greater degree of flexibility and precision.
Who This Approach Works Best For
In our experience, direct indexing is particularly valuable for:
- Clients in higher tax brackets
- Taxable investment accounts
- Families with ongoing capital gains
- Investors with legacy stock positions
- Households with more complex balance sheets
Inside IRAs and retirement accounts, the benefits are usually more limited.
Our Philosophy
At this stage, we don’t view direct indexing as a fad. We view it as a better implementation tool when the situation is right.
We continue to evaluate each client individually, but it has become a core part of how we manage many taxable portfolios today.
If you’d like us to evaluate whether direct indexing makes sense for your situation, we’re happy to take a look.
As always, our goal is simple: to keep you broadly invested, tax aware, and moving steadily toward your long-term goals.
Investing involves risk, including possible loss of principal. Asset allocation and diversification may not protect against market risk, loss of principal or volatility of returns. A diversified portfolio does not assure a gain or prevent a loss in a declining market. There is no guarantee that any investment strategy will be successful or will achieve their stated investment objective.