Direct Indexing

What is it

• An investment strategy that replicates a stock index using individual securities
• Instead of buying an ETF or mutual fund, investors own the underlying stocks directly
• Allows customization and tax management within the portfolio
  

Why investors use it

• Tax-loss harvesting opportunities throughout the year
• Ability to offset capital gains from other investments
• Greater portfolio customization (exclude industries or specific companies)
• Maintain exposure similar to a broad market index
  

When it can be useful

• Investors with large taxable portfolios
• Investors expecting realized capital gains (rebalancing, concentrated stock, business sale)
• Households in higher tax brackets where tax savings are more valuable
  

How it works

• Portfolio built using individual stocks tracking an index (often the S&P 500)
• When positions decline, they can be sold to realize tax losses
• Replacement securities maintain similar market exposure
• Losses can offset capital gains or up to $3,000 of ordinary income annually
  

Example

• Investor holds a $1,000,000 direct indexed portfolio
• Positions with losses are harvested during the year
• Assume $40,000 of tax losses generated
  

RESULT

• $40,000 offsets capital gains elsewhere
• At a 23.8% capital gains rate, potential tax savings ≈ $9,520