Is Direct Indexing Right for You?

Column distributed by Hearst Connecticut Media Group.

Links to resources referenced:

• InvestmentNews.com: “Direct indexing as an investment strategy”
  • https://www.investmentnews.com/goria/tamps/direct-indexing-as-an-investment-strategy/253642#:~:text=other%20important%20insights.-,Introduction%20to%20direct%20indexing,Russell%202000%20via%20direct%20indexing.
    • Related column excerpt:
      • “In the past, ‘direct indexing meant paying a lot in commissions and fees,’ but these days, ‘thanks to online brokerage platforms (and many RIA custodians) that offer zero-commission trading, investors don’t have to be millionaires to do direct indexing,’ quoting the InvestmentNews.com article ‘Direct indexing as an investment strategy.’”
• Cerulli Associates: “The Case for Direct Indexing: Differentiation in a Competitive Marketplace”
  • https://www.cerulli.com/resource/white-paper-the-case-for-direct-indexing  
    • Related column excerpt:
      • “As a result, interest in direct indexing has risen and is expected to continue to do so. According to Cerulli Associates (a research, consulting and analytics firm), assets for direct indexing were expected to have a five-year compound growth rate of 12.3% and reach $825 billion in total assets by the end of 2026.”
• J.P. Morgan Wealth Management: What is direct indexing and how does it work?
  • https://www.chase.com/personal/investments/learning-and-insights/article/what-is-direct-indexing-and-how-does-it-work#:~:text=Direct%20indexing%20can%20be%20worthwhile,room%20to%20customize%20your%20portfolio
    • Related column excerpts:
      • “That is, ‘[d]irectly holding securities within an index enables you to potentially take greater advantage of tax-loss harvesting, a maneuver that may ultimately lower your tax bill. Tax-loss harvesting involves selling an investment at a loss, replacing that investment with something similar (but not substantially identical) and using the tax loss to offset other taxable capital gains,’ quoting J.P. Morgan Wealth Management’s ‘What is direct indexing and how does it work?’ The potential tax benefits apply in a taxable account (not an IRA or 401(k)).”
      • “Tax-loss harvesting may or may not be successful. With your eyes open, consider this: ‘[T]he potential tax benefit of this approach depends on the stock market environment and also on whether the “wash sale” rule applies to the loss transaction, which may defer or deny any tax deduction arising from the loss sale if a substantially identical position is repurchased too quickly,’ quoting the J.P. Morgan article.”
• IRS Publication 550: “Investment Income and Expenses (Including Capital Gains and Losses)”
  • https://www.irs.gov/pub/irs-pdf/p550.pdf
    • Related column excerpt:
      • “IRS Publication 550, ‘Investment Income and Expenses (Including Capital Gains and Losses),’ provides more details on wash sales.”
      • Charles Schwab: “The Pros and Cons of Direct Indexing”
  • https://www.schwab.com/learn/story/pros-and-cons-personalized-indexing  
    • Related column excerpts:
      • “Further, ‘Over time, the opportunity to harvest capital losses can decline as stock values rise. This is especially true in a portfolio you’ve held for several years that has appreciated significantly,’ quoting the Charles Schwab article ‘The Pros and Cons of Direct Indexing.’”
      • “If your direct index is mimicking the S&P 500 Index, you could be holding and trading hundreds of stocks -- quite a number to manage, even though the vehicle used is a separately managed account. ‘[E]ach [stock] will have its own cost basis, dividends, and profit and loss, which could become burdensome at tax time,’ according to the Charles Schwab article. Burdensome to you –- and potentially your tax preparer.”
• Morgan Stanley: “Beyond ETFs: The Benefits of Direct Indexing”
  • https://www.morganstanley.com/articles/what-is-direct-indexing-benefits  
    • Related column excerpt:
      • What about costs? Morgan Stanley notes in the article ‘Beyond ETFs: The Benefits of Direct Indexing’ that ‘the strategy may lead to higher management fees than investing in similar ETF strategies, because the level of customization may involve buying and selling securities that can lead to higher transaction costs.’ Also, there is an overall financial consideration: ‘[W]hen owning individual securities, direct indexing typically requires a relatively high minimum investment of $250,000.’”
• FINRA Investor Insights: “The Basics of Direct Indexing”
  • https://www.finra.org/investors/insights/direct-indexing#:~:text=Direct%20indexing%20offers%20investors%20a,as%20high%20net%20worth%20investors.
    • Related column excerpt:
      • “FINRA Investor Insights’  ‘The Basics of Direct Indexing.’ FINRA oversees member broker-dealers who do business in the U.S.”
• Fidelity: “Direct indexing in detail”
  • https://www.fidelity.com/learning-center/trading-investing/direct-indexing#:~:text=What%20is%20direct%20indexing?,the%20S&P%20500%20Index's%20performance  
    • Related column excerpt:
      • “Fidelity Investments’ ‘Direct indexing in detail.’ Fidelity is a global financial services company.”
• Parametric Portfolio Associates
  • https://www.parametricportfolio.com/blog/how-parametric-strives-to-stay-ahead-in-direct-indexing   
    • Related column excerpt:
      • “Parametric Portfolio Associates, considered the pioneer of direct indexing, offers details of its history at parametricportfolio.com.”