Direct Index Investing:

Full Transcript:

Today I’ll share with you a modern improvement to the classic approach of index investing and three reasons why it may be right for you.

Let’s talk about direct indexing. First, I’ll go into what direct indexing is and then discuss three of its advantages. Indexes like the S&P 500 or the Nasdaq composite track the performance of a group of stocks. Many people invest in index funds by purchasing shares of a mutual fund or an ETF that are designed to mirror the performance of the index. Instead of purchasing an index fund, direct indexing is where you purchase individual company stocks that make up the underlying index. By doing so, you purchase multiple stocks across various sectors.

Let’s talk about the three advantages of doing this. First, direct indexing has various tax advantages. When owning individual stocks, you have more opportunities to harvest losses and control realized gains, reducing your taxes. For example, with an index fund, even though the index may have gone down at a specific time, if it is still higher than the purchase price, you can not realize a loss by selling that fund. With direct indexing, even when your portfolio has gone up over time, there’s more likely an opportunity to realize a loss because you may have an individual stock that is still lower than your purchase price. By selling this individual stock, you can realize that loss and then immediately purchase a similar company so that you can still maintain your investment objectives.

Next, direct indexing also helps you align your portfolio with your values. You can choose which environmental, social, and governance screenings you want applied to your account. For example, you may want to exclude tobacco companies or companies based in China.

And third, you can control the weighting of different types of stocks

within your portfolio. For example, I increase the weights of small-cap stocks, value stocks, and stocks of higher quality companies to get a higher expected rate of return.

Direct indexing used to be expensive and cumbersome, but services leveraging technology and a reduction in trading costs have greatly increased its ease, efficiency, and availability. Please send me a note if you would like to learn more.