What Is Direct Indexing?

Take Control with Direct Indexing: Tailored Strategies for Serious Investors

Flexible portfolio construction meets a higher potential for tax savings

For those with a significant amount of investable assets, direct indexing can deliver more flexibility, customization, and tax-minimizing opportunities than other more traditional investment products. 

Direct indexing enables you to directly own the underlying stocks in an index, making it one of the more desirable tax-efficient investing strategies for sizable portfolios. Unlike mutual funds or ETFs, direct indexing puts you in the driver's seat—meaning you have the ability to customize your portfolio, manage concentrated stock positions, and enjoy the other benefits of direct indexing.

At Wealth Advisors of Tampa Bay, we offer a proprietary direct indexing product designed to support your financial goals while optimizing for taxes and risk.

The Benefits of Direct Indexing

  • Calculator icon representing tax efficient investing

    Tax-Efficient Investing

    With direct indexing, you’re able to leverage a tax-loss harvesting strategy to offset capital gains and minimize your tax burden. This can add up to 1.93% in tax alpha per year compared to the benchmark index, as shown by a 5-year backtest conducted by Smartleaf.

  • Puzzle piece icon representing direct indexing customization

    Customization

    Direct indexing offers a high degree of customization since you own shares of an index’s underlying stocks—as opposed to a fund. The result? You can replicate an index or create a custom portfolio that aligns with your goals. With the flexibility to build a portfolio that truly reflects your values and goals, we can discuss options like custom indexing vs. direct indexing to find the right approach for you.

  • Pie chart representing direct indexing's use with concentrated stock positions

    Managing Concentrated Stock Positions

    If a single stock makes up a large portion of your portfolio, direct indexing allows you to gradually reduce this position in a tax-efficient manner.

  • Coins icon representing the cost effectiveness of direct indexing

    Cost-Effective Solutions

    At Wealth Advisors of Tampa Bay, we offer direct indexing at a cost-effective rate, with an annual fee of just 0.25%, in addition to our standard management fee.

Real-Life Example of Direct Indexing in Action

Applications of Direct Indexing

Direct indexing offers several applications that may potentially benefit investors:

  • Mitigating Risk from Inherited or Legacy Positions: Reduce risk in a tax-efficient manner without triggering large capital gains.

  • Concentrated Stock Strategies: Gradually diversify concentrated stock positions to reduce single-stock risk while minimizing tax consequences.

  • Tax-Efficient Investing Strategies: Maximize after-tax returns with tax-loss harvesting and deferral of capital gains.

  • Custom Indexing vs. Direct Indexing: Choose between replicating an existing index or creating custom parameters tailored to your investment needs.

  • Customizing Portfolios: Align your portfolio with specific indices, or exclude certain stocks or sectors that don’t match your investment preferences.

 Frequently Asked Questions

 

  • Direct indexing enables targeted tax-loss harvesting, allowing you to “harvest” losses from certain stocks in order to offset the capital gains of others. This can significantly reduce your overall tax liability and maximize after-tax returns.

  • Yes. Direct indexing allows you to gradually reduce a concentrated stock position over time without triggering large capital gains taxes, helping you manage risk while maintaining tax efficiency.

  • Direct indexing offers several advantages over traditional ETFs and mutual funds, including potential tax savings, greater customization, and the ability to manage concentrated stock positions effectively. Unlike mutual funds or ETFs, you can tailor your portfolio to your financial goals, exclude certain stocks or sectors, and optimize for tax savings by utilizing tax-loss harvesting.

  • Direct indexing involves owning the individual securities in an index. On the other hand, custom indexing allows investors to design a personalized index from scratch based on specific investment criteria. Both approaches offer flexibility and tax benefits, but choosing between custom indexing and direct indexing will depend on your particular needs and goals.

  • Yes, direct indexing can be valuable for estate planning and charitable giving. By implementing tax-efficient investing strategies, you may be able to more effectively transfer highly appreciated stock and other assets to your loved ones after death and minimize capital gains taxes.

  • Item descriptionWith direct indexing, you can customize a range of portfolios, including those based on popular indices like the S&P 500, NASDAQ, MSCI, along with WATB’s Dividend Growth portfolio. Additionally, you can set restrictions on specific sectors or stocks, adjust for tax efficiency, and implement concentrated stock strategies to diversify over time. This flexibility makes direct indexing an excellent choice for investors seeking custom indexing solutions tailored to their individual goals.

  • The time it takes to transition a portfolio using direct indexing depends on several factors, including your portfolio size, tax considerations, and the complexity of concentrated stock positions. Typically, it can take anywhere from 3 to 5 years to fully adjust a portfolio in a tax-efficient manner, especially when managing overconcentration within a portfolio.

Ready to Learn More About Direct Indexing and Its Tax Benefits?

Contact us today to learn how direct indexing can help you achieve your financial goals through tax-efficient investing, customized portfolios, and effective risk management strategies.