Direct Indexing for High-Net-Worth Individuals

Direct Indexing for High-Net-Worth Individuals

Thinking about more control over your investments, taxes, and values? **Direct indexing** might be a powerful tool for you—especially if you’re managing a large taxable portfolio. Here’s what you need to know:

❓What is direct indexing?

Direct indexing is an investment strategy where **you own the individual stocks** that make up a market index (like the S\&P 500), rather than owning an ETF or mutual fund.

Instead of buying one fund that tracks the market, you **hold each company’s stock separately**, which opens the door to tax and customization strategies.

❓Why is direct indexing appealing if you have high net worth?

* **Tax-Loss Harvesting**: Sell losing stocks to offset gains and reduce taxable income.
* **Customization**: Exclude companies or industries you don’t want to support.
* **Avoid Redundancy**: Don’t double up on stocks you already hold elsewhere (like company shares).
* **Control**: You decide when gains are realized—not a fund manager.

❓Is direct indexing risky?

Direct indexing isn’t inherently risky, but some factors to consider:

* **Tracking Error**: If you customize too much, performance may drift from the original index.
* **Over-Concentration**: Removing too many companies can reduce diversification.
* **Tax Rule Traps**: Selling and rebuying too quickly can trigger IRS wash sale rules.
* **Active Monitoring**: Unlike index funds, this strategy isn’t “set it and forget it.”

With smart planning and the right tools, these risks can be managed effectively.

❓Is direct indexing better than an index fund?

It depends on your situation. If you:

* Are in a **high tax bracket**
* Have at least **\$250,000 in taxable investments**
* Want to customize your portfolio or avoid certain stocks
* Value **year-round tax-loss harvesting**

Then yes—**direct indexing may provide more value than a traditional index fund**.

❓How do you get started?

You’ll want to work with a fiduciary advisor who uses **direct indexing platforms** and can help you with:

* Portfolio construction
* Ongoing tax management
* Rebalancing and risk monitoring

Direct indexing gives you the opportunity to take control of your wealth with tax-smart, personalized investing. If you’re looking to optimize your after-tax returns while aligning with your goals and values, it could be the right fit.