A direct indexing portfolio is a separately managed account where the investor owns individual stocks that represent a chosen benchmark index. But unlike an ETF, with a this portfolio, the investor directly owns each security. This gives investors benefits that may not be possible through ETFs or mutual funds.
And one of the biggest benefits? Customization. With a direct indexing service like Vanguard Personalized Indexing, advisors can build customized portfolios based on their clients’ investment goals and personal preferences. Advisors can include or exclude specific companies, sectors, or industries, giving investors complete control over their portfolios.
Tax efficiency is another major benefit. While ETFs must distribute capital gains to investors, this form of indexing lets advisors control when and how capital gains are realized. Advisors can delay the realization of gains. VPI offers tax-loss harvesting opportunities to offset gains, potentially reducing investors’ tax liabilities.
An Ideal Option for Values-Based Investors
For investors with strong ESG or values-based investing preferences, going direct can be ideal. Advisors can build portfolios that align with their clients’ values. Commingled investment funds can’t offer this level of customization.
Another way that investors can gain tax efficiency with direct indexing is through charitable giving. Investors can donate individual securities that fit the charity’s focus. This also gives the investor a tax break.
Another significant benefit is risk management. Advisors can customize the portfolios based on their clients’ risk tolerance. As mentioned above, advisors can exclude certain sectors or stocks from the portfolio based on their clients’ preferences. This can reduce their clients’ exposure to the risks associated with these sectors and companies.
Vanguard CEO Tim Buckley said at Exchange 2023 that the company will “be investing heavily” in the direct approach to indexing. More information about VPI can be found online.
For more news, information, and analysis, visit the Direct Indexing Channel.