Until recently, direct indexing was viewed as a bridge too far for even high-net-worth investors due to the prohibitive costs of creating a customized index. However, today, the threshold is much lower. With the rise of trading in fractional shares and commission-free trading in the last few years, as well as ongoing advancements in technology, costs have come down dramatically. Direct indexing is no longer exclusively for the very wealthy.
Fractional shares are key as they allow investors to buy just a portion of a single share. That can make a huge difference when you consider that some shares trade for thousands of dollars. Booking Holdings, for example, costs roughly $3,000 per share, while Autozone is just shy of $2,500 per share. If you need to fine-tune the weighting of a stock within your portfolio to align with its weight in your index, you can do it with far more accuracy and ease if you can just trade part of a single share.
Although the ability to trade fractional shares has existed for some time, it did not become widespread until a few years ago.
Commission-free trading has been an increasingly common feature at brokerages since 2019, greatly reducing costs for individual accounts trading stocks. It’s also one of the reasons why direct indexing is growing. Without it, a well-diversified direct indexing account could rack up significant trading costs every time it does something as simple as rebalance its portfolio.
Those two changes have made direct indexing much more cost-efficient and no longer solely an opportunity afforded to ultra-high-net-worth investors. Vanguard Personalized Indexing has capitalized on these developments to bring direct indexing to an even wider portion of the investing public.
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