Direct indexing is a separately managed account designed to replicate the performance of a chosen benchmark index. But unlike mutual funds or ETFs, a direct indexing account lets investors directly own each stock in the portfolio. This gives the investor a couple of huge advantages.
One big advantage is tax-loss harvesting. Tax-loss harvesting involves selling underperforming stocks at a loss and then using the proceeds to invest in correlated securities. This process mitigates an investor’s tax bill while navigating the wash-sale rule.
In addition to tax-loss harvesting, direct indexing accounts offer investors a level of customization not available through ETFs. Direct indexing services like Vanguard Personalized Indexing advisors build customized portfolios to accommodate their client’s individual investment goals.
Screen and Tilt Portfolios to Client Preferences
VPI offers screens and tilts that let advisors customize their clients’ portfolios. It also enables advisors to request custom options on their client’s behalf.
“You can help clients express environmental, social, and governance (ESG) or socially responsible investing (SRI) preferences,” according to Vanguard. “You can tilt their portfolios toward stocks with certain characteristics like momentum or value, known as factors.”
And it doesn’t just have to be ESG preferences. Say a client has strong religious beliefs. Direct indexing services let advisors tilt their portfolios to express those values. Or maybe the client wants to show solidarity with SAG-AFTRA and WGA while those unions are on strike. VPI can screen out streaming service companies like Amazon or Netflix while those unions are on strike.
At Exchange 2023, Vanguard CEO Tim Buckley said direct indexing was once an option only “reserved for the ultra, ultra-high-net-worth” investor. But he noted that its use cases could be expanding to a broader investor base. Buckley added that Vanguard will “be investing heavily” in direct indexing. More information about VPI can be found online.
For more news, information, and analysis, visit the Direct Indexing Channel.