Displaying items by tag: direct indexing

In an article for ETFTrends, James Comtois laid out the 2 major benefits provided by direct indexing as opposed to investing in index funds. Until recently, direct indexing was only available to ultra high net worth investors. Now, it’s increasingly available to a wider swathe of investors.

Direct indexing allows investors to gain the benefits of index investing such as low costs and diversification but allows for greater customization and reduction of taxes. With direct indexing, tax losses are harvested on an interim basis and can be used to offset gains.

According to Morningstar, about $260 billion has moved into the category as of the end of 2022. And, this trend is only expected to strengthen in 2023. 

According to Morningstar, “Investing directly in the underlying stocks of an index in lieu of a mutual fund or ETF tracking the same benchmark allows for individually tailored tax management.” Another factor cited is that it allows investors to modify indexes based on their specific values to account for environmental, social, or governance factors. Additionally, investors can prioritize any specific factor they want to emphasize such as value or growth. 

Finsum: Direct indexing has seen massive growth over the last couple of years as it’s become increasingly available to a wider clientele. Two major benefits are a lower tax bill and increased customization. 

In an article for Vettafi, James Comtois discussed some considerations of using direct indexing to build a portfolio. Direct indexing differs from investing in index funds, because the investor is directly owning the securities. It allows for greater customization to account for an investors’ desired factors, values, tax benefits, and concentrated positions.

The trend has accelerated in recent years, as it’s increasingly available to smaller investors. Between 2015 and 2021, direct indexing’s assets under management tripled. Yet, there are some complicating factors that need to be considered for clients and advisors.

An example is the frequency of tax-loss harvesting. Various providers of direct indexing differ in terms of conducting these turnovers on a daily, monthly, or quarterly basis. According to Vanguard, the higher the frequency of these scans, the greater the returns with a difference between 20 basis points to 100 basis points of alpha. 

Another consideration is the possibility of tracking errors. Vanguard estimates that tracking errors can lead to slippage between 75 and 275 basis points. As customization increases, the risk of tracking errors also increases. Therefore, investors need to weigh these downsides against the potential benefits.

Finsum: Direct indexing continues to gain in popularity due to it allowing for increased customization and tax benefits. Yet, there are some downsides to consider.

Vestmark just unveiled its direct indexing offering which is part of its personalized unified managed account that will give its clients more bespoke services like tax optimization and portfolio management according to reporting by Diana Britton for WealthManagement.com.

Initially, the company launched six index-based SMA strategies in January. Now, it’s adding to this with its direct investment platform, enabling direct indexing for customers. This is just one part of its comprehensive, outsourced portfolio management service - VAST. 

VAST includes direct indexing, separately managed accounts, mutual funds, ETFs, and individual securities. It’s already available on the Manager Marketplace which counts 200 managers and 1,000 strategies. Additional offerings include daily optimization to maximize tax loss harvesting.

Another feature is values-based investing which allows clients and advisors to screen out investments based on certain criteria. The current minimum for VAST is $250,000. While Vestmark’s offerings are similar to other institutions, the primary differentiator is the daily tax loss harvesting as other companies tend to harvest tax losses on a monthly or quarterly basis. 

In an article for Vettafi, James Comois laid out some ways that direct indexing can help reduce taxes. Direct indexing essentially lets investors create their own customized indexes that are appropriate for their personal situations and can help them reach their financial goals. 

Rather than buying an ETF or a mutual fund, investors buy the holdings directly. The obvious advantage is that it leads to more personalization so that portfolios can reflect an investors’ values and/or accommodate a unique situation.

A secondary benefit is that it can lead to a lower tax bill, so it may have additional utility for investors to offset capital gains. In essence, losing positions can be sold and then rebalanced into equities with similar factors.

Some of the likely factors that make it more likely that direct indexing can be useful are a high federal or state tax bracket, large investment pool, a steady replenishment of assets, volatile markets, and short-term capital gains. In contrast, the benefits of direct indexing are not substantial enough to offset the additional complications.

Finsum: Direct indexing can be a better choice for certain investors who need greater customization and have high tax bills.

In an article for Vettafi, James Comtois laid out some of the benefits of direct indexing for investors. Direct indexing has grown in popularity for certain investors because it leads to greater tax savings and customization than traditional passive and active funds.

In terms of taxes, direct indexing allows investors to sell losing positions and then buy back stocks with similar characteristics. Then, these tax losses can be harvested and used to offset capital gains, leading to a lower tax bill. 

Another beenfit of direct indexing is that it allows investors to have their personal values and preferences reflected in their investments. For instance, an investor may be uncomfortable with companies in a certain industry and can exclude them from being considered for investment. 

Many investors may also be in a unique situation such as having large exposure to a particular company due to stock options or family holdings. Direct indexing allows them to construct a portfolio that reduces this particular exchange, leading to a more resilient portfolio and financial situation.

Finsum: Direct indexing is growing in popularity as it offers some advantages of traditional funds. However, it’s likely not appropriate or necessary for most investors.