MoneyJan 25, 2025
Since the Pandemic, Direct Indexing Has Been Making a Comeback — Thanks to Fee-Conscious Financial Planners and Disruptive Fintechs
Portfolio Optimization
Noah Weidner
Discover
What’s old will always be made new again — just ask direct indexing. First introduced in the 1990s by active portfolio managers, it offered investors a way to purchase shares of every stock in an index like the S&P 500. The result? Lower fees, tax benefits from loss harvesting, and greater portfolio customization.
Of course, we know that the mutual fund won the war — and was later usurped by hundreds of even lower-cost index ETFs. That’s because ETFs were cheap and accessible, while direct indexing strategies required big upfront costs. Still, with the rise of fractional share investing, it’s staging a comeback. But in a world dominated by three-, four-, and five-letter funds, does direct indexing still have a place?
Let’s be direct: In 2021, research and consulting firm Cerulli boldly predicted that direct indexing was set to outpace the growth of mutual funds, ETFs, and separate accounts over the next few years. Outpace, not surpass — the assets under management for direct indexing numbers in the billions, compared to mutual funds’ and ETFs’ trillions. However, the prescription for that growth falls on wealth managers — increasingly squeezed from every angle by the race to zero-fee ETFs. As a commodity product, direct indexing is an opportunity to offer more customization and services — and justify higher fees.
Until the last decade, direct indexing usually meant working with a wealth manager — and needing to put up serious cash to spin up a separately managed account to run it all in. But fintech companies have been toying with ways to bring direct indexing to more users, targeting the mass affluent and looking to undercut wealth advisors (and each other) in the process.
Is it worth it? If you’re trading individual stocks, the idea of using a robo-advisor to buy an entire index of stocks might sound unnecessarily complicated. However, if you make the kind of income where you might benefit from a direct indexing strategy, employing the strategy in a taxable account might unlock new opportunities to shore up tax savings and customize your portfolio. As always, evaluate your options with research — or with the help of guidance — before making big investments.
