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.