In an article for ETFTrends, James Comtois discusses how investors can capitalize from volatile markets with direct indexing. In recent days, volatility has plunged following the successful resolution of the debt ceiling which avoided a potentially catastrophic default. However, investors should continue to be wary given rising recession risk, geopolitical tensions, and still uncomfortably high inflation.

While volatility is painful for all investors, direct indexing is one way that investors can profit from it unlike with index funds. With direct indexing, an investor owns the actual stocks in the index. Due to this, losing positions in the account can be sold which can be used to offset gains from winning positions to reduce tax liabilities. Subsequently, these losing positions are replaced with similar ones to maintain diversification and faith with the underlying index. 

Notably, this strategy works even in years when the index was up. And, it works even better in conditions like 2023 when we have indexes with healthy gains albeit with considerable volatility. Further, many services now will automatically scan portfolios to identify rebalancing opportunities. And, the more frequent the scans, the more alpha that can be uncovered. 

Finsum: While market volatility has died down in recent days, it’s inevitably going to come back. Find out how direct indexing allows investors to capitalize during volatile markets.