Forget active versus passive investing, the future is about having both, but with a twist: direct indexing. This strategy combines the low fees and market tracking of passive investing with the tax benefits and customization often desired by active investors.

Direct indexing lets you build a portfolio that mimics a market index, like the S&P 500, but with a twist. You can personalize it to minimize your tax bill through tax-loss harvesting, a strategy that sells losing investments to offset capital gains and lower your taxes. This can potentially lead to significant savings compared to traditional index funds, and research shows the alpha can be as high as 1%.

Technology plays a key role in direct indexing. It allows advisors to tailor the portfolio to your specific needs and tax situation, while still ensuring it closely tracks the chosen index. This level of customization combined with the potential for tax savings is fueling the growth of direct indexing, particularly within separately managed accounts.

Finsum: While active bonds may have an advantage, the semi-passive direct indexing offers advantageous tax alpha.