Direct and Custom Indexing is swallowing up the financial world interests like ETFs have over the last 20 years, but this new trend isn’t without its drawbacks, specifically for retirees. Most investors will utilize direct indexing to weed out stocks they don’t want or minimize their tax burden, Lawrence Tint formerly of BGI voiced some critiques of custom indexing. Tint believes the tax advantage over traditional indexing is minimal because of the turnover in the funds. Additionally direct indexing will have higher fees and even if brokers don’t charge for fees investors will incur the bid-ask spread costs. Finally, direct indexing will make it very hard for income investors to reinvest dividends in a way to mirror the existing or custom index, and the more custom the index the more likely the traditional problems of stock pickers will riddle the custom portfolio.

FINSUM: These drawbacks to direct indexing provide a more complete view of the pros and cons to the financial trend, but it still has a leg up in tax loss harvesting over traditional ETFs.