Allan Roth, founder of Wealth Logic LLC recently penned an article for etf.com where he provided his opinion on direct indexing vs. ETFs. While direct indexing is forecasted to attract assets at a faster pace than ETFs, according to a recent report by Cerulli Associates, Roth believes that direct indexing is not better than ETFs. While he does mention the benefits of direct indexing such as tax advantages, customization, and low annual costs, he asked, “But is direct indexing better than ETFs?" He added, "Generally they are not, in my view, at least not compared to the best ETFs.” He uses the S&P 500 as an example. Vanguard’s VOO ETF has a 0.03% annual expense ratio, while direct indexing typically has an annual fee of at least 0.40% annually. Roth does say that the 0.37 percentage point differential could be made up from the benefit of tax-loss harvesting in the early years, but he believes it likely won’t continue. That is because the stock market “generally moves up in the long run, so each year there is less and less tax-loss harvesting. Yet the fees continue.” In addition, after a few years, he says that “the tax benefit is minimal, and all that is left are fees and complexities.”
Finsum:Financial planner Allan Roth recently wrote an article for etf.com where he stated that direct indexing is not better than ETFs since direct indexing is more expensive and its tax benefits are minimal after a few years.