In an article for Vettafi, James Comois laid out some ways that direct indexing can help reduce taxes. Direct indexing essentially lets investors create their own customized indexes that are appropriate for their personal situations and can help them reach their financial goals. 

Rather than buying an ETF or a mutual fund, investors buy the holdings directly. The obvious advantage is that it leads to more personalization so that portfolios can reflect an investors’ values and/or accommodate a unique situation.

A secondary benefit is that it can lead to a lower tax bill, so it may have additional utility for investors to offset capital gains. In essence, losing positions can be sold and then rebalanced into equities with similar factors.

Some of the likely factors that make it more likely that direct indexing can be useful are a high federal or state tax bracket, large investment pool, a steady replenishment of assets, volatile markets, and short-term capital gains. In contrast, the benefits of direct indexing are not substantial enough to offset the additional complications.

Finsum: Direct indexing can be a better choice for certain investors who need greater customization and have high tax bills.