In an article for ETFTrends’ Direct Indexing Channel, James Comtois shared some thoughts from Vanguard executives about direct indexing. In essence, the company sees it as having a bright future and offering significant benefits in the terms of tax-loss harvesting.
With traditional ETFs, investors aren’t able to reap the benefits of tax-loss harvesting. However, direct indexing allows investors to get the benefits of an ETF like diversification and low costs, but they can also sell securities at a loss to offset taxable gains in profitable securities. Subsequently, the sold securities can be replaced with securities that have similar factors to maintain diversification.
These benefits also compound with more frequent scans. So, daily or weekly scans will lead to better outcomes than monthly or quarterly scans. Previously, there were constraints to more frequent scans as an advisor couldn’t monitor portfolios so frequently. But with automated, direct indexing strategies, these services are available to a wider swathe of investors. Overall, more frequent scanning can add between 20 and 100 basis points to a portfolio.
Finsum: Direct indexing offers specific benefits to investors especially when compared to investing in ETFs.