For Vettafi’s ETF Database, James Comtois discusses the democratization of direct indexing due to technology and increasing popularity. Initially, direct indexing was only available for ultra high net-worth investors due to its cost and complexity. Yet, technology and financial innovations have now made it quite easy, and we are seeing many firms offer it to clients with as little as $10,000 to invest. 

A key to it becoming accessible for investors with smaller accounts is the reduction in trading costs. The optimal direct indexing strategy is to regularly scan an account for tax loss harvesting opportunities which can be used to offset capital gains. This leads to increased trading activity as these positions are replaced with other stocks that have similar factor scores. However, this is only feasible for smaller accounts due to the drastic decline in transaction costs over the last decade. 

Not surprisingly, nearly every advisorship is adding these offerings. At the Exchange 2023 Conference, Vanguard CEO Tim Buckley exclaimed that Vanguard will “be investing heavily” in direct indexing and that every advisor should consider “using direct indexing for their taxable client accounts.” Currently, $260 billion of client assets are being managed with direct indexing. This figure is expected to exceed $1 trillion over the next decade, underscoring the opportunity for advisors and risk for those that are left behind.

Finsum: Direct indexing has become increasingly accessible to smaller investors over the last couple of years due to increased demand, technology, and decline in trading costs.