Direct indexing has become an increasingly popular option for ultra-high-net-worth investors with unique investment needs. When you look under the hood, that’s not surprising. Direct indexing provides benefits that ETFs cannot. They can offer greater control over investment strategies, increase tax efficiency, and enhance portfolio performance.
Enhanced Control and Customization
Direct indexing lets investors build customized portfolios tailored to their specific investment goals and preferences. Unlike traditional mutual funds or ETFs, which track specific indexes, direct indexing allows investors to include or exclude specific stocks. In fact, entire sectors can be excluded through direct indexing.
See more: “Customize Holdings Through Direct Indexing”
Investors can align their portfolios with their values, sustainability objectives, or individual investment strategies. This granular control lets advisors construct more focused and diversified portfolios for their UHNW clients. It also reduces exposure to underperforming assets, potentially enhancing long-term returns. ETFs can’t provide this level of control.
Tax Optimization
Tax optimization is another major benefit of this type of investment strategy. Compared to traditional investment vehicles, direct indexing accounts provide greater tax efficiency. Since investors directly own the securities in a direct indexing account, they can selectively harvest losses to offset capital gains. This can potentially reduce taxable income.
In addition, direct indexing allows for tax-loss harvesting at the individual stock level, which isn’t something that can be done with an ETF or mutual fund. This targeted tax management can lead to significant savings over time, maximizing after-tax returns and reducing the investor’s overall tax liability.
For ultra-high-net-worth investors seeking enhanced customization and tax efficiency, direct indexing services like Vanguard Personalized Indexing offer a compelling solution. With the ability to create tailored portfolios, optimize tax strategies, and reduce expenses, VPI provides investors with the control and flexibility they require to achieve their investment objectives.
Vanguard CEO Tim Buckley said at Exchange 2023 that the company will “be investing heavily” in direct indexing. More information on Vanguard Personalized Indexing can be found online.
For more news, information, and analysis, visit the Direct Indexing Channel.