Direct Indexing: A More Customizable Approach

An index fund seeks to replicate the performance of an existing stock index, like the S&P 500 or the Russell 2000. Now, that investment may work for many investors. But not for all. For example, say an investor wants to replicate the performance of the S&P 500, but doesn’t want to invest in any energy companies. An ETF won’t get them there. That’s where a direct indexing account may be the right option.

Direct indexing is a separately managed account where the investor owns individual stocks that represent a chosen benchmark index. But unlike index funds, which track specific indexes, investors directly own each stock in an account.

See more: “Use Direct Indexing to Counter Greenwashing

Include Stocks, Exclude Sectors

Through direct indexing, investors can include or exclude specific stocks from an index. In fact, entire sectors can be excluded. With the advisor’s guidance, investors can align their portfolios with their values, sustainability objectives, or individual investment strategies.

Sometimes called personalized indexing, it also offers access to potential tax savings that aren’t typically available through an ETF. This type of investing also provides more flexibility when it comes to choosing the individual securities to own.

It should be noted that this is an investment option primarily reserved for ultra-high-net-worth investors. However, Vanguard CEO Tim Buckley said at Exchange 2023 that that may be changing.

Vanguard Personalized Indexing offers a range of screens and tilts to allow investors to customize their portfolios. Advisors can also request custom options on their client’s behalf. Once investors select their options, advisors can generate impact and performance reports on demand. That way, their clients can have a clearer picture of the impact of their customizations.

Buckley added at Exchange that Vanguard will “be investing heavily” in direct indexing.

For more news, information, and analysis, visit the Direct Indexing Channel.