Direct indexing was a service that used to be reserved only for the ultra-high-net-worth investor with complex needs. But thanks to advancements in technology, increased investor awareness, and reductions in trading costs, it is growing in popularity.
And according to Vanguard, these advancements have not only upped investor demand, but also increased its availability.
At Exchange 2023, Vanguard CEO Tim Buckley said direct indexing was once an option only “reserved for the ultra, ultra-high-net-worth” investor. But he noted that its use cases could be expanding to a broader investor base. Buckley added that Vanguard will “be investing heavily” in direct indexing.
Randy Bullard, global head of wealth management at Charles River Development, also said at Exchange 2023 that “every FA should be using direct indexing for their taxable client accounts.”
“I think every retail investor dollar more than $150,000 sitting in a taxable broad market exposure ETF will ultimately be better served in a direct index,” Bullard added.
See more: “What’s Driving Interest in Tax-Loss Harvesting (Besides Lowering Taxes)”
Direct indexing is a separately managed account designed to track an index. The client owns the securities while a financial advisor manages the account on their behalf.
But unlike a pooled investment fund, the client owns the actual stocks in an account. So, they can tilt the index and customize the account to align with the client’s investment goals and personal values.
All This and Tax-Loss Harvesting, Too
Direct indexing also provides tax-loss harvesting opportunities. Tax-loss harvesting involves selling investments at a loss, reinvesting that cash elsewhere, and writing off those losses at tax time.
A service like Vanguard Personalized Indexing can automatically scan portfolios throughout the year for tax-loss harvesting and rebalancing opportunities at a set frequency (daily, quarterly, or monthly). Generally, the more frequent the scans, the higher and more consistent it is. It can also help capitalize on volatile markets without violating the wash-sale rule.
More information about VPI can be found online.
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