What if you could build your own S&P 500—minus the companies you don’t want to own?
That’s direct indexing in plain English.
Most investors know index funds as the gold standard. Low fees, broad exposure, set-it-and-forget-it simplicity. But there’s a newer option gaining attention among investors with significant portfolios: direct indexing.
Instead of buying shares of an ETF or mutual fund, you own the individual stocks that make up an index. That shift from fund ownership to stock ownership could unlock a level of control and tax efficiency that traditional index investing can’t match.
Let me walk you through it.
How It Works
With direct indexing, you’re essentially replicating an index—like the S&P 500—by purchasing the underlying stocks directly. You’re not pooling your money with thousands of other investors. You’re holding the actual shares in your account.
Think of it as building the cake yourself instead of buying a pre-made one from the store. You choose the ingredients. You control the recipe.
This approach can offer two primary benefits: customization and tax efficiency.
Customization: Your Portfolio, Your Values
When you invest in an ETF, you invest in everything inside it. That includes companies you might prefer to avoid—whether for ethical reasons, personal beliefs, or portfolio strategy.
Maybe you don’t want exposure to fossil fuels. Or tobacco companies. Or a sector you’re already overweight in through your employer stock.
Direct indexing allows you to exclude specific industries or individual companies without abandoning the diversification an index provides. You’re still tracking the broader market, but on your terms.
It’s personalized investing without losing the discipline of indexing.
Tax Efficiency: Harvesting Losses Throughout the Year
Here’s where direct indexing gets interesting from a tax perspective.
When you own individual stocks, you can sell losing positions to offset gains elsewhere in your portfolio. This strategy—called tax-loss harvesting—could help reduce your tax bill year after year.
With a traditional index fund, you can only harvest losses when you sell the fund itself. But with direct indexing, you might have dozens or even hundreds of positions. That means more opportunities to capture losses without disrupting your overall exposure to the market.
Those harvested losses can offset capital gains from other investments—or even up to $3,000 of ordinary income annually. Over time, this tax alpha can add meaningful value.
It’s not magic. It’s math.
Who Should Consider It?
Direct indexing isn’t for everyone. It typically makes the most sense for investors with portfolios above $500,000—though some platforms have lowered the threshold.
You’ll also want to consider it if:
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- You’re in a higher tax bracket and looking for ways to reduce taxable income.
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- You have concentrated stock positions or regularly generate capital gains.
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- You want more control over what you own without giving up diversification.
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- You’re interested in aligning your portfolio with personal values or risk preferences.
For investors with smaller portfolios or simpler tax situations, traditional index funds might still be the better fit. There’s no shame in that. Good investing is about what works for your situation—not chasing the latest trend.
The Bottom Line
Direct indexing is a tool. Not a silver bullet.
It offers real benefits—customization, tax efficiency, and greater control—but it also requires more attention and a thoughtful strategy. It’s not hype. It’s practical portfolio engineering for the right investor at the right stage.
If you’re curious whether direct indexing could fit into your financial plan, let’s talk through it. No pressure. Just a conversation about whether it makes sense for where you are and where you’re headed.
Putting It All Together
I’m Alex Gibbs, a Financial Advisor with Measured Financial. My mission is to build client relationships that go beyond financial investment. I’m committed to putting my clients first by building trust and providing value from day one. It’s not just an investment in securities—it begins with an investment in trust.
At Measured Financial, our strategy is to broaden your investment opportunities through strategies tailored to your goals. You’re treated with a personal touch, and we strive for you to feel valued, heard, and understood every time we interact. We take your trust seriously. That’s why we’re straightforward, honest, and open in our communication.
Ready to explore whether direct indexing could work for you? Visit measuredfinancial.com/contact-page-alex-gibbs, fill out the contact form, and a member of our team will reach out to schedule a discussion.
Advisory services are offered through Tailored Wealth Management, LLC dba Measured Financial, an Investment Advisor in the State of California.
All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication of future results. Purchases are subject to suitability. This requires a review of an investor’s objective, risk tolerance, and time horizons. Investing always involves risk and possible loss of capital.
