Direct indexing
Also: direct indexing, custom indexing, separately managed account index, SMA indexing
An investment strategy that replicates an index by owning the individual constituent securities in a separately managed account, enabling customization, tax-loss harvesting at the position level, and factor tilts.
Direct indexing holds the individual stocks that make up an index rather than buying a single ETF share. It is typically delivered through a separately managed account with algorithmic rebalancing. The structural advantage is tax-loss harvesting at the security level: in a flat or up year, dozens of individual stocks still trade below basis at various points, creating losses that can be harvested against other gains. Minimum account sizes have dropped from $1 million to around $100,000 with automation, with typical management fees of 25 to 40 basis points.
Example: an IPO-rich engineer has $300,000 of RSU gains to offset and moves $800,000 of index ETFs into a direct-indexed S&P 500 account. In the first 18 months, the algorithm harvests $72,000 of losses from individual holdings, fully offsetting the RSU gains and leaving $12,000 carryforward.
Common mistake: running direct indexing alongside RSU holdings in the same employer without flagging the restricted security. The harvester will pile into employer stock if allowed, compounding the concentration.
Direct indexing matters at post-IPO diversification, during RSU-heavy years, and when coordinated with charitable giving of appreciated positions.
Articles referencing Direct indexing
- Concentrated Stock: 8 Ways to Diversify Without Blowing Up Your Tax Bill
Practical techniques for reducing single-stock concentration when most of your basis is locked in appreciation and a straight sale would cost 30% in tax.
- Direct Indexing Against a Concentrated Stock Position
How holding an index as individual stocks instead of a fund produces $30-80k of realized losses per year that offset gains from a concentrated sell-down.