What Is Direct Indexing In 2021


Direct Indexing is a concept that has been around forever but, for most investors, it has been tough to actually do in a safe and convenient way, so it has remained pretty obscure.

Direct Indexing is the passive investing approach of the future. It is the same cheap and safe passive investing strategy from the past but with a personal touch.

Now, thanks to technology and innovation and especially lower fees for a host of financial services it is very possible and also very interesting.

The Basics of Direct Indexing:

In one sentence, Direct Indexing is:

Replicating the performance of an entire stock market index by purchasing the underlying individual equities instead of purchasing an ETF or mutual fund.

In other words, you buy the individual components that make up the index rather than a manufactured product sold by a third party that packages them all together and sells them to you for a fee.

You still want to own the index but instead of buying a single product you instead buy all the different publicly traded stocks that

It is sort of like buying all the various parts of a car rather than driving one already assembled right off the lot.

Key Takeaways:

  • Direct Indexing is rising in popularity thanks to some recent innovations and trends in the investing space.

  • You buy all the stocks in an index. This is hundreds if not thousands of orders. Traditionally this was both painful and very time consuming as well as expensive. These days technology can handle this part of the process very quickly however.

  • Thanks to low fees in the financial industry it is also far more affordable.

  • Another innovation is fractional shares. Because you might not have enough to cover buying all the individual shares that can be, in some cases many hundreds or even thousands of dollars. These days, though, that is no longer the case. You can easily buy the fractions of the relevant shares for the size of the portfolio you have.

Advantages:

Direct indexing has several distinct advantages:

  • Direct indexing provides a very real tax advantage. Because you own individual positions you or your financial advisor can go in and harvest tax losses when the time is optimal.

  • Direct indexing allows you to customize your index to suit your needs. You might want to exclude a company (or even a sector) perhaps you either dislike it or, maybe you work in that sector and are already very exposed to it.

  • Direct indexing can be cheaper. Depending on what you are paying to own an entire index it can be dramatically cheaper to skip paying for the ETF or mutual fund wrapper and instead own the underlying index through the individual companies.

  • There are also no longer any trading fees either. So all those orders no longer add up to a prohibitive amount each and every time you attempt to replicate the index. Therefore Direct Indexing equals reduced operating costs.

  • It used to be hard and expensive but thanks to technology and innovations like the above it is something that a lot of regular retail investors can easily have access to.

  • It is cool! It can be an a safe and diversified index but one that fits your own context or circumstances.

Direct Indexing Examples:

There are many. In fact that are as many possible scenarios as there are individual investing circumstances. Since that is basically everyone it means a near infinite number of possibilities.

Here are some precise examples however:

Let us say you work for a company and are paid some portion of your compensation in company stock. You may not want to be further exposed to that company’s share price.

You also might work investing or covering a specific industry or sector and be wary or further leveraging yourself to that industry.

It is possible that you simply either deeply personally dislike or simply have no interest in investing in a handful of companies or an industry entirely. This could be for any reason individual to you - personal, values based or otherwise.

You might inherit a number of large positions and want to exclude those companies from your other passive positions.

********

There is plenty more to say about this powerful and personal investing strategy and please do not hesitate to reach out to contact@pebble.finance if you have any questions!

    Previous
    Previous

    The Carbon Offset Market Going Up In Flames:

    Next
    Next

    Robinhood - Democracy For Thee, Not For We: