Direct Indexing vs ETFs: Does It Make Sense for Your Portfolio Today?

Modern portfolios are no longer built around a single index fund. Today’s investors allocate across U.S. equities, innovation strategies, commodities, digital assets, international markets, and select themes. As portfolios scale, the relevant question is no longer ETFs or direct indexing, but where each belongs within a disciplined allocation.

Direct indexing enables investors to own individual securities while tracking a broad market benchmark. Its value lies in precision and tax control. By holding stocks directly, investors can harvest losses at the security level, exclude specific exposures, and manage the timing of realized gains. This makes direct indexing particularly effective for taxable investors facing significant capital gains such as those arising from business sales, real estate transactions, or concentrated equity positions where loss generation materially improves after-tax outcomes.

That said, direct indexing carries trade-offs. It relies on advanced technology to track indices, manage large numbers of tax lots, and systematically harvest losses. These capabilities introduce additional costs and complexity. As a result, direct indexing is not always efficient, particularly in tax-deferred vehicles such as 401(k) plans, defined benefit plans, and IRAs, or in portfolios without a clear need for capital loss generation.

Actively managed ETFs remain among the most efficient portfolio building blocks available. Their tax efficiency is often understated. Portfolio rebalancing, security selection, and tax management occur within the ETF structure, typically without creating taxable events for investors. This allows investors to benefit from active management, diversification, and risk control while maintaining liquidity, simplicity, and cost efficiency. For many portfolios, actively managed ETFs are the preferred core exposure.

From a construction standpoint, the question is not which approach is superior, but how each is applied. Direct indexing is best suited for targeted tax outcomes and customization. ETFs are designed for efficient, scalable exposure across markets and themes, in both taxable and tax-deferred accounts.

Direct indexing can also add value during periods of volatility by allowing selective de-risking and opportunistic loss harvesting rather than all-or-nothing decisions. ETFs, however, remain the most effective tools for rapid allocation changes and tactical positioning.

For investors with advanced tax needs, MyTimeEquity offers specialized rapid direct indexing strategies designed to generate substantial capital losses, ~ 30% to 200% of the underlying equity exposure through the use of leverage. These strategies are intended for specific use cases and should be implemented selectively.

In practice, the most effective portfolios are structured, not binary. We favor a core satellite approach: direct indexing where tax efficiency and customization are rewarded, and ETFs for broad, liquid, and cost-effective exposure.

At MyTimeEquity, we deploy both direct indexing and advanced ETF strategies using institutional-grade tools, with a focus on tax efficiency, risk management, and long-term compounding.

Bottom line: Direct indexing is a powerful, specialized tool. Actively managed ETFs remain foundational. When combined thoughtfully, they create resilient, tax-aware portfolios built to perform across market cycles.

Disclaimer: MyTimeEquity is a state registered fee-based RIA firm. Information shared here is for informational purposes only and does not constitute financial or tax advice. The company is also affiliated with MyTimeEquity PE.