What Is Direct Indexing?

For years, investors have believed that owning an index fund meant owning the market. In reality, an ETF or mutual fund is still a single pooled vehicle, efficient, yes, but inherently rigid. You accept every stock in the index, you realize gains when the fund does, and you have limited ability to align the portfolio with your personal tax situation or existing exposures.

Direct indexing changes that equation fundamentally.

With direct indexing, an investor owns the individual securities that make up an index (or a carefully optimized subset of them) within a separately managed account. The objective is simple: deliver index-like market exposure, while unlocking powerful tax and customization benefits that traditional funds cannot offer.

The real value of direct indexing is not about chasing headline outperformance; it’s about maximizing after-tax returns over a full market cycle.

The primary advantage of direct indexing is systematic tax-loss harvesting at the stock level. In a direct-index portfolio, individual stocks move independently. Some are up, some are down, almost all the time. That dispersion allows losses to be harvested opportunistically, even when the overall portfolio or index is rising. Those realized losses can then be used to offset current or future capital gains, improving net, after-tax outcomes over time.

In contrast, an ETF investor can only harvest losses by selling the entire fund, often disrupting asset allocation or market exposure. Direct indexing removes that trade-off. You stay invested, while taxes are actively managed in the background.

The second major benefit is precision and personalization. Direct indexing allows investors to exclude stocks they already own elsewhere, avoid over-concentration, apply sector tilts, or implement ESG and values-based screens without abandoning core market exposure. This level of control is increasingly important for sophisticated investors whose portfolios are more complex than a single-account solution.

At MyTimeEquity, we have started offering direct indexing as a core equity strategy to our clients with disciplined portfolio construction, continuous tax-aware rebalancing, and transparent reporting.