Welcome to the future of personalized investing: direct indexing.
Ready to dive deeper? Explore our comprehensive Direct Indexing Basics page for a full breakdown, or download the Ultimate Guide to Direct Indexing to get started today!

What is Direct Indexing?
Direct indexing is a portfolio management strategy where an investor replicates the performance of an index by purchasing the individual securities that comprise it, rather than investing in a mutual fund, index fund, or exchange-traded fund (ETF) that tracks the index. This approach gives you and your clients a unique opportunity to take control of investments, offering a level of customization and flexibility that traditional pooled investment vehicles cannot provide.
As highlighted by industry thought leaders like Nerd’s Eye View on Kitces.com, direct indexing allows you to move beyond a “one-size-fits-all” approach. By owning the underlying securities directly, you can tailor portfolios to meet specific goals, preferences, and values—all while maintaining the broad market exposure that index investing provides.
Understanding Direct Indexing
Direct indexing is a sophisticated investment strategy that allows investors to own individual securities in a separately managed account (SMA), providing direct ownership and control over their portfolio. Unlike traditional mutual funds or exchange-traded funds (ETFs), where investors indirectly own a basket of securities, direct indexing strategies offer a more hands-on approach with several unique benefits.
One of the primary advantages of direct indexing is the potential for tax-loss harvesting. This involves selling individual securities at a loss to offset capital gains from other investments, thereby reducing overall tax liability and increasing after-tax returns. However, it’s important to be aware of IRS rules, such as the wash sale rule, which prohibits claiming a tax loss if the same or substantially identical securities are purchased within 30 days before or after the sale.
Direct indexing portfolios typically require a significant amount of capital to set up, as they involve owning individual securities in a separately managed account. This approach can be more expensive than traditional index funds or ETFs due to higher transaction costs and the need for ongoing management. However, for investors seeking a high degree of customization and control over their portfolio, direct indexing can be an attractive option.
Investors who may benefit from direct indexing include those who:
- Want to offset capital gains and reduce tax liability
- Have a substantial amount to invest and desire a high degree of customization
- Are looking for a more tax-efficient investment strategy
- Prefer direct ownership and control over their portfolio
It’s essential to consult with a financial advisor or investment professional to determine if direct indexing is suitable for your individual circumstances and investment goals. They can help you evaluate the potential benefits and drawbacks of direct indexing and create a personalized investment strategy that meets your needs.
In summary, direct indexing is a sophisticated investment strategy that offers several benefits, including tax-loss harvesting, direct ownership, and customization. However, it may not be suitable for all investors, and it’s crucial to carefully consider the costs and benefits before deciding whether it’s the right choice for you.
How It Works
Direct indexing begins with a benchmark index, such as the S&P 500 or the Russell 3000 (or, even one that you create). The process involves purchasing the individual securities that make up the index in proportions that reflect its composition. This baseline portfolio can then be customized to align with your client’s unique financial and personal objectives.
For example, an investor might exclude companies that conflict with their values, such as fossil fuel producers, or overweight securities that align with their beliefs, like renewable energy firms. Additionally, clients with concentrated positions in specific stocks can exclude those holdings from the portfolio to avoid duplication.

You can sell individual securities in the portfolio that have declined in value to realize capital losses, which can offset capital gains elsewhere. This technique not only improves after-tax returns but also creates opportunities for ongoing tax efficiency—a crucial benefit for high-net-worth clients and taxable accounts. Utilizing a taxable account can enhance after-tax returns by offsetting capital gains with losses and capitalizing on the power of compound growth through careful investment timing and portfolio adjustments.
By combining customization with tax efficiency, direct indexing empowers you to deliver highly personalized investment strategies while keeping your clients’ portfolios aligned with market benchmarks. For financial advisors looking to differentiate their offerings, this strategy opens up new avenues for value-added services and deeper client relationships.
The Evolution of Direct Indexing: From Niche to Mainstream

Direct indexing has undergone a significant transformation, evolving from a niche strategy for ultra-wealthy investors into a powerful tool accessible to a wide range of clients. Initially, it was favored by high-net-worth individuals due to its ability to offer unparalleled customization and tax efficiency. However, high costs and the complexity of managing individual securities limited its adoption to those with significant resources and sophisticated advisory relationships.
While direct indexing offers customization and potential tax advantages, there may be circumstances where investors could achieve better returns with less risk by simply owning broad-based index mutual funds instead. This sets the stage for weighing the benefits of direct indexing against traditional index fund investments.
One game-changer that enabled the introduction of direct indexing to the mass affluent, and not only the high net worth, has been the introduction of fractional shares, enabling investors to purchase smaller portions of high-priced stocks. Fractional shares make it possible to build diversified, index-based portfolios for your clients with modest account sizes, something that was previously out of reach. Combined with the advent of zero-fee trading, the cost of implementing direct indexing has dropped dramatically, making it an attractive option for a much broader client base.
It may seem cliche to say now, but these innovations democratized direct indexing, opening it up to clients across the wealth spectrum. Today, it’s not just a tool for tax optimization but a flexible, customizable investment strategy that aligns with individual values, preferences, and financial goals.
Those advancements then made it possible for technology to enter the arena that had previously been dominated by expensive subadvisors. Enter Alphathena and our groundbreaking platform. Over the past decade, advancements in financial technology have driven direct indexing into the mainstream. The rise of AI and advanced portfolio management software has streamlined the once-complicated process of selecting and managing individual securities.
Our direct indexing platform allows you to efficiently replicate index performance while implementing customizations at scale, eliminating many of the operational barriers that previously made direct indexing prohibitive.
For financial advisors, this evolution presents an opportunity to offer a differentiated and personalized approach to portfolio management that was once reserved for only the wealthiest clients.
Key Features and Benefits of Direct Indexing
Direct indexing offers a unique combination of customization, tax efficiency, and scalability, making it a powerful tool for advisors seeking to deliver personalized solutions. Some of the key advantages that set direct indexing apart include:
Customization
One of the most compelling features of direct indexing is the ability to tailor portfolios to align with individual client values and preferences. For example:

Additionally, direct indexing allows for managing losses at the individual security level, optimizing tax outcomes.
This level of customization allows you to build portfolios that resonate deeply with your clients’ values, creating a more meaningful and satisfying investment experience.
Tax Efficiency and Tax Loss Harvesting
Tax-loss harvesting is a hallmark benefit of direct indexing. By selling individual securities that have declined in value, you can realize capital losses to offset taxable gains elsewhere in a portfolio. This strategy can significantly improve after-tax returns, especially for clients with taxable accounts.
A direct indexing account enables investors to manage their concentrated stock positions while mitigating risk and potentially offsetting tax liabilities, distinguishing it from traditional index funds.
To explore this topic in greater depth, check out our blog, Direct Indexing Tax-Loss Harvesting.
Personalization at Scale
Direct indexing empowers you to deliver unique client experiences without sacrificing operational efficiency. Advanced technology platforms streamline the process of customizing portfolios and managing tax strategies, allowing you to scale these tailored solutions across a broad client base.
By leveraging tools like AI and fractional shares, you can build individualized portfolios for your clients at various wealth levels, delivering high-touch service traditionally reserved for high-net-worth investors.
Comparison to Traditional Indexing and Underlying Securities
While ETFs and mutual funds remain popular for their simplicity and low costs, they lack the flexibility and personalization offered by direct indexing. Unlike pooled investment vehicles, direct indexing gives investors full control over the underlying securities, enabling tax optimization and alignment with personal values.

With its ability to blend customization, tax efficiency, and scalability, it’s an essential strategy for advisors looking to provide personalized solutions and stand out in a competitive marketplace.
Who Benefits from Direct Indexing?
Direct indexing isn’t just for your wealthiest clients—it’s a strategy that can provide significant value to a wide range of clients. RIAs can leverage the power of direct indexing to meet specific needs and goals for nearly anyone. Let’s look specifically into who benefits from this innovative investment approach.
Investors
Direct indexing offers a host of benefits for individual investors looking to take a more personalized and proactive approach to managing their portfolios:
- Personalization: With direct indexing, investors have the flexibility to tailor their portfolios according to personal preferences. Whether it’s selecting specific sectors, industries, or companies to include or exclude, direct indexing allows for a level of customization that traditional ETFs and mutual funds can’t provide. For example, an investor could choose to avoid companies in sectors like tobacco or oil & gas while emphasizing technology or healthcare, aligning the portfolio with their values.
- Tax Optimization: Tax-loss harvesting is a major benefit of direct indexing. By selling individual securities that have depreciated in value, investors can realize capital losses to offset gains from other investments. This strategy can reduce overall tax liability and significantly improve after-tax returns, particularly for clients with taxable accounts.
- ESG Alignment: Investors who are passionate about environmental, social, and governance causes can align their portfolios with those values. Direct indexing allows them to exclude specific industries, such as fossil fuels, or overweight companies that meet their ESG criteria. This level of alignment isn’t easily achieved through traditional index funds or ETFs, where investors are simply buying a basket of securities without the ability to tailor their investments to personal values.
Direct indexing empowers investors to create a portfolio that’s not just a reflection of market indices but a true reflection of their preferences, values, and financial goals. However, the information provided should not be interpreted as personalized investment advice, and individuals are encouraged to consult their own financial advisors for tailored guidance.
Financial Advisors (RIAs)

RIAs can harness direct indexing as a tool to differentiate offerings, build deeper client relationships, and scale business efficiently:
- Differentiation in a Competitive Market: As more investors demand personalized solutions, RIAs can stand out by offering direct indexing as a way to provide customized portfolios that meet individual client needs. By utilizing direct indexing, advisors can offer a highly tailored approach that isn’t available through traditional mutual funds or ETFs. This ability to deliver custom, ESG-aligned, and tax-optimized portfolios gives RIAs a competitive edge in a crowded market.
- Enhanced Client Relationships: With direct indexing, advisors can demonstrate a deep commitment to clients’ specific goals, values, and tax needs. The flexibility to exclude certain companies or sectors and the opportunity to optimize portfolios for tax efficiency helps build stronger relationships, as clients see their portfolios reflecting their personal beliefs and financial aspirations. Clients are more likely to remain loyal when they feel their advisor is actively managing their unique needs.
- Scalability and Efficiency: While direct indexing allows for extreme customization, advancements in technology—such as AI, fractional shares, and tax optimization tools—allow RIAs to manage these portfolios efficiently and at scale. Advisors can apply customized strategies to multiple clients without dramatically increasing their workload, enhancing productivity while maintaining the quality of service. This scalability helps RIAs grow their businesses while still delivering highly personalized investment strategies.
For RIAs, direct indexing represents a powerful way to meet the growing demand for customization, deepen client relationships, and enhance operational efficiency, all while differentiating their services in an increasingly competitive landscape.
Challenges and Considerations in Direct Indexing Strategies
Just like most things in the world, there are always takeaways from the benefits. Understanding these hurdles and how to address them is essential for both you and your clients.
Complexity of Management
The right tools can make managing a direct indexing portfolio straightforward and efficient, even with its unique complexities. Direct indexing offers the flexibility to customize investments, but it also involves tasks like:
- Tracking the performance of dozens (or even hundreds) of individual stocks.
- Regularly rebalancing the portfolio to stay aligned with the chosen index.
- Executing tax-loss harvesting strategies at the security level.
- Producing detailed performance and tax reports.
When equipped with the right technology, these tasks become seamless, saving time and resources while enabling you to scale your practice and manage multiple portfolios with ease.
Technology to the Rescue
Fortunately, advancements in financial technology have made managing direct indexing portfolios more feasible and efficient, and Alphathena is leading the charge as a premier platform for advisors.
Alphathena automates many of the complex processes that would otherwise demand significant time and effort:
- Automated Rebalancing: Alphathena ensures that portfolios remain aligned with their benchmark index, even as market conditions change or customizations are applied. This saves you countless hours of manual adjustments.
- Tax-Loss Harvesting: With Alphathena’s sophisticated algorithms, you can easily identify and execute tax-loss harvesting opportunities across individual securities with precision, optimizing after-tax returns for clients without the need for manual tracking.
- Detailed Reporting: Alphathena generates comprehensive, easy-to-understand performance and tax reports, enabling you to clearly communicate portfolio results and demonstrate value to clients.
By leveraging Alphathena, you can streamline your operations and deliver a seamless, efficient, and highly personalized experience for your clients. This technology empowers you to scale your direct indexing offerings without sacrificing customization or service quality.

By allowing for unparalleled customization, alignment with personal values, and enhanced tax optimization, direct indexing empowers both individual investors and financial advisors to achieve goals that traditional ETFs and mutual funds simply cannot.
Whether you’re looking to tailor portfolios to specific ESG values, optimize for after-tax returns through tax-loss harvesting, or provide a highly personalized client experience, direct indexing offers a powerful solution for today’s investment landscape.
For a deeper dive into the fundamentals, be sure to explore our Direct Indexing Basics page. Remember, direct indexing isn’t just an investment strategy—it’s a way to create portfolios as unique as the clients they’re built for. Take the next step to learn how it can help you or your clients achieve a more personalized and efficient financial future.