By Kerri Quinn
Head of Index Solutions
In early 2025, the S&P 500’s concentration reached notable levels with the top 10 holdings accounting for more than 30% of the weight in the S&P 500, prompting investors to reconsider their indexing approaches. Let’s explore how direct indexing can help manage risk and taxes in this environment.
Current Market Reality
The S&P 500 shows significant concentration in a small number of large-cap stocks. This concentration creates both opportunities and challenges for investors looking to maintain market exposure while managing their tax burden.
What is Direct Indexing?
Think of direct indexing as building your own ETF. Instead of buying an S&P 500 fund, you own the individual stocks directly. This gives you two main advantages:
- Tax-loss harvesting at the individual stock level
- Control over your exact market exposure
Key Benefits in Today’s Market
Better Tax Management
- Harvest losses from individual stocks while maintaining market exposure
- Offset gains from other investments
- Time tax events based on your personal situation
Concentration Control
- Adjust exposure to heavily weighted stocks
- Maintain desired market exposure without overconcentration
- Rebalance positions based on your risk tolerance
Is Direct Indexing Right for You?
Consider direct indexing if:
- You have significant taxable investments
- You want more control over your market exposure
- You’re concerned about concentration in major indices
- You have regular tax-loss harvesting needs
Looking Forward
As technology improves and costs decrease, direct indexing is becoming more accessible. The current market environment, with its high concentration in certain stocks, makes this strategy particularly relevant for tax-aware investors.
Key Takeaways
- Direct indexing offers more control than traditional ETFs
- Tax benefits can be significant in taxable accounts
- Current market concentration makes position control valuable
- Technology is making implementation easier and more cost-effective
