At Oberdorfer Financial, we believe your money should always be on a mission.
If you’ve ever invested in an index fund like the S&P 500, you know the appeal: broad diversification, low costs, and consistent market performance. But what if you could go one step further—owning the individual stocks that make up that index, with more control and potential tax advantages such as tax-loss harvesting? That’s the idea behind Direct Indexing, and it’s one of the fastest-growing investment strategies in wealth management today.
What Is Direct Indexing?
Direct indexing is a personalized approach to index investing. Instead of buying a mutual fund or ETF that tracks an index, you directly own the individual securities that make up the index—usually in a separately managed account (SMA). This allows for customization in a way traditional index funds can’t offer.
You still track an index like the S&P 500, but with the flexibility to:
- Harvest tax losses
- Avoid specific companies or industries
- Align investments with personal values or ESG preferences
- Tilt toward certain sectors or factors (like value or growth)
Why Is Direct Indexing Gaining Popularity?
Until recently, direct indexing was only available to ultra-high-net-worth investors because it required sophisticated technology and large minimums. But thanks to technology this strategy is becoming more accessible to everyday investors through their financial advisors.
RIAs (Registered Investment Advisors) are now able to offer direct indexing to clients with lower account minimums using advanced tools that handle the complexity behind the scenes.
The Benefits of Direct Indexing
1. Tax-Loss Harvesting Opportunities
One of the biggest advantages of direct indexing is tax-loss harvesting. Since you own the individual stocks, you can sell losing positions to offset gains elsewhere—potentially lowering your annual tax bill. With an ETF or mutual fund, this isn’t possible at the individual stock level.
And because you’re still tracking the broader index, these sales don’t materially change your exposure.
2. Customization and Personalization
Want to exclude certain companies? Avoid a certain stock because you already have too much exposure at work? Or invest in companies that align with your personal values? Direct indexing makes this possible without giving up broad market diversification.
3. Better Control Over Gains
In some cases, you may want to limit capital gains in a specific year due to a change in income, retirement, or a large windfall. With direct indexing, you can manage when and how gains are realized—giving you more control over your taxable events.
Who Should Consider Direct Indexing?
Direct indexing is best suited for:
- Investors in taxable accounts (this is where the tax benefits really shine)
- Clients with appreciated positions looking for smarter ways to manage capital gains
- Individuals interested in values-based investing
- Business owners or executives who want to avoid concentrated exposure to a certain stock or industry
It’s not a replacement for all investment strategies—but it can be a powerful addition to the toolkit for clients who want more customization and tax efficiency.
Let’s Look at an Example
How Teddy and Ann Roosterbelt Benefit from Direct Indexing
Teddy and Ann Roosterbelt are in their early 40s and have built up a $750,000 taxable investment account. Their financial advisor recommends they shift from a traditional S&P 500 index fund into a direct indexing strategy.
Instead of owning one ETF or mutual fund, their account now holds approximately 250–300 individual stocks that closely track the S&P 500. The underlying exposure remains nearly identical—but the real advantages come in tax efficiency.
In the first year, markets experience volatility. While the index itself ends slightly positive, several of the individual holdings in Teddy and Ann’s portfolio post losses. Their advisor uses tax-loss harvesting, selling those underperformers and replacing them with similar stocks to maintain overall exposure. This creates $18,000 in harvested capital losses that can be used to offset gains elsewhere—like the $12,000 gain from selling a rental property earlier in the year.
The result? A significantly lower tax bill for the year, without compromising investment performance. Over time, direct indexing also gives The Roosterbelts the ability to tilt their portfolio toward ESG (Environmental, Social, and Governance) factors—avoiding a few industries they personally don’t support—all while still tracking closely to the S&P 500.
For investors like Teddy and Ann, direct indexing turns a passive index into an actively optimized, personalized portfolio—one that works harder behind the scenes to minimize taxes and reflect their values.
Truly,
Matt Oberdorfer
Founder & Financial Advisor
Oberdorfer Financial at OBFI.com
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Disclaimer: This content is for informational and educational purposes only and should not be considered investment, tax, legal, or insurance advice. Asset location strategies are not appropriate for every investor and should be evaluated based on individual circumstances. Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results.
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