A new investment strategy is slowly making its way to Main Street investors as technology improves and lowers trading costs.
The strategy, direct indexing, was once mostly reserved for the affluent with at least $1 million to invest. But it is now offered to some with as little as $5,000, who can use the money to replicate an index like the S&P 500 or Russell 2000. An investment professional, like a financial adviser, will buy stocks to mirror the index you choose, through a separately managed account, or SMA.
Instead of trying to match the performance of a stock index by buying mutual funds or exchange-traded funds (ETFs) that track it, investors buy a sampling of individual stocks to mimic the index.
Since you’re buying individual shares, you have the flexibility to customize your portfolio and exclude companies that don’t align with your views.
You can also save on taxes through “tax-loss harvesting,” a tactic wealthy people have used for decades that has the potential to save you thousands of dollars in taxes each year.
Direct indexing used to be expensive when brokers charged fees to trade stocks – and it was laborious to track. But with better technology and zero- or low-commission trading now the norm, more people can use direct indexing.
“This is the next generation,” said Adam Taback, Wells Fargo Private Wealth Management chief investment officer.
How to start direct indexing
To begin, investors should decide if they want to build and manage their…
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