Direct indexing

Direct indexing is buying the individual stocks that make up an index (say, all 500 stocks in the S&P 500) in roughly their index weights, instead of buying a single index ETF. On the surface it sounds like more work for the same result. The reason sophisticated taxable investors are moving toward it is tax-loss harvesting.

The core idea

When you own an ETF, the ETF is one security. If the index is up 10% for the year but some individual stocks inside it are down, you can't harvest those individual losses — the ETF is a single price. If you own the underlying stocks directly, you can sell the losers individually (realizing losses to offset gains elsewhere) while keeping the overall portfolio close to the index.

Who it's for

• High earners with significant taxable (non-retirement) investment accounts.
• Investors with large capital gains from other sources that need offsetting.
• People making concentrated stock sales (startup exits, executive compensation) where offsetting losses save real money.

Who it's not for

• Retirement account investors — no taxes to harvest.
• Investors with modest taxable accounts — the extra complexity and platform fees (~0.1–0.4%/year) eat most of the benefit.
• Anyone below the 15% capital gains bracket — the harvested losses are worth less.