Direct Indexing

Direct indexing is a form of passive investing that enables direct ownership of the individual securities that compose a benchmark. Unlike an ETF or other commingled fund, it gives an investor greater control, allowing for tax-loss harvesting at the security level, customization around ESG preferences, and other advantages.

What makes direct indexing so compelling?

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Tax


Third-party research has shown that tax management can add 1%–2% in after-tax excess returns.*  

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Flexibility


Investors can use direct indexing to escape concentrated positions, optimize charitable giving, and more. 

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Customization


Clients can choose from equities or fixed income, blending benchmarks to get the precise exposure they seek.

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ESG


From screens to proxy voting and more, investors can align a portfolio with their environmental and social values. 

* Shomesh E. Chaudhuri, Terence C. Burnham, and Andrew W. Lo. 2020. “An Empirical Evaluation of Tax-Loss-Harvesting Alpha.” Financial Analysts Journal 76:3, 99–108. This study did not involve Parametric or its clients. There is no guarantee that a tax-management strategy will result in increased after-tax returns. Results will differ based on an individual investor’s circumstances. 

CERULLI ASSOCIATES REPORT

Direct indexing essentials


Only in recent years has the financial industry awakened to how direct indexing can add value for investors. What do wealth managers need to know? This report from Cerulli Associates explores:


How direct indexing enables a wide range of customization options

Why tax management is at the core of direct indexing

The leading asset managers in the direct indexing space


…and much more. 


“Improving Client Experience: Customizing with Direct Indexing”


DOWNLOAD THE REPORT >>

Which types of investors benefit most from direct indexing?


Direct indexing offers a number of advantages, but it may not be ideal for all investors. If you’re weighing whether the strategy is right for your clients, consider those with an interest in one or more of the following:

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Transitioning assets

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Transitioning assets

Unlike an ETF, you can fund a direct indexing portfolio with cash or existing securities—potentially lessening the tax impact of transition.




Reducing capital gains tax

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Reducing capital gains tax

Unlike an ETF, direct indexing systematically harvests losses at the security level, so your clients can offset gains elsewhere in their holdings.
 


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ESG

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ESG

Direct indexing allows for robust screening, so you can align a client’s passive portfolio with their environmental or social values.

 




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Charitable giving

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Charitable giving

Unlike an ETF, direct indexing allows your clients to gift individual securities to charities or heirs, potentially lessening the tax impact of appreciated holdings.

 




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FIXED INCOME

The investment universe isn’t limited to equities. Neither is direct indexing.

You can also build a fixed income account that follows popular benchmarks, providing broad exposure to bonds. Just as with equities, a bond portfolio can be actively tax managed, harvesting any losses year-round when the opportunities arise, so your clients can use them to offset realized capital gains elsewhere in their broader holdings.

Direct indexing at Parametric:

Custom Core®

Equities or fixed income? One benchmark or a combination of benchmarks? ESG screens, single-stock exclusions, or both? With Parametric Custom Core, your clients get to make passive investing personal, and you get to enhance your value by tailoring a tax-managed portfolio around their precise needs.

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An idea that’s 30 years new


Parametric pioneered custom passive portfolios close to 30 years ago. Today we remain the leading provider of direct indexing, and we continue to demonstrate its value to advisors and their clients. Download our direct indexing guide—and get in touch to learn more about how Parametric can help you grow your practice.

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