Wealth Management
Direct Indexing Explained: Customization, Tax Efficiency, and More
June 24, 2025
As investors seek smarter, more personalized ways to manage their portfolios, direct indexing is emerging as a compelling alternative to traditional index funds and ETFs. It combines the broad diversification of indexing with the flexibility and control of owning individual stocks. While once reserved for high-net-worth individuals, advances in technology and commission-free trading have made direct indexing more accessible than ever. For those looking to enhance tax efficiency, align investments with personal values, or gain greater visibility into their holdings, direct indexing is worth a closer look.
What Is Direct Indexing?
Direct indexing allows investors to buy individual stocks that mimic a broader index—like the S&P 500—through a separately managed account. Unlike traditional index funds or ETFs, where you own shares in a fund, direct indexing gives you direct ownership of each stock. This offers greater customization, tax efficiency, and transparency.
How It Works:
Instead of owning a pre-packaged basket of stocks, investors can customize their holdings—excluding certain companies or aligning with personal values like ESG (Environmental, Social, and Governance) criteria. You can also see exactly which stocks you own and how many shares of each. Thanks to advancements in technology and commission-free trading, direct indexing is also more accessible to everyday investors.
Key Benefits:
- Tax Efficiency: Direct indexing allows for tax-loss harvesting—selling underperforming stocks to offset capital gains and reduce taxable income.
- Customization & Control: Investors can tailor their portfolios based on personal values, risk preferences, or tax needs.
- Diversification: It’s useful for portfolios with concentrated or appreciated holdings, helping decrease risk while managing taxes.
- Transparency: Full visibility into your portfolio means better understanding and more informed decision-making.
Tax-Loss Harvesting Explained:
Even when an index is up overall, some individual stocks may be down. With direct indexing, you can sell those specific stocks to harvest losses—something not possible with index funds, where you must sell the entire fund. This strategy can significantly lower tax bills and may increase after-tax returns.
Note: Tax-loss harvesting only applies to taxable accounts—not 401(k)s or IRAs, which are already tax-advantaged.
Who Benefits Most?
Who Benefits Most?
- High-net-worth individuals
- Investors with large capital gains
- Philanthropic investors looking to donate appreciated stock
- Those seeking ESG integration or avoiding specific stocks or sectors
Direct indexing blends the low-cost appeal of indexing with the flexibility and personalization of active management. As technology brings down costs and complexity, more investors can access its tax advantages, transparency, and customization. For the right investor, direct indexing can be a smart strategy to optimize both performance and tax outcomes.
Speak with an Oppenheimer Financial Professional today to see if direct indexing is right for you.
DISCLOSURE
1 Direct Indexing can be considered tax efficient because it allows investors to individually manage the components of their investment portfolios. This level of control allows the investor to implement tax-saving strategies such as tax loss harvesting potentially reducing their tax liability and optimizing after-tax returns.
2 Tax alpha describes the potential value created by the effective tax management of investments, relative to an underlying index, such as the S&P500.
3 A customized transition strategy is a tailored approach to transitioning an existing investment into a direct indexing structure in a way that minimizes disruptions, maximizes tax efficiency and aligns with the investor’s financial objectives. The strategy takes into account an investor’s current holdings, tax implications and desired asset allocation with the goal of efficiently migrating from traditional investments into a direct indexing strategy. Views and opinions expressed reflect the current opinions of the author and views are subject to change at any time without notice. Other industry analysts and investment personnel may have different views or opinions. There are no guarantees to the effectiveness of tax alpha in minimizing an investor’s overall tax liabilities or to the tax results of any given transaction and the performance of an account may be negatively affected by tax gain/ loss harvesting. This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. This summary is not intended to be tax or legal advice. This summary is being used to illustrate the characteristics of direct indexing. The taxpayer should consult an independent tax advisor. There are no guarantees to the effectiveness of direct indexing in minimizing an investor’s overall tax liabilities or to the tax results of any given transaction and the performance of an account may be negatively affected by tax gain/loss harvesting. All investments involve risks, including possible loss of principal. There can be no assurance that investment objectives will be achieved or that an investment strategy will be successful. Diversification does not ensure a profit or protect against loss. This material is not a recommendation as defined in Regulation Best Interest adopted by the Securities and Exchange Commission. It is provided to you after you have received Form CRS, Regulation Best Interest disclosure and other materials.
Oppenheimer Asset Management is the name under which Oppenheimer Asset Management Inc. (OAM) does business. OAM is a registered investment adviser and is an indirect wholly owned subsidiary of Oppenheimer Holdings Inc., which also indirectly wholly owns Oppenheimer & Co. Inc. (“Oppenheimer”), a registered investment adviser and broker dealer.
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