A direct index is an index fund, unbundled.
Own an S&P 500 index fund and you hold a single ticker — one share of a pool that owns the 500 companies for you. Direct indexing holds those same 500 stocks directly, in your name, each with its own cost basis. Same index, just unbundled into the companies behind it.
Hold the companies directly and you can start changing which ones you hold: skip your employer's stock, harvest the losers and replace them with something close, tilt toward the sectors and factors you have a view on. The moment you intentionally deviate from the index, direct indexing becomes custom indexing. And it exists on a spectrum that runs from a single exclusion (e.g., your employer) to a portfolio shaped around your factors, your values, and your whole tax picture.
That last part is the custom part. It’s the only kind we run.
// FIRST - THE BASICS
Direct indexing is an investment strategy that replicates a market index — like the S&P 500, or a total-market benchmark — by owning its underlying stocks individually rather than through a mutual fund or ETF. The return profile aims to track the index. The tax profile is where everything changes.
Inside a fund wrapper, like an ETF, the individual stocks are invisible to your tax return. The ETF nets winners against losers internally, and you own one position with one cost basis. When the index is up, there is nothing to harvest — even though, in most years, dozens of the stocks inside it finished down.
Held directly, each stock keeps its own tax identity. The ones that dip can be sold, their losses captured, and similar exposure bought back — so the portfolio keeps tracking the index while the losses go to work against gains elsewhere in your financial life.
// THE WRAPPER
In an ETF
One position, one cost basis. Every stock’s move is packed inside — you can’t see or act on any single one.
📦
1 ETF · 1 COST BASIS
A stock drops below cost? Netted away. Nothing reaches your tax return.
// HELD DIRECTLY
Direct indexing
You own each stock. Winners track the index; losers become harvest candidates — framed in green.
AAPL
▲ +1.8%
MSFT
▲ +0.9%
NVDA
▼ −2.1%
AMZN
▲ +2.4%
META
▲ +1.1%
GOOG
▲ +0.6%
BRK
▲ +0.3%
JPM
▼ −1.4%
V
▲ +0.8%
MA
▲ +1.5%
LLY
▲ +3.2%
UNH
▼ −4.0%
HD
▼ −0.7%
PG
▲ +0.4%
COST
▲ +1.9%
NFLX
▼ −3.1%
KO
▲ +0.2%
CVX
▲ +1.2%
WMT
▲ +0.5%
DIS
▼ −2.6%
Up — tracking
Down — book the loss
Sell the loser, book the loss, buy a close substitute. The loss offsets gains elsewhere — your index exposure never breaks.
Illustrative. Each square represents an individually held stock; in any given year some positions trade below cost even when the index rises. Wrapper funds net these losses internally; direct ownership keeps them usable.
1.08%
Average annual tax alpha over a buy-and-hold portfolio, 1926–2018
22.4%
Compound annual growth in direct indexing assets, 2021–2024
24 of 24
Calendar years since 2001 in which some S&P 500 stocks lost value — including strong up years
Sources: Tax-loss-harvesting alpha from Chaudhuri, Burnham & Lo, “An Empirical Evaluation of Tax-Loss-Harvesting Alpha,” Financial Analysts Journal, 2020; Cerulli Associates, December 2025, as reported in Nuveen, “Harness the benefits of tax-advantaged SMA solutions,” January 2026; S&P Global data 2001–2025, as presented in Nuveen, “Tax-loss harvesting: upgrade portfolios amidst volatility,” Exhibit 2.
// THE ENGINE
Tax-loss harvesting is the practice of selling positions that have declined, capturing the loss for tax purposes, and replacing them with similar exposure so the portfolio stays on plan. A direct index runs this at the individual-security level, all year — not as a December cleanup.
The index being up tells you almost nothing about the stocks inside it. In every calendar year from 2001 through 2024, some S&P 500 constituents lost value — including years when the index itself rose more than 20%. A direct index is built to notice, harvest, and move on while staying invested.
Those harvested losses can offset realized gains elsewhere — including the gains created when selling down a concentrated stock position. That is why this page lives inside our concentrated-positions playbook: the index does the diversifying, and its losses may help pay the tax bill of getting there.
One framing matters more than any mechanic: the value here is measured after tax. A direct index isn’t trying to outguess the market — the potential benefit is what some call tax alpha, not market-beating returns.
// THE CUSTOM PART
Custom direct indexing starts from the same chassis — individually held stocks tracking an index — and then tunes it: factor tilts (deliberately leaning toward characteristics like momentum, value, or quality that academic research has associated with long-run return differences), regional and sector weights, exclusions, and tax constraints specific to your situation.
Plain direct indexing has become genuinely good and genuinely cheap — robo-advisors run it well at scale. If automated harvesting at default index weights were all a portfolio needed, most of our clients could set that up themselves in an afternoon. They come to us for the version that carries an outlook.
The tuning can also subtract. If your net worth already leans hard on one company — like the one you work at — a custom index can exclude that stock and its closest peers, so your diversification engine isn’t quietly re-buying the risk you hired it to reduce.
Direct indexing vs. custom direct indexing
Direct indexing
Custom direct indexing
What you own
Individual stocks tracking an index at its default weights
Individual stocks tracking an index, weighted to an outlook
Index weights
The benchmark’s defaults
Tilted — by factor, region, or sector — to reflect a documented market view
Tax-loss harvesting
Automated, at the security level
Security-level, coordinated with your wider tax picture — concentrated sell-downs, capital-gains budgets, charitable plans
Exclusions
Standard screening options
Built around you — starting with the stock you already earn at work
Funding
Typically cash
Cash or existing holdings in kind, transitioned against a pre-set capital-gains budget
Who decides
An algorithm’s defaults
An advisory team accountable for the outlook
Capabilities vary by provider; this comparison describes how we use the tool, not a claim about any specific platform.
// ASSESSING FIT
Custom direct indexing tends to fit investors with a sizable taxable account, meaningful realized or expected capital gains, and a plan to keep adding to the portfolio. The signals we look for:
A taxable account doing real work. The strategy’s engine is tax treatment — it only matters where taxes apply. The larger the taxable portfolio, the more the security-level machinery has to work with.
Gains worth offsetting. Harvested losses need a job. Selling down a concentrated position, a windfall, an equity-heavy compensation year — these create the gains a direct index may help absorb.
An existing portfolio that’s hard to exit. Appreciated holdings can fund the index in kind, with sales paced against a pre-set capital-gains budget — a managed transition rather than a one-day tax event.
Ongoing savings. Regular contributions keep the engine supplied with fresh tax lots. More on why that matters below — it’s the part most providers skip at the demo.
Minimums apply — meaningfully lower than our long/short portfolios, but real. And when there are no realized gains to offset and none on the horizon, the harvesting engine has nothing to work against; a simpler portfolio may serve better. Knowing when not to deploy a strategy is part of the strategy.
// KEEPING IT ALIVE
Ossification is what happens to a direct index that stops receiving new money: as positions appreciate and losses get harvested, fewer and fewer lots remain below cost, and the harvesting engine gradually winds down.
The mechanics are unglamorous but worth understanding. Every harvested loss lowers the replacement position’s cost basis — harvesting defers tax, it doesn’t erase it. Over time, a portfolio left alone ages into a block of appreciated lots with little left to harvest. The first years are typically the richest; an unfed index drifts toward being an ordinary index portfolio with extra line items.
The treatment is replenishment. New contributions buy new lots at today’s prices — fresh raw material for future harvests. This is why we’d rather see a steady savings rate flowing into a custom index than a lump sum left to fossilize. And the aged, low-basis lots aren’t dead weight: they may become candidates for charitable gifts or simply long-term holdings whose tax bill stays deferred.
// REPLENISHED — THE ENGINE KEEPS RUNNING
New savings flow in
Each contribution adds tax lots at current prices.
Dips get harvested
Fresh lots are the most likely to trade below cost.
Losses stay useful
Available against gains, year after year.
// UNFED — THE ENGINE WINDS DOWN
No new lots
The portfolio holds only aging positions.
Lots appreciate past cost
Harvesting lowered basis; markets did the rest.
Little left to harvest
The index ossifies into a static appreciated block.
Conceptual illustration of how harvesting capacity tends to evolve with and without ongoing contributions. Actual results vary with market conditions, contribution timing, and individual tax circumstances.
One conversation. We’ll look at your taxable accounts, your embedded gains, and whether the engine would actually have work to do. If it wouldn’t, we’ll tell you that too.
// FAQ
What is direct indexing?
How is direct indexing different from an index fund or ETF?
How does tax-loss harvesting work in a direct-indexed portfolio?
Who benefits most from direct indexing?
What are the trade-offs to know about?
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