Pieces of wood.

The "What" and "Why" of Direct Indexing

Direct indexing is a method of investing that involves buying a portfolio of individual stocks in order to match the performance of a market index.

Direct indexing is a method of investing that involves buying a portfolio of individual stocks in order to match the performance of a market index, such as the S&P 500. Unlike traditional index funds, which use derivatives and other financial instruments to track the performance of an index, direct indexing involves purchasing the underlying stocks that make up the index. This approach has several advantages over traditional indexing methods.

First, direct indexing allows investors to have more control over their portfolio. Because the portfolio consists of individual stocks, investors can make changes to their portfolio as they see fit. For example, if an investor believes that a particular stock is overvalued, they can sell that stock and replace it with another one. This level of control is not possible with traditional index funds, which are passively managed and do not allow for individual stock selection.

Second, direct indexing can potentially offer better tax efficiency. Because the portfolio consists of individual stocks, investors can choose which stocks to sell in order to realize capital gains or losses. This allows investors to manage their tax liability in a way that is not possible with traditional index funds, which are required to sell stocks in a predetermined order that is based on the index's methodology.

Third, direct indexing can provide greater transparency. Because the portfolio consists of individual stocks, investors can see exactly which stocks they own and how each stock is performing. This level of transparency is not possible with traditional index funds, which do not disclose the specific stocks that they hold.

Overall, direct indexing offers investors a more flexible and transparent way to invest in the stock market. By buying individual stocks rather than derivatives, investors can have more control over their portfolio and potentially achieve better tax efficiency and transparency.

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Aligned Investing, LLC does not provide legal or tax advice and do not assume any liability for the tax consequences of any client transaction. Clients should consult with their personal tax advisors regarding the tax consequences of investing with Aligned Investing, LLC and engaging in these tax strategies, based on their particular circumstances. Clients and their personal tax advisors are responsible for how the transactions conducted in an account are reported to the IRS or any other taxing authority on the investor’s personal tax returns. Aligned Investing, LLC assumes no responsibility for the tax consequences to any investor of any transaction.

Investment management and advisory services–which are not FDIC insured–are provided by Aligned Investing, LLC (“Aligned Investing”), an SEC-registered investment adviser. Brokerage products and services are offered by Alpaca Markets LLC, member FINRA / SIPC. All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance.

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All investing involves risk, including the possible loss of money you invest. Past performance does not guarantee future performance. Historical returns, expected returns, and probability projections are provided for information and illustrative purposes, and may not reflect actual future performance. Please see our Form ADV for important details. Investment services provided by Aligned Investing, LLC.

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