How Direct Indexing Could Work for You

Tax efficiency is the primary goal for many new direct indexing offerings, but they come with a lot of caveats.

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Take advantage of an investing strategy only institutional or ultra-high-net-worth investors had access to in the past. Increase your investment portfolio’s after-tax return. Build your own index fund to invest in what matters to you. It’s tempting to dismiss these marketing claims as hyperbole, except they are coming from some of the best-known and most-respected names in the investing world, including Fidelity, Schwab and even Burton Malkiel, author of the investing classic A Random Walk Down Wall Street.

The fanfare is about a controversial trend: A growing number of investment firms now offer Main Street investors a strategy called “personalized” or “direct” indexing that typically requires buying and trading stocks directly, mimicking an index. Investment firms and advisers have long offered this strategy to the wealthy for an annual management fee that’s often more than 1% of the portfolio’s value. But now, enabled by no-commission trading, smart supercomputer programs and the ability to buy fractions of shares, at least three firms—Fidelity, Schwab and Wealthfront—are repackaging the service for cost-conscious index investors. The new offerings enable you to dabble in personalized indexing with portfolios as small as $1, for fees ranging from $4.99 a month to 0.4% a year (see the table below). 

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Comparing Personalized Indexes
NameFeeMinimum investmentPrimary goalTypes of accounts
Fidelity Solo FidFolios$4.99/month$1PersonalizationTaxable and some IRAs
Fidelity Managed FidFolios0.4%/year$5,000Tax-loss harvestingTaxable
Schwab Personalized Indexing0.35%-0.4%/year depending on assets invested$100,000Tax-loss harvestingTaxable
Wealthfront US Direct Indexing0.25%/year$100,000Tax-loss harvestingTaxable

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Kim Clark
Senior Associate Editor, Kiplinger's Personal Finance

Kim Clark is a veteran financial journalist who has worked at Fortune, U.S News & World Report and Money magazines. She was part of a team that won a Gerald Loeb award for coverage of elder finances, and she won the Education Writers Association's top magazine investigative prize for exposing insurance agents who used false claims about college financial aid to sell policies. As a Kiplinger Fellow at Ohio State University, she studied delivery of digital news and information. Most recently, she worked as a deputy director of the Education Writers Association, leading the training of higher education journalists around the country. She is also a prize-winning gardener, and in her spare time, picks up litter.