WSJ on Direct Indexing

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FrugalProfessor
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WSJ on Direct Indexing

Post by FrugalProfessor »

Anyone else read this (paywall) article?

https://www.wsj.com/articles/pros-and-c ... 1638390453

Until reading the article, I hadn't realized that Vanguard was planning on getting into the mix:
Vanguard Group recently agreed to buy a provider of direct-indexing technology and indicated that it would offer direct indexing to customers in its advisory business, though it offered few other details. It already has been offering direct indexing to certain clients through a pilot program.

“Technology-driven solutions such as direct indexing continue to reshape our industry, driving better investment outcomes and lowering costs for clients,” Vanguard Chairman and CEO Tim Buckley said in announcing the acquisition.
It'd be pretty cool if VTSAX (or equivalent) could be converted to a direct holding. That said, I remain convinced that tax-loss-harvesting is largely overrated if you consider the $3k limit + the eventual higher capital gain tax burden downstream (https://frugalprofessor.com/tax-loss-ha ... overrated/)
I blog here: https://www.frugalprofessor.com/
sycamore
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Re: WSJ on Direct Indexing

Post by sycamore »

I didn't read the article; couldn't get past the paywall.

But there has been some discussion about Vanguard getting into direct indexing via its recent purchase of the wealth management firm "Just Invest." See https://pressroom.vanguard.com/news/Pre ... 10121.html. A key part is:
Personalized indexing capabilities at Vanguard will initially be implemented within Vanguard’s $3 trillion financial intermediary business, Financial Advisor Services, which serves registered investment advisors (RIAs), banks, and broker-dealer financial advisors.
So Vanguard is targeting the ability for advisors rather than directly to retail investors like you and me.

I'm not interested in using an advisor for helping with my finances, and this doesn't change things for me.

Maybe someday Vanguard will offer direct indexing to retail investors. Even then I doubt I'd bite - as you noted, the tax benefits may be overrated.
Impatience
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Re: WSJ on Direct Indexing

Post by Impatience »

Taking losses now without a corresponding offset is not tax loss harvesting as it’s generally discussed. It’s just a loss. TLH occurs when you do have offsetting gains in the same year.

Direct indexing doesn’t just allow TLH, it also reduces your fees. Individual stocks don’t have expense ratios. If you have a portfolio worth millions or more a well implemented direct index approach is probably worth the extra hassle, or it will be once it’s widely available for a low cost.
tj
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Re: WSJ on Direct Indexing

Post by tj »

Impatience wrote: Sun Dec 05, 2021 9:21 am Taking losses now without a corresponding offset is not tax loss harvesting as it’s generally discussed. It’s just a loss. TLH occurs when you do have offsetting gains in the same year.

Direct indexing doesn’t just allow TLH, it also reduces your fees. Individual stocks don’t have expense ratios. If you have a portfolio worth millions or more a well implemented direct index approach is probably worth the extra hassle, or it will be once it’s widely available for a low cost.
Most people will TLH to offset the 3k ordinary income rather than burn the on capital gains
texasfight
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Re: WSJ on Direct Indexing

Post by texasfight »

Direct indexing CANNOT compete with the ability to sell and buy back into a different ETF with 99.99% of the same stock exposure, and getting a free tax loss. Period.

Until IRS changes the rules at least.
BF3000
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Re: WSJ on Direct Indexing

Post by BF3000 »

https://research.wealthfront.com/whitep ... arvesting/


Most of the time, direct indexing WILL IN FACT beat tax-loss harvesting at the ETF level. And with minimal index tracking error. Rarely, it will not.
prioritarian
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Re: WSJ on Direct Indexing

Post by prioritarian »

FrugalProfessor wrote: Sun Dec 05, 2021 12:22 am That said, I remain convinced that tax-loss-harvesting is largely overrated if you consider the $3k limit + the eventual higher capital gain tax burden downstream (https://frugalprofessor.com/tax-loss-ha ... overrated/)
Tax loss harvesting is not overrated because it allows one to reset basis on lots with high capital gains (and lower future taxes).
cheapskate
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Re: WSJ on Direct Indexing

Post by cheapskate »

Is direct indexing popular because of the recent outperformance of Mega Cap stocks ? Based on recent data, it seems reaonable that one can replicate the performance of the S&P500 by holding just a fraction of the 500 stocks in the index. But what happens when small and mid cap stocks start outperforming (catching up to the mega caps) ?

The claim that you can match the performance of the index by holding just a fraction of the stocks in the index is very hard to believe. If Direct Indexing is so great, why don't firms publish the long term record of their strategy, across all their accounts, and compare it to the index ? This should be an easy marketing sell, and should enable the leaders to sweep up hundreds of billions of dollars very quickly.

Being able to deliver 1.08% in alpha over the index (as the other expert in the article claims), is enough of a win for these direct indexing firms to be absolutely dominant. The fact that they aren't making this great data public in splashy marketing campaigns is suspicious.
tvubpwcisla
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Re: WSJ on Direct Indexing

Post by tvubpwcisla »

What was Mr. Bogle's stance on direct indexing? Did he ever talk about it or provide a recommendation?
ryman554
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Re: WSJ on Direct Indexing

Post by ryman554 »

Impatience wrote: Sun Dec 05, 2021 9:21 am Direct indexing doesn’t just allow TLH, it also reduces your fees. Individual stocks don’t have expense ratios.
No, but they have transaction fees. And rebalancing (daily/weekly/..) to keep tracking the index aeems like trading one set of fees for another.

Are the big three (fido/Schwab/VG) really going to let you trade individual, fractional, stocks with no fees? And who it going to do the rebalancing for me? Assuming I want to tilt away from standard market cap -- otherwise there doesn't appear to be much of an advantage...

Let's face it: the low cost mutual funds/etfs seem to me to already be close to loss-leaders. Let's not get greedy... I'm only paying what, $3-500/year per million?. That's a dollar a day to avoid excess complexity.
CletusCaddy
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Re: WSJ on Direct Indexing

Post by CletusCaddy »

cheapskate wrote: Sat Jan 01, 2022 1:29 pm Is direct indexing popular because of the recent outperformance of Mega Cap stocks ? Based on recent data, it seems reaonable that one can replicate the performance of the S&P500 by holding just a fraction of the 500 stocks in the index. But what happens when small and mid cap stocks start outperforming (catching up to the mega caps) ?

The claim that you can match the performance of the index by holding just a fraction of the stocks in the index is very hard to believe. If Direct Indexing is so great, why don't firms publish the long term record of their strategy, across all their accounts, and compare it to the index ? This should be an easy marketing sell, and should enable the leaders to sweep up hundreds of billions of dollars very quickly.

Being able to deliver 1.08% in alpha over the index (as the other expert in the article claims), is enough of a win for these direct indexing firms to be absolutely dominant. The fact that they aren't making this great data public in splashy marketing campaigns is suspicious.
It is a dominant strategy for anyone talking to HNW advisers about taxable portfolios >$2-3M.

The reason you don’t hear about it is because that is a small sliver of the asset management market.
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