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@ Karnage
2025-05-18 10:27:56
Direct indexing is a portfolio management strategy that replicates a stock market index by buying the individual stocks in the index directly, rather than purchasing a traditional index fund or ETF.
Key Characteristics:
• Own individual securities: Instead of owning a fund like the S&P 500 ETF, you own each of the ~500 stocks yourself in the same proportions.
• Customizable: Investors can exclude companies, overweight sectors, or apply ESG filters.
• Tax optimization: You can sell specific underperforming stocks to realize capital losses (tax-loss harvesting) while keeping the rest of the portfolio intact.
Tax-Loss Harvesting Mechanism:
• Identify individual stock positions that have declined below purchase price.
• Sell those stocks to realize a capital loss.
• Replace with a similar (but not “substantially identical”) security to avoid wash sale rule.
• Use losses to offset capital gains elsewhere or deduct against income.
Requirements:
• High enough capital to buy full or partial lots of many stocks.
• Often automated by robo-advisors or wealth platforms using fractional shares.
• Most effective in taxable (non-retirement) accounts.