Direct Indexing: A Strategic Addition to Your Portfolio Expanding Opportunities for Customization, Tax Efficiency, and Control
Unlocking Targeted Advantages: Introducing Direct Indexing as a Strategic Complement to ETFs
The wealth management landscape is evolving rapidly, and we continue to evaluate and adopt tools that align with our clients’ increasingly diverse goals and complex financial lives. While Exchange Traded Funds (ETFs) remain a cornerstone of our investment philosophy—providing cost-effective, diversified, and transparent market exposure—we are also expanding our capabilities with a more tailored approach: direct indexing.
Direct indexing is not a replacement for ETFs, nor is it a judgment on current portfolio construction. Instead, it represents an additional lever we can pull selectively, offering unique benefits in tax optimization and customization when circumstances warrant it. In some portfolios, this may represent a small allocation; in others, it may grow over time based on appropriateness. The key is fit—not a blanket upgrade.
ETFs: Efficient and Proven
ETFs have long been praised for democratizing access to diversified portfolios. These passively managed funds replicate the performance of market indices and can be traded throughout the day, offering flexibility and transparency at a relatively low cost. For many investors, ETFs are a highly effective and sophisticated solution that balances risk, return, and simplicity.
Our use of ETFs reflects our commitment to disciplined diversification and long-term asset allocation. They will remain foundational in many portfolios, even as we selectively enhance our capabilities for specific client situations.
What Is Direct Indexing?
Direct indexing enables an investor to hold the individual stocks that make up an index, rather than buying a pooled fund that owns those stocks on their behalf. Technology now allows this approach to be executed efficiently at scale, often using a representative subset of index components to replicate performance closely.
The value of direct indexing comes from the increased control it affords. Because investors directly own the underlying securities, we gain the ability to fine-tune portfolios to match each client’s personal, tax, or legacy considerations more precisely than is possible with pooled vehicles.
Targeted Benefits for Select Client Needs
Direct indexing introduces strategic advantages in specific areas:
- Tax-Loss Harvesting Flexibility: Because clients hold individual stocks, we can harvest losses at the security level without selling the entire This can help offset gains elsewhere or reduce taxable income, particularly for clients with significant annual capital gains. While the full tax impact will vary depending on the size of the allocation and individual tax circumstances, the incremental benefit— sometimes referred to as “tax alpha”—can add value over time.
- ESG and Values-Based Customization: Clients with environmental, social, or governance preferences can exclude specific companies or sectors, aligning portfolios with personal values in a way broad ETFs can’t always accommodate.
- Integration with Legacy Holdings: For clients with concentrated positions from past employment or inheritance, direct indexing allows us to build around those holdings, avoiding unnecessary sales or duplicated
- Charitable Giving Opportunities: Appreciated securities can be donated directly from a direct indexing portfolio, potentially avoiding capital gains and maximizing the charitable benefit.
Managing Expectations and Implementation
As with any investment strategy, context matters. While direct indexing offers compelling features, it is most effective when applied to the right client profile and portfolio structure.
It is not universally superior, nor should it be viewed as a statement against ETF investing, which continues to be a powerful and relevant approach.
Our implementation of direct indexing will be paced and intentional. We will assess where it can add meaningful value and integrate it alongside other proven strategies. In some cases, this may begin with a small slice of a portfolio, particularly in taxable accounts where the benefits of customization and tax-loss harvesting are most relevant.
Conclusion: Optionality with Purpose
Direct indexing represents another step in our ongoing effort to deliver thoughtful, high- quality investment solutions. It allows us to offer more personalized portfolios without abandoning the principles that have served clients well for decades. As markets evolve and client needs become more nuanced, we are committed to providing flexible, forward-looking strategies that reflect both innovation and discipline.
We look forward to sharing more as we continue to integrate direct indexing into our broader toolkit—always with the goal of aligning our investment strategies to each client’s unique financial landscape.
Thayer Partners LLC is an SEC registered investment adviser. SEC registration does not constitute an endorsement of Thayer Partners LLC by the SEC nor does it indicate that Thayer Partners LLC has attained a particular level of skill or ability. This material prepared by Thayer Partners LLC is for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Opinions expressed by Thayer Partners LLC are based on economic or market conditions at the time this material was written. Economies and markets fluctuate. Actual economic or market events may turn out differently than anticipated. Facts presented have been obtained from sources believed to be reliable. Thayer Partners LLC, however, cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Thayer Partners LLC does not provide tax or legal advice, and nothing contained in these materials should be taken as tax or legal advice.