Understanding Direct Indexing

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Direct indexing portfolios are broadly diversified portfolios of individual stocks that are personalized to meet the needs, values, and preferences of an investor.

Capturing broad market returns

As its name suggests, direct indexing takes an index-oriented approach to investing. The investor, in consultation with their advisor, selects one or more broad market indexes, and the portfolio is managed to track those indexes.

Index investing is supported by the volume of research that shows that asset allocation – how you deploy your assets among different “asset classes” – is more important to your overall investment success than individual stock picking.

Asset classes are categories of investments. They may be defined broadly, like stocks, bonds, and cash, or more narrowly, like large-growth stocks, small-value stocks, and emerging markets stocks. Each asset class consists of investments that have similar performance characteristics.

Asset classes can be represented by indexes. Indexes are baskets or collections of investments that fall within the definition of the asset class. For example, the Russell 2000 Value Index consists of U.S. small-value stocks. The S&P 500 Index consists primarily of U.S. large-cap stocks.

There are many mutual funds and exchange traded funds (ETFs) that allow investors to gain exposure to different asset classes. Those funds hold most, if not all, of the securities in an index that represents the asset class. They may hold hundreds or even thousands of securities.