What Is Direct Indexing?

If you’re not sure what direct indexing means, you’re not alone. Even after the recent growth, direct indexing remains relatively unknown. As our compliance team never fails to remind us, you can’t invest directly in an index. So what exactly is direct indexing?

The first thing to note is that the name may be relatively new, but the strategy isn’t. In fact, direct indexing describes what Parametric has been doing for over 30 years: providing an alternative to index mutual funds and passive ETFs for investors who want more choice, greater flexibility and the potential tax advantages that those commingled investments simply can’t offer.

Direct indexing has been in the news a lot more in recent years. Larger industry players have strategically acquired a number of providers—including Parametric. And many new entrants have entered the space, looking to build on its success.

I’ve written many blogs over the years highlighting some use cases of direct indexing, diving into the details of tax management and risk. But I want to use this opportunity to take a step back, to define direct indexing, to answer some common questions and to help advisors and their clients understand who may stand to benefit the most from it.