What is direct indexing?

Direct indexing is an investment strategy where you buy the individual stocks that make up an index or ETF instead of buying the fund itself. This eliminates the fund's annual expense ratio and gives you full control over which stocks you hold, enabling tax-loss harvesting and portfolio customization.

Is direct indexing better than ETFs?

It depends on your situation. Direct indexing is better if you have $25K+ invested, pay more than 0.20%/yr in ETF fees, want tax-loss harvesting, or need portfolio customization. ETFs are better for smaller portfolios, ultra-low-cost funds like VTI (0.03%), or investors who prefer zero maintenance.

How much does ETF expense ratio cost over time?

ETF fees compound against you over time. On a $100,000 portfolio at 7% annual growth, a 0.40% expense ratio costs over $81,000 in lost returns over 30 years. Even a 0.09% fee (SPY) costs about $19,000 over the same period. Direct indexing eliminates this cost entirely.

What is tax-loss harvesting and how does it work?

Tax-loss harvesting is selling investments at a loss to offset capital gains taxes. With direct indexing, you own stocks individually, so you can sell losers to harvest losses while keeping winners. ETF holders cannot do this because they own one bundled security. High-income investors in taxable accounts benefit most.

Who is direct indexing suitable for?

Direct indexing is best suited for investors with $25,000 or more in taxable brokerage accounts, those paying 0.20%+ in ETF expense ratios, high-income earners who benefit from tax-loss harvesting, and anyone who wants to exclude or overweight specific stocks for personal or ESG reasons.

What is the difference between an index fund and direct indexing?

An index fund (ETF or mutual fund) pools investor money to buy all stocks in an index, charging an annual expense ratio. Direct indexing means you buy the individual stocks yourself, paying no ongoing fees. You get similar market exposure but with added benefits: zero expense ratio, tax-loss harvesting on individual positions, and full control to customize holdings.

Direct Indexing vs ETF: Which Is Better in 2026?

ETFs changed investing. Direct indexing might change it again.

ETFs made diversified investing simple and cheap. Buy one ticker, get hundreds of stocks. But "cheap" is not "free." Every ETF charges an annual expense ratio, and those fees compound against you for decades. Direct indexing eliminates that fee entirely by owning the underlying stocks yourself.

So which approach is better? It depends on your portfolio size, tax situation, and how much control you want. Not sure what direct indexing is? Start with the complete guide to direct indexing, then come back here for the comparison.

Expense ratio: 0% vs 0.03-0.75%

The most obvious advantage of direct indexing is cost. When you own stocks directly, there is no fund manager taking an annual cut. Compare that to common ETFs:

SCHB / VTI: 0.03%/yr (about $30/yr on $100K)
SPY: 0.09%/yr ($90/yr on $100K)
QQQ: 0.20%/yr ($200/yr on $100K)
ITA (Defence): 0.40%/yr ($400/yr on $100K)
ARKK: 0.75%/yr ($750/yr on $100K)

On a $100K portfolio with a 0.40% expense ratio, you lose over $81,000 in compounded returns over 30 years (assuming 7% annual growth). Direct indexing: $0 in fees, $0 lost to compounding drag. The savings are most dramatic with high-fee sector and thematic ETFs. For ultra-cheap funds like VTI at 0.03%, the fee savings alone may not justify the extra complexity. See the full numbers on our ETF expense ratio calculator.

Tax-loss harvesting: the hidden advantage

When you own an ETF, you can only harvest losses on the entire position. If SPY is down 5% but half its stocks are actually up, you cannot sell the losers individually. You are stuck.

With direct indexing, you own each stock separately. That means you can sell individual losers to offset gains elsewhere in your portfolio, while keeping the winners. This is called tax-loss harvesting, and it can save high-income investors thousands of dollars per year in taxes.

Wall Street firms like Parametric and Wealthfront charge 0.25-0.40% annually for this service. With direct indexing, you can do it yourself for free. Learn more in our tax-loss harvesting guide.

Customization: ESG, sector exclusions, concentration

ETFs give you a pre-set basket. If you want to exclude oil companies, weapons manufacturers, or a stock you already own through your employer, you are out of luck. You would need to find a specialized ESG ETF, which usually charges higher fees.

Direct indexing lets you drop or overweight any stock. Work at Apple and already have RSUs? Remove AAPL from your S&P 500 replica. Want to avoid fossil fuels? Exclude XOM and CVX and redistribute the weight. You get index-like diversification with personal control.

Minimum investment and complexity

ETFs win on simplicity. Buy one share of VOO for about $500 and you own the S&P 500. Done. Direct indexing requires buying 15-50 individual stocks, which means you need enough capital to get meaningful positions in each one.

For sector ETFs (ITA, XLE, XLV), 15-20 stocks replicates the fund at R² > 0.95. You can start with as little as $5,000. For broad market ETFs like SPY, you would want $25,000+ to hold 30-50 positions comfortably.

Rebalancing is also manual with direct indexing, though most brokers let you set up periodic reviews. The tradeoff is clear: more work, more control, lower cost.

Who should use each?

Stick with ETFs if: you have less than $10K to invest, you want zero maintenance, or you are investing in ultra-cheap index funds (VTI/SCHB at 0.03%) where the fee savings do not justify the extra effort.

Consider direct indexing if: you hold $25K+ in a single ETF position, you pay more than 0.20%/yr in fees, you want tax-loss harvesting opportunities, or you want to customize which stocks you hold. The higher the expense ratio and the larger your portfolio, the more direct indexing saves you.

Many investors use both. Broad US market exposure through VTI (cheap enough to keep), and direct indexing for sector tilts where ETF fees are 0.40%+ and customization matters.

Try direct indexing for free

Direct Index Club shows you exactly which stocks to buy, at what weights, for any supported ETF. See your projected R² correlation, annual savings, and a ready-to-use buy list. Free, no signup required.

Build your basket →