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.

ETF Expense Ratio Calculator

Enter any expense ratio and portfolio size. See the exact dollar cost over 10, 20, and 30 years — and how much you save by going direct.

What is an expense ratio?

Every ETF and mutual fund charges an annual management fee called the expense ratio. It is expressed as a percentage of your total investment and deducted automatically from the fund's returns. You never see a line item on your statement. The money quietly disappears from your growth.

A 0.40% expense ratio means for every $100,000 invested, $400 goes to the fund manager each year. That sounds manageable. But fees compound against you, just like returns compound for you. Over decades, the impact is enormous.

Real ETF expense ratios

Not all ETFs are created equal. Broad market index funds have gotten remarkably cheap, but sector and thematic ETFs still charge meaningful fees:

SCHB (Schwab US Broad Market): 0.03%/yr
VTI (Vanguard Total Stock Market): 0.03%/yr
SPY (S&P 500 SPDR): 0.09%/yr
QQQ (Nasdaq-100 Invesco): 0.20%/yr
ITA (iShares US Aerospace & Defence): 0.40%/yr
HACK (ETFMG Prime Cyber Security): 0.60%/yr
ARKK (ARK Innovation): 0.75%/yr

The real cost of ETF fees

These tables show how much money you lose to expense ratio drag at different portfolio sizes, assuming 7% annual returns. The numbers represent total dollars lost compared to holding the same stocks with 0% fees.

$10K portfolio

ETF	Fee	10 Years	20 Years	30 Years
VTI / VOO / SCHB	0.03%	-$55	-$216	-$638
SPY	0.09%	-$165	-$646	-$1,898
QQQ	0.2%	-$365	-$1,421	-$4,155
ITA (Defence)	0.4%	-$723	-$2,793	-$8,090
ARKK	0.75%	-$1,336	-$5,078	-$14,482

$50K portfolio

ETF	Fee	10 Years	20 Years	30 Years
VTI / VOO / SCHB	0.03%	-$275	-$1,082	-$3,188
SPY	0.09%	-$824	-$3,229	-$9,488
QQQ	0.2%	-$1,823	-$7,106	-$20,774
ITA (Defence)	0.4%	-$3,616	-$13,964	-$40,450
ARKK	0.75%	-$6,681	-$25,392	-$72,409

$100K portfolio

ETF	Fee	10 Years	20 Years	30 Years
VTI / VOO / SCHB	0.03%	-$551	-$2,164	-$6,377
SPY	0.09%	-$1,648	-$6,458	-$18,976
QQQ	0.2%	-$3,646	-$14,212	-$41,549
ITA (Defence)	0.4%	-$7,231	-$27,927	-$80,901
ARKK	0.75%	-$13,362	-$50,783	-$144,818

Why compounding makes it worse

The fee does not just take money from your pocket. It takes money that would have earned returns, which would have earned more returns. That is the compounding drag. A 0.40% fee does not cost you 0.40% of your gains. Over 30 years, it costs you closer to 10% of your final portfolio value.

On $100K invested for 30 years, a 0.40% expense ratio costs you over $81,000. The original investment was $100K, and fees ate $81K of growth. The higher the fee, the worse it gets. ARKK's 0.75% fee costs you nearly $145,000 over the same period.

How to pay 0% in fees

Direct indexing eliminates the expense ratio by owning the top 15-20 stocks of an ETF directly in your brokerage account. You get nearly identical exposure (R² > 0.95 for most sector ETFs) with zero annual fees. Plus, owning individual stocks unlocks tax-loss harvesting opportunities that ETFs cannot provide.

Stop paying expense ratios

Direct Index Club calculates the exact stocks to buy, at what weights, for any supported ETF. See your fee savings and get a ready-to-use buy list. Free, no signup.

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