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Vanguard Personalized Indexing

Direct indexing: Its uses and advantages

Learn how direct indexing works and understand how you can use Vanguard Personalized Indexing to help your clients keep more of what their portfolios earn.

Overview

What is direct indexing?

Think of it as indexing with an edge. In a direct indexing portfolio, investors directly own the individual stocks in a separately managed account (SMA). The SMA tracks a chosen benchmark, such as the S&P 500 or the Russell 3000.

This direct ownership structure can give your clients an edge: They gain unique opportunities for after-tax alpha and personalization that may not be possible with ETFs and mutual funds.¹

An advisor’s take on direct indexing

“Frankly, the use of this product [Vanguard Personalized Indexing] and others, in my opinion, really helps to reframe the discussion…You get to talk about tax savings, you get to talk about ways you can customize a portfolio, you get to talk about the things that [clients] care about, which is what they keep at the end of the day.”


- Dave Murdoch, Managing partner, Bordeaux Wealth Advisors

Note: Dave Murdoch is a Vanguard advisory client.

Tax optimization

Scalable tax optimization

A key benefit of direct indexing is regular, automated scanning for tax-loss harvesting opportunities. Unlike with mutual funds or ETFs, you can harvest losses from a direct indexing portfolio at the individual security level, even in years when the benchmark index’s return is positive.

 

Percent of stocks with positive and negative returns versus S&P 500 Index return

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Sources: FactSet, as of January 31, 2023

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Clients can use these losses to offset capital gains elsewhere in their holdings, helping increase their after-tax returns. Direct indexing solutions with daily tax-loss harvesting—like Vanguard Personalized Indexing—could boost certain investors' after-tax returns by 1%–2% or more.²

Tax alpha calculator
Use cases

Direct indexing use cases

Use a direct indexing strategy like Vanguard Personalized Indexing to build custom portfolios that fit each client’s unique tax situation, preferences, and existing positions—potentially improving their investment outcomes.

Although Vanguard Personalized Indexing isn’t for every investor, its benefits could help you deepen relationships with existing high-net-worth clients and attract new ones by offering:

  • Automated tax-loss harvesting. Help boost after-tax performance for higher-net-worth clients at scale.
  • Enhanced portfolio construction. Gain new opportunities to build portfolios around clients’ concentrated or locked legacy positions.
  • Customization. Give your clients the personalized experience they expect. Express their ESG preferences down to the individual security level or apply factor exposures.
Insights and resources

More insights on direct indexing

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Resources

DOWNLOAD

  • Personalized indexing practitioner's guide

    How does personalized direct indexing work? Which clients would be a good fit for the strategy? Get answers in this practical guide.

  • Benefits of Personalized Indexing

    Get detailed analysis in this Plain Talk® white paper that can help you decide whether your high-net-worth clients would benefit more from direct indexing or traditional strategies like ETFs and mutual funds.

Disclosures and footnotes

1 Though some clients will benefit from personalized equity portfolios, many find that pooled products such as mutual funds and ETFs meet their needs.

2 Kevin Khang, Alan Cummings, Thomas Paradise, and Brennan O'Connor, 2022. Personalized indexing: A portfolio construction plan. Valley Forge, Pa.: The Vanguard Group. Simulation as of September 2021.

Vanguard Personalized Indexing Management, LLC ("Vanguard Personalized Indexing Management"), formerly Just Invest, LLC, an SEC registered investment adviser, is an independently operated wholly-owned subsidiary of The Vanguard Group, Inc. ("Vanguard"). Vanguard Personalized Indexing is an asset management technology that has been developed and is offered solely by Vanguard Personalized Indexing Management.

For more information on Vanguard Personalized Indexing Management and Vanguard Personalized Indexing, and to access Vanguard Personalized Indexing Management's Form CRS and Form ADV Part 2A disclosure brochure, please visit Vanguard Personalized Indexing page.

All investing is subject to risk, including possible loss of principal. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.

Tax-loss harvesting involves certain risks, including, among others, the risk that the new investment could have higher costs than the original investment and could introduce portfolio tracking error into your accounts. There may also be unintended tax implications. Prospective investors should consult with their tax or legal advisor prior to engaging in any tax-loss harvesting strategy. Neither Vanguard Personalized Indexing Management nor Vanguard provide tax or legal advice.

The information contained herein does not constitute tax advice and cannot be used by any person to avoid tax penalties that may be imposed under the Internal Revenue Code. Each person should consult an independent tax advisor about their individual situation before investing in any security.

ESG portfolios are subject to ESG investment risk, which is the chance that the stocks or bonds screened by the data provider for ESG criteria generally will underperform the market as a whole or, in the aggregate, will trail returns of other portfolios screened for ESG criteria. The data provider's assessment of a company, based on the company's level of involvement in a particular industry or the data provider's own ESG criteria, may differ from that of other portfolios or of the advisor's or an investor's assessment of such company. As a result, the companies deemed eligible by the data provider may not reflect the beliefs and values of any particular investor and certain screens may not exhibit positive or favorable ESG characteristics. The evaluation of companies for ESG screening or integration is dependent on the timely and accurate reporting of ESG data by the companies. Successful application of the customized investment strategy will depend on the data provider's proper identification and analysis of ESG data.

Factor investing is subject to investment style risk, which is the chance that returns from the types of stocks selected will trail returns from U.S. stock markets. Factor investing is subject to the risk that poor security selection will cause underperformance relative to benchmarks or funds with a similar investment objective.

Past performance is no guarantee of future returns.

Vanguard is investor-owned, meaning the fund shareholders own the funds, which in turn own Vanguard.