Is Direct Indexing Active Management “in Drag”

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

The surging popularity of direct indexing has led to confusion. Some believe it is barely indistinguishable from indexed investing, while others claim it is active management “in drag.”

Let’s see who is right.

What Is direct indexing?

Direct indexing is a way to create a broadly diversified portfolio of individual stocks that is personalized to meet an investor’s needs, values, and investment preferences.

The first step in creating a direct-indexing portfolio is for the investor, in consultation with their advisor, to select one or more indexes that their portfolio will be designed to track.

The second step is for the investor, again in consultation with their advisor, to individually customize the portfolio. There are many ways this can be done.