Rethinking Portfolios: A Visual Guide to Direct Indexing

The following content is sponsored by MSCI.

A Visual Guide to Direct Indexing

Like many other industries, creating custom experiences has become the standard—and investing is no exception.

Direct indexing allows investors to create a personalized index that offers direct ownership of relevant investments. Given the diverse set of client needs, a direct index offers one avenue to meet each investor’s unique objectives. Reducing taxes and boosting ESG metrics in a portfolio are among just a few.

In this graphic from MSCI, we show how direct investing works, and the opportunities it offers.

Direct Indexing, Explained

To start, direct indexes are one way for investors to create a custom index in separately managed accounts. In that account, an investment firm will oversee a portfolio of assets.

Advisors can help clients decide the number of holdings, ESG screens, or sector inclusions that more closely align with their needs.

The benefit of using this approach is that investors have direct ownership of these holdings, which allows for certain tax advantages. This is in contrast to mutual funds, which are pools of assets owned by a number of investors. Through direct indexing, for instance, an investor could apply tax-loss harvesting by selling securities at a loss to reduce their capital gains tax.

At the same time, direct indexes can use analytics and risk modeling to identify the drivers of risk and return. In short, direct indexing gives investors access to tools that power portfolio construction and performance measurement.

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