Direct indexing explained: the investing strategy of the wealthy

Jan 1, 2024

New at Plenty

Here’s the scoop — good investing is boring investing. The key? Invest early, often, and buy the market.


Fun fact: Warren Buffet once made a $1M bet that an index fund (ie. a buy and hold strategy) would have higher returns than Wall Street traders and hedge funds trying to 'beat the market’.



He was right and won ... 10 times over.



Wall Street has a dirty, unacknowledged secret: More than 80% of traders on Wall Street are underperforming compared to index investing. And it's not just Wall Street. In 2022, individual hobby investors who picked their own stocks had a 44% loss compared to the S&P 500 index loss of 20%.



Investment managers for the wealthy have known this for decades and developed an ‘advanced’ form of indexing for their clients, called direct indexing. At Plenty, we believe that wealth building shouldn’t be a privilege — so we’re bringing the products of the 1% to the rest of us.



TL;DR: Direct Indexing

1. Is a higher-returning way to invest in the market
2. Has similar risk to regular ETF investing
3. Lets you invest based on your values



Let’s start with the basics of direct indexing


An index fund (aka ETF or exchange traded fund) is like a one-stop shop of stocks, bonds, and investments designed to match the returns of a popular index — like the the S&P 500. Think of an index fund as a basket that holds all those investments.


You can buy shares of that whole basket. That way, if a single company in your basket goes bankrupt, your whole basket doesn’t drop to $0 — it just loses a bit of value. There are many types of ETFs: domestic US company ETFs, tech-focused ETFs, international company ETFs, bond ETFs, and more. Companies like Wealthfront and Betterment allow you to invest in 5-10 different ETFs to create a balanced portfolio.


That’s what “diversifying” your portfolio means.


It’s a way to reduce your risk. The more you spread out your money, the less likely a dip in one part of the market will tank your entire portfolio.



Index investing is popular, and chances are you’re familiar with it.


Index funds and ETFs are popular because they charge lower fees and have better long-term track records than stock picking and most active fund managers.



The thing about ETFs … is that they were basically the 'innovation' that allowed us regular people to invest like rich people.



Why? Because we couldn’t afford to directly own all the stocks in an ETF. If you were to buy 1 share of every stock in the S&P 500, you’d need $85,985 — and that’s without properly balancing your whole portfolio to reduce your risk.


But, what is direct indexing?


For decades, when the everyday person was purchasing ETFs, the wealthy were using direct indexing. With direct indexing, you invest directly in individual stocks instead of the basket, like a mutual fund or ETF. If you had enough money, it made sense to hire someone to do this for you, and you didn’t worry about the trading fees.



Over the past 10 years, companies like Robinhood and Square Cash drove trading fees to $0 and introduced fractional shares. At Plenty, we’re combining the $0 trading fees, fractional shares, and improvements in algorithmic trading to now make direct indexing accessible for everybody — not just those with personal investment managers. 



Why is direct indexing better?


Good question. Direct indexing has a few benefits:

  1. Lower taxes (via tax-loss harvesting…another secret of the wealthy).

  2. Lower ETF fees (avg. ETF fee was 0.24% in 2022). 

  3. Personalization for people who care about what their money supports.


Did we lose you at taxes? Stay with us!


When you invest, you make money when your investment goes up. That’s the name of the game, after all. When you sell for a profit, you have to pay taxes and what's leftover is called your after-tax gain. 


Since we all want to make more money, in order to increase your after-tax gains, you can either:

  1. Increase how much you make; or

  2. Decrease your taxes


So, why own individual stocks? Well, even the most successful investors know not every investment is a winner all the time. In markets where stocks go up and down a lot (aka volatile markets - like the one we're in now), tax-loss harvesting becomes a strategy you can use to your advantage. With tax-loss harvesting, you’re strategically using losses to lower your tax liability both now and in the future.



Even though ETFs could hold hundreds of stocks, you’d need the entire ETF to drop before you could create a loss to use. Holding individual stocks gives you way more tax-saving opportunities because you’re “harvesting losses” at the individual stock level.



We’ve maximized tax-loss harvesting across your portfolio to automatically look for opportunities every week, adding roughly an extra 2-4% on top of your portfolio’s after-tax returns. That means lower taxes and more money in your pocket. We have a lot more to say if you’re curious to learn more about tax-loss harvesting.



Where do values come into this?


Did you know Blackrock and Vanguard are the two largest investors in for-profit prisons and detention centers in the US? When you are investing in ETFs, you had no say in what was included. Oil and gas? Probably included. For-profit prisons? Check. Payday lenders? Check. 



But when you’re investing directly in stocks (aka direct indexing), we give you the ability to effortlessly fine tune your portfolio. You can choose to invest or not invest in industries and values that are important to you.



When you invest in companies that support and reflect your values, you’re not just lending a hand to those businesses — you're enabling the positive change and progress you want to see in the world.



- Posted by the Plenty team, with love



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If you're a big reader like we are, you might want to learn more! Here are a few more references we like:

Direct Indexing Growth Projected to Outpace ETFs, Mutual Funds, and Separate Accounts Over Next Five Years, According to Cerulli

Direct indexing reduces taxes, According to Morgan Stanley

What Is Direct Indexing? | Russell Investments


This information is for general informational purposes only. It is not intended to constitute investment advice or any other kind of professional advice and should not be relied upon as such. Before taking action based on any such information, we encourage you to consult with the appropriate professionals. We do not endorse any third parties referenced within the article. Market and economic views are subject to change without notice and may be untimely when presented here. Do not infer or assume that any securities, sectors or markets described in this article were or will be profitable. Past performance is no guarantee of future results. There is a possibility of loss. Historical or hypothetical performance results are presented for illustrative purposes only.

Plenty was founded to democratize access to financial products and tools that accelerate wealth building. Plenty Financial and affiliated entities. (“Plenty Financial”) provide a web, mobile, personal financial management and educational platform to consumers; some of these tools are freely accessible to all consumers, others require a fee-based subscription. Advisory services are provided in the form of software-first financial planning and investment advisory services for fee-based Subscribers. Plenty Financial RIA, LLC is an SEC-Registered Investment Advisor. All investments made are legally owned by you. Investing is inherently risky and Plenty does not guarantee positive performance. Investments are held in accounts at BNY Mellon | Pershings, the world's largest securities servicing company and are SIPC insured. Investing involves risk, including the possible loss of principal, and there is no assurance that the investment will provide positive performance over any period of time.


Brokerage services are provided by Atomic Brokerage LLC "Atomic Brokerage", member FINRA and SIPC. Clearing and custody services are provided by Brokerage firm BNY Mellon Pershing, member SIPC. Plenty Financial RIA, LLC has a relationship with Atomic Brokerage to manage and execute investments on behalf of customers. Subadvisory services are offered through Atomic Invest LLC ("Atomic Invest"), an SEC-registered investment advisor, member SIPC. Atomic Invest was formerly known as Helium Advisors LLC.


Return data used in the interactive tool are hypothetical performance data which contains inherent limitations and is not a substitute for actual investment returns derived from a live portfolio. There are numerous risk factors related to trading and markets which cannot be fully accounted for when depicting Hypothetical Performance. Consequently, future returns are not guaranteed, and a loss of principal may occur. THIS IS FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE RELIED UPON AS INVESTMENT ADVICE. This site/application has been prepared by Plenty and is not intended to be (and may not be relied on in any manner as) legal, tax, investment, accounting or other advice or as an offer to sell or a solicitation of an offer to buy any securities of any investment product or any investment advisory service. The information contained in this site/application is superseded by, and is qualified in its entirety by, such offering materials. This site/application may contain proprietary, trade-secret, confidential and commercially sensitive information.


By accessing this site, you signify your agreement with and understanding of the following Terms of Use and Legal Information pertaining to both this site and any material in it. Plenty owns and maintains this site. No act of downloading or otherwise copying from this site will transfer title to any software or material at this site to you. Anything that you transmit to this site becomes the property of Plenty, may be used by Plenty for any lawful purpose, and is further subject to disclosure as deemed appropriate by Plenty, including to any legal or regulatory authority to which Plenty is subject. Plenty reserves all rights with respect to copyright ownership of all material at this site, and will enforce such rights to the full extent of the law.


Plenty was founded to democratize access to financial products and tools that accelerate wealth building. Plenty Financial and affiliated entities. (“Plenty Financial”) provide a web, mobile, personal financial management and educational platform to consumers; some of these tools are freely accessible to all consumers, others require a fee-based subscription. Advisory services are provided in the form of software-first financial planning and investment advisory services for fee-based Subscribers. Plenty Financial RIA, LLC is an SEC-Registered Investment Advisor. All investments made are legally owned by you. Investing is inherently risky and Plenty does not guarantee positive performance. Investments are held in accounts at BNY Mellon | Pershings, the world's largest securities servicing company and are SIPC insured. Investing involves risk, including the possible loss of principal, and there is no assurance that the investment will provide positive performance over any period of time.


Brokerage services are provided by Atomic Brokerage LLC "Atomic Brokerage", member FINRA and SIPC. Clearing and custody services are provided by Brokerage firm BNY Mellon Pershing, member SIPC. Plenty Financial RIA, LLC has a relationship with Atomic Brokerage to manage and execute investments on behalf of customers. Subadvisory services are offered through Atomic Invest LLC ("Atomic Invest"), an SEC-registered investment advisor, member SIPC. Atomic Invest was formerly known as Helium Advisors LLC.


Return data used in the interactive tool are hypothetical performance data which contains inherent limitations and is not a substitute for actual investment returns derived from a live portfolio. There are numerous risk factors related to trading and markets which cannot be fully accounted for when depicting Hypothetical Performance. Consequently, future returns are not guaranteed, and a loss of principal may occur. THIS IS FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE RELIED UPON AS INVESTMENT ADVICE. This site/application has been prepared by Plenty and is not intended to be (and may not be relied on in any manner as) legal, tax, investment, accounting or other advice or as an offer to sell or a solicitation of an offer to buy any securities of any investment product or any investment advisory service. The information contained in this site/application is superseded by, and is qualified in its entirety by, such offering materials. This site/application may contain proprietary, trade-secret, confidential and commercially sensitive information.


By accessing this site, you signify your agreement with and understanding of the following Terms of Use and Legal Information pertaining to both this site and any material in it. Plenty owns and maintains this site. No act of downloading or otherwise copying from this site will transfer title to any software or material at this site to you. Anything that you transmit to this site becomes the property of Plenty, may be used by Plenty for any lawful purpose, and is further subject to disclosure as deemed appropriate by Plenty, including to any legal or regulatory authority to which Plenty is subject. Plenty reserves all rights with respect to copyright ownership of all material at this site, and will enforce such rights to the full extent of the law.


Plenty was founded to democratize access to financial products and tools that accelerate wealth building. Plenty Financial and affiliated entities. (“Plenty Financial”) provide a web, mobile, personal financial management and educational platform to consumers; some of these tools are freely accessible to all consumers, others require a fee-based subscription. Advisory services are provided in the form of software-first financial planning and investment advisory services for fee-based Subscribers. Plenty Financial RIA, LLC is an SEC-Registered Investment Advisor. All investments made are legally owned by you. Investing is inherently risky and Plenty does not guarantee positive performance. Investments are held in accounts at BNY Mellon | Pershings, the world's largest securities servicing company and are SIPC insured. Investing involves risk, including the possible loss of principal, and there is no assurance that the investment will provide positive performance over any period of time.


Brokerage services are provided by Atomic Brokerage LLC "Atomic Brokerage", member FINRA and SIPC. Clearing and custody services are provided by Brokerage firm BNY Mellon Pershing, member SIPC. Plenty Financial RIA, LLC has a relationship with Atomic Brokerage to manage and execute investments on behalf of customers. Subadvisory services are offered through Atomic Invest LLC ("Atomic Invest"), an SEC-registered investment advisor, member SIPC. Atomic Invest was formerly known as Helium Advisors LLC.


Return data used in the interactive tool are hypothetical performance data which contains inherent limitations and is not a substitute for actual investment returns derived from a live portfolio. There are numerous risk factors related to trading and markets which cannot be fully accounted for when depicting Hypothetical Performance. Consequently, future returns are not guaranteed, and a loss of principal may occur. THIS IS FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE RELIED UPON AS INVESTMENT ADVICE. This site/application has been prepared by Plenty and is not intended to be (and may not be relied on in any manner as) legal, tax, investment, accounting or other advice or as an offer to sell or a solicitation of an offer to buy any securities of any investment product or any investment advisory service. The information contained in this site/application is superseded by, and is qualified in its entirety by, such offering materials. This site/application may contain proprietary, trade-secret, confidential and commercially sensitive information.


By accessing this site, you signify your agreement with and understanding of the following Terms of Use and Legal Information pertaining to both this site and any material in it. Plenty owns and maintains this site. No act of downloading or otherwise copying from this site will transfer title to any software or material at this site to you. Anything that you transmit to this site becomes the property of Plenty, may be used by Plenty for any lawful purpose, and is further subject to disclosure as deemed appropriate by Plenty, including to any legal or regulatory authority to which Plenty is subject. Plenty reserves all rights with respect to copyright ownership of all material at this site, and will enforce such rights to the full extent of the law.