What is a Direct Index?
A Direct Index is a collection of individual securities designed to replicate the performance of an index. The index selected for replication is often a broad market index such as the S&P 500 or Russell 3000, but any index can be used. Advisers choose Direct Index investing because of the myriad of client solutions enabled by customizing the underlying holdings.
Enhanced Tax Efficiency
Because the Direct Index contains the individual holdings of an index portfolio, Direct Index investments are immune from the phantom taxable gain distributions of mutual funds and ETFs. In addition, the large number individual holdings provide more opportunities to harvest tax losses from the portfolio to offset taxable gains. As an overlay manager, Sawtooth is responsible for trading and rebalancing all the positions in a unified managed account, including the Direct Index’s underlying positions. This unique perspective enables Sawtooth to increase investors’ after-tax returns through continuous tax lot monitoring and trading. The higher the marginal tax bracket of the investor, the greater the tax benefits of these strategies.
Clients holding concentrated stock positions are always needing ways to improve the diversification of their portfolios. Advisors can customize Direct Index accounts on a client-by-client basis to restrict additional purchases of securities that would further concentrate the client’s holdings – either by restricting individual security purchases or by restricting purchases of entire industries. The resulting portfolio is a custom solution for the client designed to improve their diversification.
Talking with your clients about their core values and aligning their investments with those values is impactful. ESG/SRI screening is growing in popularity year-by-year, and it is another area available for Direct Index customization. Unlike ESG/SRI-oriented mutual funds, ETFs and SMAs, this is not a “one size fits all” solution. Your client can dictate which issues are important to them, and we can build a portfolio tailored to their preferences. Enroll the client’s account in Sawtooth’s SRI/ESG screening services, and we’ll take care of removing any positions in the Direct Index that violate the client’s mandates.
This information is intended for general informational purposes only; it is not investment advice. The material on this website does not consider the specific investment objectives, financial situation, needs or special circumstances of any particular person. This information does not represent the suitability of any strategy, financial product, security, or other instrument. Past performance is not a guarantee of future performance.
Sawtooth Solutions, LLC (“Sawtooth”) is an investment adviser registered with the U.S. Securities and Exchange Commission. The information on this website is for informational purposes only and is intended as an overview of the services offered by Sawtooth to financial advisors. Nothing contained on this website is a solicitation for investment. Any individual investor seeking more information should consult with their financial advisor.
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