Look under the hood for direct indexing

Live indexing is a separately managed account that attempts to replicate index performance. But unlike an index fund, an investor directly owns shares of the underlying securities in an indexed portfolio. Like a live indexing service Vanguard Custom Indexing allows advisors to create customized portfolios on behalf of their clients.

How it works: First, the advisor selects a traditional market price-weighted index. They then enter their client’s criteria to customize the portfolio. This includes factor or style biases to include securities or sectors that are not part of the selected index. Or it could mean adding screens to exclude stocks or sectors from the index.

See more : »Reduce concentrated positions with custom indexing»

After initial screens and swings are added to the account, the VPI selects the stocks owned by the investor. According to Vanguard, directly indexed portfolios typically contain several hundred stocks. But this indicator can change depending on the needs of the customer.

Since then, VPI will follow the strategy and analyze the portfolio for opportunities to collect tax losses on a regular basis. While this frequency can be daily, monthly, or quarterly, Vanguard research shows that the more frequent the scanning frequency, the higher and more consistent the alpha of the tax loss collection. In fact, Vanguard found that the difference could range from 20 to 100 basis points.

Direct indexing has often been viewed as a service only for the UHNW investor. However, Vanguard CEO Tim Buckley told Exchange 2023 that the company is working to change that. He added that the company is “investing heavily” in direct indexing.

More information about VPI can be found online.

For more news, information and analysis, visit here Direct indexing channel.

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The views and opinions expressed herein are those of the author and reflect those of Nasdaq, Inc.