At Payne Nickles & Company, we believe effective accounting goes far beyond compliance; it should be a strategic advantage for your business. Our approach focuses on more than just preparing tax returns and reviewing statements. We help our clients make proactive decisions all year long.

This four-part series highlights practical—but often overlooked—strategies that can significantly improve your tax outcomes and financial clarity. These articles are packed with guidance and real examples from the work we do every day.

This month, we’re looking at a strategy that’s gaining momentum among a wide range of investors: Direct Indexing.

What Is Direct Indexing?

Direct indexing is an investment strategy where, instead of buying an index fund or ETF, you directly own the individual stocks that make up a chosen benchmark index. These holdings are kept in a separately managed account, giving you:

• Market exposure similar to the index.
• Tax advantages through active tax-loss harvesting.
• Personalization by excluding or overweighting certain companies or sectors.

Because you own the securities directly, you can better manage capital gains, customize around your preferences, and use losses more strategically.

Why Direct Indexing Matters

Traditional mutual funds and ETFs pool investors together, which often leads to taxable distributions that you can’t control. With direct indexing, you decide when gains are realized and can use losses to your advantage.

Here’s what that looks like:

• Better tax efficiency – Losses harvested throughout the year become valuable tax “assets” that can offset gains, reduce your overall liability, or even offset up to $3,000 of ordinary income annually.
• More control – You decide when to sell and how to structure your holdings, rather than being tied to the actions of a fund manager.
• Greater customization – Exclude companies or sectors that don’t align with your goals and values, or increase exposure to areas where you see long-term opportunity.
• Smarter risk management – Direct indexing helps diversify concentrated stock positions, such as company stock from compensation packages, in a tax-conscious way

Who Should Consider Direct Indexing?

Direct indexing may be the right fit if you:

• Have taxable brokerage assets and want more flexibility than traditional mutual funds or ETFs.
• Expect a large financial windfall from selling a business, property, or a sizable stock position.
• Want to align your investments with personal or ethical values.
• Even investors without a lot of up-front capital can get into direct-indexing by purchasing fractional shares. 

Who Might Not Benefit?

Direct indexing isn’t ideal for every investor. It may not be the right fit if you:

• Hold only retirement accounts (like IRAs or 401(k)s), where gains are already tax-deferred.
• Prefer simple, hands-off investing without customization.

A Real-World Scenario: How Does This Benefit the Investor?

Ready to Explore Direct Indexing?

If you’re looking for ways to grow your wealth, reduce taxes, and invest in line with your personal values, now is the time to explore direct indexing.

Our team at Payne Nickles & Company can help you evaluate whether this strategy makes sense for your unique situation and design a customized plan to help you reach your long-term financial goals.