Direct Indexing is an investment strategy where you own the individual stocks of an ETF rather than buying the ETF to track an index. Direct Indexing is designed to offer an enhanced form of Tax-Loss Harvesting over ETFs since it looks for movements in individual stocks to harvest more tax losses and help lower your tax bill. Wealthfront offers three options to access direct indexing. S&P 500 Direct and Nasdaq- 100 Direct are standalone Direct Indexing products, and require a $5,000 minimum. They track the index for the S&P 500® and Nasdaq-100® respectively. US Direct Indexing is available as a portfolio strategy in any Automated Index Investing Account with at least $100,000. Clients that add US Direct Indexing to an Automated Index Investing Account with less than $100,000 will hold VTI (or ITOT) until the account balance reaches the minimum. You can learn more about the different direct indexing products using the table below.

How does it work?

Instead of using a single ETF (such as SPY, QQQ, or VTI) or index fund to invest in stocks, Direct Indexing purchases individual stocks on a market-weighted basis, along with completion ETFs of smaller companies (US Direct Indexing only), to follow the behavior of an index such as S&P 500® or Nasdaq-100® or an ETF that seeks to represent the total market of US stocks (VTI). This allows us to take advantage of the countless opportunities for tax-loss harvesting presented by the movement of individual stocks, in an attempt to further improve your after-tax investment performance.

Why is direct indexing only available for taxable accounts?

The point of direct indexing is to harvest losses on individual stocks to then help lower your taxes. Because IRAs are tax-deferred accounts, you don’t owe taxes on gains and aren’t allowed to apply realized losses to reduce your taxes. This means Tax-Loss Harvesting and direct indexing are of no value in IRA accounts.

Why can’t I gain the benefits of direct indexing from holding a broad US market ETF?

Low-cost ETFs and index funds are very good investments and form the core of every Wealthfront recommended portfolio. However, ETF and index funds have one disadvantage — they can’t legally pass on tax losses to their investors.

So while an ETF such as VTI is able to use the movements of individual component stocks and its own cash inflows and outflows to minimize or eliminate any taxable gain passed on to you, it is never able to pass on any tax losses that may help you write off capital gains in other assets or help to offset your regular income.

Thus, an ETF or index fund investment is never able to generate a tax-loss harvesting benefit from the movement of its individual component stocks.

To learn more, read our US Direct Indexing white paper.

Wealthfront’s Standalone Direct Indexing Products

S&P 500 Direct

S&P 500 Direct was designed to track the performance of the S&P 500® Index closely while also improving the tax efficiency and after-tax return of your portfolio through tax-loss harvesting. 

Instead of using an ETF (such as SPY or VOO), S&P 500 Direct purchases up to 500 individual stocks (depending on your account size), including both whole and fractional shares, to track the performance of the S&P 500®. This allows us to continuously look for opportunities to harvest losses in individual stock holdings, which can be used to offset capital gains and/or income, thus lowering your tax bill.

To learn more, read our S&P 500 Direct & Nasdaq-100 Direct white paper.

Nasdaq-100 Direct

Nasdaq-100 Direct was designed to closely track the performance of the Nasdaq-100 Index® while also improving the tax efficiency and after-tax return of your portfolio through tax-loss harvesting. 

Instead of using an ETF (such as QQQ® or QQQM), Nasdaq-100 Direct purchases up to 100  individual stocks (depending on your account size), including both whole and fractional shares, aiming to track the performance of the Nasdaq-100 Index®. This allows us to continuously look for opportunities to harvest losses in individual stock holdings, which can be used to offset capital gains and/or a portion of income, thus lowering your tax bill.

To learn more, read our S&P 500 Direct & Nasdaq-100 Direct white paper.

How does holding stocks in fractional shares impact the account?

S&P 500 Direct and Nasdaq-100 Direct will invest in whole shares, fractional shares, or a combination of both within companies in the S&P 500® and Nasdaq-100 Index® respectively.

With fractional shares, you’re able to open the account at a lower minimum deposit ($5,000) since we’re not restricted by only trading whole shares of stocks, some of which can be hundreds of dollars per share. This enables more stocks to be held within the account in general which improves our ability to track the index, keeping more of your cash invested in the market, while balancing that with your tax-loss harvesting yield. 

Keep in mind that, in general, small portfolio sizes may limit how many stocks we can hold in the portfolio. This is because although we are able to hold stocks at a fraction of a share, we may choose not to hold certain stocks if the fractions are extremely small. The higher the total value of the portfolio, the more stocks we can hold in the account resulting in closer tracking of the index.

Can I have both a Nasdaq-100 Direct portfolio and an S&P 500 Direct and/or Automated Investing Account with US Direct Indexing?

Yes, you can use direct indexing in multiple account types and Wealthfront will automatically coordinate trades between your accounts in an effort to avoid creating wash sales. 

Can I move individual stocks from an Automated Investing Account to a S&P 500 Direct or Nasdaq-100 Direct portfolio and vice versa?

No, you can’t transfer securities between Wealthfront accounts at the moment, or convert a portfolio to a different account type. We hope to add this feature in the future and we’ll update this FAQ when we do. In the meantime, you are welcome to open a new standalone direct indexing account for any new deposits and we'll coordinate wash sales.