In this article, we’ll explore…
- Direct Indexing’s Prominence in 2025: It’s a leading trend in Wealth Management, with assets projected to reach $800 billion by 2026 [Cerulli, 2024], driven by its tax efficiency and customization capabilities—a key focus for advisors.
- Tax Loss Harvesting’s Significant Value: This strategy enables annual tax reductions, enhancing after-tax returns by 0.5% to 1% according to Morningstar, a primary reason for its widespread adoption.
- Acknowledging Direct Indexing’s Limitations: Challenges include closet indexing, diminishing tax benefits over time, and high minimum investments, critical considerations for advisors to understand [Vanguard, 2024].
- High Active Share Momentum Managers as a Complement: These managers focus on active security selection and trending opportunities, offering a distinct approach that diverges from index-based strategies.
Direct Indexing has become a cornerstone of Wealth Management in 2025 [Cerulli, 2024], and its widespread adoption among advisors reflects its value. It’s a topic driving industry discussions, blending efficiency with customization. While Direct Indexing excels on its own, there’s an opportunity to broaden its impact with a complementary strategy. A High Active Share Momentum Manager—focused on active security selection and trending opportunities—can serve as an effective satellite to diversify your portfolios, distinct from the Direct Indexing model.
Direct Indexing: Direct Indexing is an investment strategy where an investor holds a portfolio of individual stocks designed to replicate the performance of a specific index (e.g., S&P 500) while allowing for customization. Unlike traditional index funds or ETFs, Direct Indexing enables tax-loss harvesting, personalized exclusions (e.g., specific sectors or companies), and tailored factor tilts (e.g., value or growth), all managed directly in the investor’s account to optimize after-tax returns and align with individual preferences.
In this post, we’ll explore why Direct Indexing is gaining popularity—particularly its Tax Loss Harvesting benefits—and then outline how this type of manager can enhance your approach. Let’s dive into the details.
THE RISE OF DIRECT INDEXING: WHY IT’S GAINING TRACTION
In case you missed it, Direct Indexing is a defining trend in 2025 [Cerulli, 2024], rooted in its ability to combine the cost-effectiveness of index investing with the flexibility of owning individual securities. This allows for tailored portfolio adjustments and significant tax advantages.
According to Cerulli Associates, assets in Direct Indexing are projected to reach $800 billion by 2026, outpacing the growth of ETFs, mutual funds, and separately managed accounts [Cerulli Associates, 2024].
Advisors value its capacity to deliver market-aligned returns alongside personalization that traditional index funds can’t offer. One of the key drivers of its appeal is Tax Loss Harvesting. By holding individual stocks, advisors can sell underperforming positions to offset capital gains elsewhere, potentially reducing taxable income by up to $3,000 annually, with excess losses carried forward [IRS Publication 550, 2024]. Even in a rising market, opportunities persist, as individual stocks often lag broader indices. Research from Morningstar suggests this tax efficiency can enhance after-tax returns by 0.5% to 1% annually, fueling its momentum [Morningstar, 2024]. However, it’s not without limitations.
POTENTIAL CHALLENGES: NAVIGATING DIRECT INDEXING’S LIMITATIONS
Direct Indexing delivers substantial value, but advisors should be aware of its potential drawbacks:
- Closet Indexing Risk: Some providers market Direct Indexing as active management, yet their portfolios closely track benchmarks, offering little differentiation for fees ranging from 0.30% to 0.40%—higher than the 0.20% typical of ETFs [Vanguard, 2024].
- Declining Tax Opportunities: As holdings appreciate over time, harvestable losses diminish, particularly in prolonged bull markets, reducing tax efficiency [BlackRock, 2025].
- Operational Hurdles: With minimums often between $100,000 and $250,000, and the complexity of managing numerous securities, Direct Indexing may not suit all clients or practices [Schwab, 2024].
These factors don’t diminish Direct Indexing’s strengths—they highlight the potential for a complementary strategy to round out its application. A High Active Share Momentum Manager can fill this role effectively.
HIGH ACTIVE SHARE MOMENTUM MANAGERS: A DISTINCT SOLUTION
A High Active Share Momentum Manager operates differently from the passive leanings of Direct Indexing. This type of manager focuses on active security selection across all market capitalizations, avoiding overlap with index-based approaches. By prioritizing stocks with upward price trends, they offer a strategy that diverges from market-tracking exposure, serving as a satellite to Direct Indexing’s core.
Direct Indexing provides a tax-efficient foundation for client portfolios. A High Active Share Momentum Manager adds a dynamic layer, pursuing a distinct path through active management. Together, they create a balanced approach that leverages both strategies’ strengths.
MOMENTUM INVESTING: A STRATEGIC COMPLEMENT TO DIRECT INDEXING
The momentum approach employed by High Active Share Momentum Managers centers on attempting to identify securities with sustained upward price trends across all market capitalizations. This differs from Direct Indexing’s broad-market exposure, which reflects the full range of an index’s movements. By focusing on trending opportunities, this strategy provides a contrast to the index-tracking core.
The combination works seamlessly: Direct Indexing’s Tax Loss Harvesting manages tax implications, while the momentum focus brings a distinct angle to the portfolio. Research from JP Morgan notes that pairing momentum strategies with tax-aware approaches can enhance after-tax outcomes, potentially by up to 1.5% annually [JP Morgan, 2024]. This synergy offers advisors a way to diversify their clients’ strategies effectively.
TAKE THE NEXT STEP: MEET COOKSONPEIRCE
Direct Indexing is a proven strategy, and your use of it is well-founded. Adding a High Active Share Momentum Manager as a satellite can diversify your approach further. That’s where CooksonPeirce comes in. We’re a firm that embodies this strategy with our All Cap Equity approach, offering a $70,000 entry point, minimal administrative effort, and no need to adjust your current lineup. It’s a practical step to broaden your client offerings in 2025.
Contact CooksonPeirce today for a consultation. Let’s discuss how we can complement your Direct Indexing strategy and provide additional value to your clients. One conversation could open new possibilities.
How can CooksonPeirce help you serve your clients better?
To schedule a consultation, click here for Raymond James / Institutional, or click here for Private Client / Schwab.
Sources
- Cerulli Associates. (2024). U.S. Retail Distribution Report 2024.
- IRS. (2024). Publication 550: Investment Income and Expenses.
- Morningstar. (2024). Tax-Managed Investing: The Direct Indexing Advantage.
- Vanguard. (2024). 2024 Fee Study: Trends in Investment Costs.
- BlackRock. (2025). Direct Indexing: Opportunities and Challenges.
- Schwab. (2024). Advisor Insights: Scaling Direct Indexing.
- JP Morgan. (2024). Momentum and Tax Efficiency: A Winning Combination.
*Not for client use