How direct indexing might work for you

Take advantage of an investment strategy only very high net worth or institutional investors had access to in the past. Increase the after-tax return of your investment portfolio. Create your own index fund to invest in what matters to you. It’s tempting to dismiss these marketing claims as hyperbole, except they come from some of the best-known and most respected names in the investing world, including Fidelity, Schwab, and even Burton Malkiel, author of the investment classic. A random walk down Wall Street.

The fanfare is about a controversial trend: A growing number of investment firms now offer Main Street investors a strategy called “custom” or “direct” indexing that typically requires buying and trading stocks directly, imitating an index. Investment firms and advisers have long offered this strategy to the wealthy for an annual management fee that is often more than 1% of the portfolio’s value. But now, enabled by trading without commission, smart supercomputer programs and the ability to buy fractions of shares, at least three companies (Fidelity, Schwab and Wealthfront) are retooling the service for cost-conscious index investors. The new offers let you dabble in custom indexing with portfolios as small as $1, for rates ranging from $4.99 a month to 0.4% a year (see table below).


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