Direct indexing is an investment strategy that involves buying the individual stocks that make up an index, in the same weights as the index. This is in contrast to owning an index mutual fund or index exchange-traded fund, which tracks the performance of an index but does not provide the same level of customization. Direct indexing allows investors to tailor an index to meet their specific circumstances and optimize for things like taxes, ESG exposure, or factor exposure.

Direct indexing can offer potential tax savings and flexibility, as investors can use a strategy called tax-loss harvesting to sell positions that are down and use those losses to offset capital gains from other positions, which may help lower their tax bill. Direct indexing can also enable tax management, as it is possible to tax-loss harvest each position to help manage the tax bill.

However, direct indexing can be quite time-consuming to identify all the stocks in an index and compute how many shares an investor must own given the amount of money that they will be investing. Moreover, direct indexing involves active management to track the index as desired, which is significantly more complex compared with simply buying a fund that attempts to track a benchmark.

In summary, direct indexing is an investment strategy that involves buying individual stocks that make up an index, in the same weights as the index, and can offer potential tax savings and flexibility. However, it can be time-consuming and complex to implement and maintain compared to owning an index fund or ETF.