For decades, ETFs have been the workhorse of contemporary investing. They’re accessible to trade, inexpensive, and track everything from the S&P 500 to specialized themes such as artificial intelligence and clean energy. But investor expectations continue to shift. Now, advisers are exploring portfolios that suit the individual goals, values, and tax scenarios of each client, without compromising efficiency or scale.
This is where direct indexing comes in. Rather than purchasing shares of a pooled fund, investors own individual stocks of an index. That allows for customization, removing particular sectors, inserting personal themes, or using the framework to more effectively handle taxes.
“ETFs remain a cornerstone of portfolio construction thanks to their simplicity, liquidity, and cost efficiency,” Paul Kenney, SVP of Client Solutions at Syntax Data, told Benzinga, adding that while they will continue to be an essential part of advisor toolkits, they are yet to match the customization, accuracy, and tax optimization offered by direct indexing.
Also Read: This Bond ETF’s Wild Rally Echoes The Pandemic Market Chaos
The Versus Cases
Direct indexing offers three distinct benefits relative to ETFs: clarity on portfolio construction, flexibility in implementation, and transparency, explained Kenney. “In the ETF world, there can be material differences in how managers choose to implement the same theme.”
Consider the following cybersecurity-related ETFs:
- The Global X Cybersecurity ETF (NASDAQ:BUG) has about 87% of its weight invested in cybersecurity software revenue streams. Based on Syntax's FIS industry classification system, just 4% of the weight in the portfolio is tied to revenue streams unrelated to cybersecurity.
- The Amplify Cybersecurity ETF (NYSE:HACK) has roughly 63% of its weight in cybersecurity software revenue, while 30% of its weight is in non-cybersecurity related product lines.
“These differences are largely driven by differences in focus on pure-play companies and conglomerates and do not inherently make one ETF superior to the other. However, this example illustrates that there are multiple ways to approach thematic investing. With a direct index, the advisor, working with their client, can define the characteristics of their desired thematic index, removing the potential ambiguity around what you really own,” Kenney added.
Big ETF Names Joining The Party
Even the titans who created the ETF space are embracing direct indexing, not as a replacement of ETFs, but as the next layer of logic.
In April this year, Envestnet and State Street Global Advisors announced at the Elevate 2025 conference in Las Vegas that they're rolling out direct indexing portfolios on Envestnet's Unified Managed Account (UMA) platform. The move combines SSGA's decades-long index expertise (and ETF legacy) with Envestnet's technology to deliver tax-aware, personalized portfolios at scale.
Allison Bonds Mazza, senior managing director of SSGA, said, “Historically, direct indexing has been costly and cumbersome to implement, limiting most investors’ ability to take advantage of its potential benefits. However, the combination of the desire to personalize portfolios at scale and technological innovation has made it possible to bring direct indexing to investors of all sizes.”
This marks a larger shift: ETFs are still the default for efficiency, but direct indexing is now accessible to more investors — not just the super-rich.
Real-World Blended Portfolios
Industry insiders note that ETFs and direct indexing play off each other via a “core-satellite” strategy. ETFs serve as the core and direct indexing offers the satellites: individual tilts, ESG screens, or tax-loss harvesting.
“A widely used framework for portfolio construction is the core-satellite approach, where advisors build a foundation of broad, low-cost, long-term investments and complement it with more targeted exposures. The core typically consists of diversified holdings that provide market-wide exposure, while the satellite positions are designed to enhance or personalize the portfolio, incorporating sector-specific strategies, niche asset classes like REITs, emerging markets, or themes. The combination of ETFs and direct indexing offers advisors the ability to mix and match these tools to tailor portfolios to client needs,” Kenney said.
He offered examples. “An individual works for a large Silicon Valley firm and receives compensation in the form of salary, shares, and options. She is concerned about the concentration risk associated with her career, compensation at work, and investment portfolio all being closely linked to the technology sector. Her advisor recommends holding a core position in a direct index that holds the S&P 500 but excludes the technology sector. To provide some exposure to innovation outside the information technology sector, the advisor suggests satellite positions in two ETFs with one focused on biotechnology, and the other on power solutions for the energy market,” he said.
Similarly, to better clarify the idea, Kenney cited the example of a family invested in significant real estate taking advantage of a broad exposure through a Russell 3000 ETF and a direct index invested in non-residential REITs to prevent doubling up on housing.
The Future Is Blended, Not Binary
ETFs aren’t going to disappear. They’re still unbeatable for simplicity, size, and access to complex markets such as fixed income or alternatives. But direct indexing is becoming a tool of personalization, more within reach due to fractional shares, automation, and tools such as Syntax Direct and Envestnet UMA.
Kenney put it in perspective. “It is not a question of either or, but how best an advisor can meet the needs of their clients and their business.”
Or to put it another way, ETFs will continue to be the foundation of portfolios of the future, but direct indexing is increasingly the tailored layer on top, redefining how advisors add value in an era where one-size-fits-all no longer suffices.
Read Next:
Photo: Shutterstock
