There are three main advantages to direct indexing. Firstly, transparency – investors are able to know exactly which stocks they own in their portfolios at any time. As a point of comparison, when investing in mutual funds, an investor may access the full list of holdings on a quarterly basis and top ten holdings on a monthly basis.
Secondly, costs will be lowered further as direct indexing eliminates any fees such as expense ratios associated with ETFs or mutual funds. For mutual funds, the average annual expense ratio is 1-2%. Over the long term, these fees paid to the external fund managers will lower net investment returns significantly.
Lastly, direct indexing addresses overlaps in holdings between fund vehicles. The same stock (for example, Apple or Microsoft) may appear in several ETFs or mutual funds that charge different fees. Through direct indexing, overlaps between holdings are eliminated.