Direct indexing promises lower costs, personalization, and better tax-loss harvesting. This Field Note finds it delivers none of these reliably. Model fees and small-lot trading friction exceed index fund expense ratios; the alternative to that is to hold only a subset of the index's stocks and introduce tracking error, which can be significant. Customization and tax-driven trades introduce tracking error and drift toward active management. Traditional index funds and ETFs serve the same goals more effectively.

Steve McConnell, CFP^®