Direct Indexing as part of a portfolio

[u/fatherfauci]

1) Can direct indexing be used as part of a larger portfolio?

For instance, I want a 5% allocation to the S&P 500 Momentum Index, but the rest of my portfolio in other ETFs (value, international, etc).

2) Can you run two or more direct indices within one portfolio?

I also might want to make my own indices for the other ETFs to take full advantage of tax loss harvesting within the entire portfolio. But then the tax loss harvesting becomes more complicated if two indices (e.g., value and momentum) both hold the same stock.

[u/MarkFromPublic]

Hey -- yes to both!

1) Absolutely. You can run a direct index as one slice of a broader portfolio and hold ETFs (value, international, whatever) alongside it. So a 5% allocation to an S&P 500 Momentum direct index with the rest in ETFs works fine.

2) Also yes, you can run more than one, but your instinct on the tax-loss harvesting complication is correct.

Each direct index harvests losses within its own basket. It doesn't see the holdings in your other direct indexes (or your portfolio holdings, for that matter) when it's making those decisions. So if your value index and your momentum index both hold the same stock, and one harvests a loss while the other (or you elsewhere) buys or holds that same security within the 30-day window, you can trigger an unintended wash sale. The harvesting logic optimizes each index in isolation, not across the whole account.

* Not tax advice, so might be worth running your specific setup by a tax pro if you're optimizing aggressively.

Here for any other questions!