Why the Ultra-Wealthy Could Be Quietly Ditching ETFs in 2026 — and What Savvy Investors Can Learn From It

They deliver broad market exposure, low costs, and convenient diversification—qualities that helped make them one of the most popular investment vehicles in America.¹

But among high-net-worth investors, a subtle shift is underway. Many are exploring a strategy known as direct indexing, which lets investors own the individual stocks inside an index rather than a single fund share. This approach can provide greater control, enhanced transparency, and more flexibility for managing taxes and customization.² ³

Thanks to digital trading platforms and fractional-share technology, direct indexing is no longer limited to institutions or the ultra-wealthy.⁴ ⁵ It is now accessible to a much wider group of investors seeking a more personalized approach to portfolio management.

Why Some Investors Are Reassessing ETFs

ETFs have long been considered a smart way to invest, but they come with serious limitations—especially when it comes to taxes and customization. Here’s why the ultra-wealthy are making the switch:

1. Tax Flexibility

ETF investors can face capital-gains distributions when the fund sells underlying holdings—even if they never sell a single share.³ This can create unwanted taxable events.

With direct indexing, investors own the stocks directly. That structure allows for tax-loss harvesting, a process of strategically selling individual positions that have declined in value to offset realized gains elsewhere.⁶ This does not guarantee lower taxes, but it can offer more flexibility in managing them.

2. Customization and Control

An ETF requires investors to hold every company in a given index, whether or not each aligns with their values, other holdings, or risk tolerance.

Direct indexing allows investors to exclude certain companies, overweight others, or design a portfolio that reflects personal goals and preferences.² ⁵

3. Fee Structure and Transparency

ETFs generally carry small management fees known as expense ratios. Over decades, even low fees can modestly affect portfolio growth.⁷

With direct indexing, investors own securities directly and may reduce or eliminate fund-level expenses depending on their platform or advisor. However, trading and advisory fees can still apply, so total costs vary by provider.⁴

Why Direct Indexing Is Gaining Attention

For years, direct indexing required seven-figure accounts and specialized management.⁵ Today, commission-free trading and portfolio automation have made it accessible to investors at lower minimums.

Key reasons some investors are adding direct indexing to their toolkit include:
 
• Tax flexibility: Potential to offset gains with harvested losses.
 
• Personalization: Ability to align investments with individual goals.
 
• Transparency: Clear ownership of every position in the portfolio.

For many, direct indexing complements rather than replaces ETFs—adding another layer of precision within a diversified investment plan.

What Savvy Investors Can Learn From This Trend

Direct indexing is not a “better” version of ETF investing; it is a different structure with distinct tradeoffs. The right choice depends on your objectives, time horizon, and tax considerations.

A fiduciary financial advisor can help you evaluate whether direct indexing fits your financial situation.

Take our free retirement quiz to see if direct indexing is right for you. Based on your results, we’ll match you with a vetted financial advisor who can help you transition to a smarter, tax-efficient investment strategy.