Investing by attempting to replicate the performance of an index—like the S&P 500 or the S&P SmallCap 600—is a common strategy many investors use. To do this, most investors typically buy mutual funds and ETFs to track an index (because you can't invest directly in an index).
Another way to do this is direct indexing, where you buy the individual stocks of an index so that your investments have similar characteristics to that index. Essentially, direct indexing involves choosing the index you want to replicate the performance of and then buying a representative amount of all of those index's components individually.
For example, if you wanted to replicate the performance of the S&P 500, which tracks the largest companies in the US, you would buy a representative amount of all of the stocks within the S&P 500. You would then rebalance those positions as needed to continue to closely replicate the S&P 500 Index's performance.
In next blogpost, we will discuss what are new to direct indexing.