Because of the previous inability to purchase fractional shares and the transaction costs of buying each company in an index, this strategy was generally only available to those with significant assets (in addition, those in higher tax brackets would also get more benefits from the tax-loss harvesting). But with the now-wide availability of fractional share purchases and zero-fee transactions, direct indexing has been opened up to a wider range of investors.
And now, Fidelity plans to take the next step by offering its Fidelity Managed FidFolios direct indexing products to individual investors with as little as $5,000 to invest. Investors will initially be able to choose from three account strategies: U.S. Large Cap, International, and Environmental Focus.
The latter strategy represents a potential growth area for direct indexing platforms, with Environmental, Social, and Governance (ESG) and Socially Responsible Investing (SRI) becoming increasingly popular. Rather than relying on the ESG/SRI criteria of a given mutual fund or ETF, direct indexing allows investors to customize the index for their particular preferences (e.g., removing gun manufacturers or tobacco companies).
The FidFolios will have an initial expense ratio of 0.40%, creating a fee hurdle to overcome (compared to index ETFs which have expense ratios near zero) through its tax advantages and/or its customization abilities.