The Power of Direct Indexing in a Volatile Market
Authors & Contributors
Stephanie Hill
Brett Olsen
How can a direct indexing strategy potentially help investors in a volatile market?
During times when the market experiences rapid, significant fluctuations in price, usually with high levels of uncertainty, investors typically gravitate toward certain low risk strategies. They may seek to reduce risk through further diversification of their portfolios. They may also shift resources to potentially safer assets.
For investors who select a direct indexing (DI) portfolio, which involves establishing investment preferences and goals, much of the work needed to weather market volatility has already been accomplished.
Comparing Direct Indexing Activity in Stable Versus Volatile Markets
In our last article, “The Democratization of Direct Indexing,” we identified potential tax savings as one of the primary benefits of a DI strategy.1 When markets are volatile, direct indexing strategies sell stocks that have lost value and replace them with stocks that provide similar exposure. Each of these transactions, which are conducted according to the investor’s initial preferences, can help lower the taxes that the investor owes or offset gains in other investments.
During times of market volatility, these transactions are naturally made with increased frequency. For instance, compare our own firm’s data on DI accounts traded in January and February 2025 versus April 2025. Following the US administration’s announcement of worldwide reciprocal tariffs on April 2, the market experienced a significant spike in volatility with equity markets trading down. As a result, during April our firm’s net order and notional amount volumes nearly doubled compared to the levels of January and February to continue to track indexes. Additionally, accounts traded per day were up 60% in April versus the prior period.2 For our DI investors, the increased frequency of trading brought the potential to harvest tax losses faster and at a lower cost, efficiently supporting our investors’ tax goals.
Power Through Frequency
During periods of extreme volatility, when securities markets are experiencing large swings from day to day (or even hour to hour), it is important to work with a firm that monitors accounts on a daily basis and reacts promptly to market fluctuations.
No Need for Difficult Conversations
Finally, investors are likely more inclined to seek safer harbors during periods of volatility. While this may lead to challenging conversations between advisors and investors, an investor with a DI strategy has already had that discussion. By identifying their strategic goals and preferences early, along with the index they wish to track, they have essentially already prepared for volatility and are set up to potentially realize tax benefits as a result.
1There's no guarantee that a particular investor will realize significant tax benefits from harvesting gains or losses. Investment strategies that seek to employ tax management may be unable to fully realize strategic gains or harvest losses due to various factors. Market conditions and/or client account holdings may limit the ability to generate tax losses. Tax-loss harvesting involves the risks that the new investment could perform worse than the original investment and that transaction costs could offset the tax benefit. Also, a tax-managed strategy may cause a client portfolio to hold a security in order to achieve more favorable tax treatment or to sell a security in order to create tax losses. The ability to minimize tax consequences for a specific account may decrease as gains have the potential to accumulate over a period of time. Investors in lower tax brackets generally will not derive the same level of potential tax benefits from tax-managed strategies than those in higher tax brackets. Tax considerations, while important, are just one factor to consider before making any investment decision. Tax-managed investing and tax transitioning do not equate to comprehensive tax advice, are limited in scope and not designed to eliminate taxes in an account. Please consult your own tax advisor or financial professional for more detailed information on tax issues as they relate to your specific situation. Example shown is for illustrative purposes only and does not reflect actual results.
2Firm data.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
All investments involve risk, including the possible loss of principal. Certain investments have specific or unique risks. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
This material has been provided for informational purposes only and should not be construed as investment advice or a recommendation of any particular investment product, strategy, investment manager or account arrangement, and should not serve as a primary basis for investment decisions. Prospective investors should consult a legal, tax or financial professional in order to determine whether any investment product, strategy or service is appropriate for their particular circumstances. This document may not be used for the purpose of an offer or solicitation in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorized. Views expressed are those of the author stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change. This information may contain projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or expectations will be achieved, and actual results may be significantly different from that shown here. The information is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be, interpreted as recommendations. Charts are provided for illustrative purposes and are not indicative of the past or future performance of any BNY product. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.
Indices referred to herein are used for comparative and informational purposes only and have been selected because they are generally considered to be representative of certain markets. Comparisons to indices as benchmarks have limitations because indices have volatility and other material characteristics that may differ from the portfolio, investment or hedge to which they are compared. The providers of the indices referred to herein are not affiliated with Mellon Investments Corporation (MIC), do not endorse, sponsor, sell or promote the investment strategies or products mentioned herein and they make no representation regarding the advisability of investing in the products and strategies described herein. Investors cannot invest directly in an index.
