Fixed Income Direct Indexing: A New Frontier in Investment

By Andrew Merrill, bondIT 

Gone are the days of relying solely on the performance of a mutual fund or ETF to track a fixed income index. Technological advances in recent years have created another way to invest like an index with important advantages for investors: direct indexing. 

Fixed income direct indexing involves purchasing individual fixed income securities, such as bonds, in the same proportions as a fixed income index or benchmark. Instead of investing in a fixed income mutual fund or ETF, investors can build a portfolio of bonds that replicates the performance of a specific index or benchmark. 

Direct Indexing offers customization and tax benefits 

Just like with equity direct indexing, fixed income direct indexing offers greater control and customization compared to traditional fixed income investment vehicles. Investors can tailor their portfolios to align with their preferences, goals, and risk tolerance. They have the flexibility to exclude certain bonds or sectors that they do not favor or tilt their portfolio towards certain themes they believe will outperform the market, such as growth, value, or elements of ESG investing. 

One of the key advantages of fixed income direct indexing is tax efficiency. Similar to equity direct indexing, investors can strategically harvest losses by selling individual bonds that have declined in value to offset capital gains from other investments. This ability to selectively sell positions without impacting the overall exposure to the index can help investors lower their tax liabilities. 

However, direct indexing does come with some potential challenges. It can be more complex and expensive than buying index funds or ETFs. It requires expertise in bond selection, as well as knowledge of the specific index or benchmark being replicated. Investors need to consider factors such as bond duration, credit quality, and yield when constructing their portfolios. Additionally, like any investment strategy, fixed income direct indexing is subject to market risk and fluctuations in interest rates. 

Technology democratizes access to Direct Indexing 

Previously, direct indexing was primarily available to wealthy investors who could afford separately managed accounts (SMAs) managed by professional advisors. However, with the emergence of advanced technologies, direct indexing has become more accessible to individual investors. Today’s technology automates the process of building and maintaining direct indexing portfolios, incorporating features such as tax optimization, portfolio customization, and performance reporting. 

bondIT is at the forefront of this democratization of direct indexing. We have developed technology that automates the creation and optimization of direct indexing portfolios, enabling investors to build rule-based portfolios that reflect their personal preferences while generating tax benefits. Our portfolio construction software can significantly reduce the time and effort required to implement direct indexing strategies, making it accessible to a wider range of investors. 

Contact the bondIT team now to find out more and arrange a demo.