Direct Indexing Minimums: Who Qualifies and Why

Direct indexing isn’t for everyone. If you’re sitting on $5,000 in a brokerage account and wondering if this is the next big thing for your portfolio, the short answer is: probably not. But if you’ve got $100,000 or more in taxable investments and pay top-tier taxes, this strategy could save you thousands each year. So who actually qualifies-and why does the bar feel so high?

What Exactly Is Direct Indexing?

Direct indexing means owning the actual stocks in an index-like the S&P 500-not shares of an ETF or mutual fund that holds them. Instead of buying one fund that owns 500 companies, you own all 500 individually. Sounds complicated? It is. But that complexity is the point. It gives you control you can’t get elsewhere: you can exclude companies you disagree with (like tobacco or fossil fuels), overweight certain sectors, and most importantly, harvest tax losses in a way that’s impossible with traditional funds.

Here’s the catch: you can’t just buy one stock and call it direct indexing. You need enough positions to make tax-loss harvesting work. That’s why the minimums exist. You need enough diversity to find losers without breaking the index’s balance. And you need enough size so the cost of managing hundreds of trades doesn’t eat up your savings.

Minimum Investment Requirements: What’s the Real Number?

The industry standard? $250,000. That’s what Morgan Stanley, Parametric, and other top-tier firms require. But the landscape is shifting. Charles Schwab lowered their bar to $100,000. Fidelity offers a $5,000 entry point-but only for limited products, and with fewer customization options. So which number matters?

If you’re serious about tax-loss harvesting, aim for $100,000. Below that, the math rarely works. Here’s why: tax alpha-the extra return you get from selling losers to reduce your tax bill-averages 0.5% to 1% per year. On a $50,000 portfolio, that’s $250-$500. But fees for direct indexing? They’re 0.3% to 0.85%. So if you’re paying $250 in fees on a $50,000 account, you’re barely breaking even. At $100,000, you’re looking at $500-$1,000 in tax savings, which starts to justify the cost. At $250,000, you’re talking $1,250-$2,500 in savings annually, and the fees become a small price for the control you gain.

There’s also the wash sale rule to consider. The IRS says you can’t claim a loss if you buy back a “substantially identical” security within 30 days. To get around this, direct indexing platforms swap out the sold stock for another in the same sector-say, replacing Exxon with Chevron. But you need enough stocks to make those swaps meaningful. A $20,000 portfolio with only 10 positions? Not enough wiggle room. A $150,000 portfolio with 300+ positions? Plenty of options to keep the index tracking tight while harvesting losses.

Who Should Be Doing This?

You’re a good candidate for direct indexing if you check most of these boxes:

• You’re in the 24%, 32%, or 37% federal tax bracket (or higher). The higher your rate, the more you save.
• You have $100,000+ in a taxable brokerage account. IRAs and 401(k)s don’t benefit-there’s no tax to save in those.
• You plan to hold investments for 10+ years. This isn’t a short-term play.
• You care about ESG values and want to avoid certain industries.
• You already have a tax advisor or accountant who handles complex returns.
• You hold concentrated stock positions (like company stock from your job) and want to diversify without triggering a huge tax bill.

According to a 2023 Cerulli survey, 83% of direct indexing clients have over $1 million in investable assets. That’s not a coincidence. The strategy was built for people with complex portfolios and big tax bills. But it’s no longer just for billionaires. With Schwab and Fidelity pushing lower minimums, upper-middle-class investors are starting to join.

Why the High Minimums? It’s Not Just Greed

Some people think the $250,000 minimum is just a way for firms to exclude regular folks. It’s not. It’s about cost.

Managing hundreds of individual stocks means constant rebalancing, automatic dividend reinvestment, tax-loss harvesting algorithms, and compliance tracking. That’s not a spreadsheet job. It’s software running 24/7, monitoring every trade, every dividend, every IRS rule. A $5,000 account can’t justify that infrastructure. The firm would lose money managing it.

Plus, tax-loss harvesting needs volume. You need enough losing positions to offset gains. In a year when the market’s up 15%, most stocks are rising. But in a down year? You need enough losers to create real tax savings. A $10,000 portfolio might have one or two losers. A $200,000 portfolio could have 30. That’s the difference between a tax credit and a tax footnote.

As Morningstar noted in 2024, the cost of this tech is dropping. AI systems now analyze 50+ factors-dividend timing, sector exposure, wash sale rules, capital gain buckets-to optimize harvesting. That’s why $50,000 might be the new floor by 2026. But right now? $100,000 is the practical starting line.

Benefits Beyond Taxes

Yes, tax-loss harvesting is the headline. But direct indexing does more:

• Customization: Exclude tobacco, firearms, or fossil fuels. Add ESG screens. Even overweight small-cap stocks if you believe they’ll outperform.
• Flexibility: If you get a large bonus and want to invest $50,000 all at once, you can. ETFs force you to buy whole shares-you can’t invest $4,872.34. Direct indexing lets you invest the exact amount.
• Control over timing: Sell specific lots with the highest cost basis to minimize gains. With ETFs, you’re stuck with FIFO (first in, first out) rules.

Capital Group’s 2022 study found that 67% of high-net-worth investors want ESG alignment-but most index funds don’t let them. Direct indexing fixes that.

The Downsides You Can’t Ignore

It’s not all sunshine. Here’s the other side:

• Higher fees: 0.4% on $100,000 is $400 a year. An S&P 500 ETF? $30. You need at least $780 in tax savings (Vanguard’s average) to break even.
• More paperwork: You’ll get dozens of Form 8949s each year-not one. Your CPA will hate you.
• Tracking error: Because you’re swapping stocks to avoid wash sales, your portfolio won’t perfectly match the index. You might underperform by 0.5%-1.5% in a strong bull market.
• Market conditions matter: In a steady, rising market, there are fewer losses to harvest. Tax alpha drops. The strategy works best in volatile or down markets.

And remember: this only works in taxable accounts. Put your direct index in a Roth IRA? You lose all the benefits. The IRS doesn’t care about your capital gains there.

Is It Worth It?

Let’s say you have $150,000 in a taxable account, you’re in the 32% tax bracket, and you hold it for 10 years. Your average tax alpha? 0.78% per year. That’s $1,170 saved annually. Fees? $600. Net gain? $570 per year. Over 10 years? $5,700 in after-tax savings. Plus, you avoided paying taxes on $15,000 in gains you didn’t realize.

That’s real money. And if you’re holding concentrated stock-say, $500,000 in Apple shares-you can use direct indexing to slowly diversify without triggering a $100,000+ tax bill. That’s life-changing.

But if you’re starting with $20,000 and just want to “get into the market”? Stick with a low-cost ETF. You’ll do better. Direct indexing isn’t a magic bullet. It’s a precision tool for a very specific job.

What’s Next?

The market is moving fast. Fidelity’s $5,000 option is a warning shot. If tech keeps getting cheaper and AI gets smarter, we’ll see $50,000 minimums by 2026. That could open the door for thousands more investors. But until then, the rule is simple: if you don’t have $100,000 in taxable assets, you’re not ready. Not because you’re not smart enough. Because the math doesn’t add up yet.

The future of direct indexing isn’t about who can afford it. It’s about who needs it. And right now, that’s still the top 10% of earners with serious taxable portfolios. But the gap is closing. Keep watching. The rules will change.