A strategy blurring the lines between benchmark-hugging and stock picking is attracting choosy investors.

Those who appreciate the lower costs and simplicity of passive investing can make their own edits to a benchmark with an approach called direct indexing. Rather than owning an exchange-traded fund or mutual fund that tracks a gauge like the S&P 500, the strategy allows you to buy shares of the companies in an index, while tailoring the portfolio to your needs.

This style of investing is getting increased attention, especially as values-based money management becomes more mainstream. Assets in direct indexing strategies may total as much as $300 billion, though an exact figure is difficult to calculate, according to estimates from Bloomberg Intelligence analyst Eric Balchunas. Eaton Vance Corp.’s Parametric Portfolio Associates, Optimal Asset Management and Ethic Inc. all offer direct index strategies. But critics say flexible indexing undermines the whole premise of passive investing.

“It sounds like a blessing on paper but it could be a curse in reality,” Balchunas said.

These strategies are revamping separately managed accounts, products that can be used to create bespoke portfolios, traditionally for institutional investors or high-net-worth clients. And developments such as zero-commission trading and brokerage Charles Schwab Corp.’s offer to transact fractional shares have made it cheaper and easier to run tailored pools than ever before, paving the way for direct indexing to reach more customers.

The accounts can be used in various ways: an Apple Inc. staffer who already owns company stock via benefits could reduce further exposure in their portfolios, for example. An ethically minded investor who wants to steer clear of a company that’s not doing enough to combat climate change could use direct indexing to avoid that firm but still track the rest of the market.

There are also some tax advantages to this approach as the provider can regularly adjust an account’s holdings to lock-in tax losses. Known as tax-loss harvesting, ETF users can do something similar to minimize their gains, but direct indexers can do this at an individual stock level.

“There are use cases,” said Nate Geraci, president of The ETF Store, an investment adviser that uses ETFs to construct portfolios. Still, “I don’t believe it’s an ETF killer.”

The freedom to tweak your portfolio comes with risks. The more you stray from the index, the greater the difference in your returns versus that benchmark. That could be an advantage -- if you excluded Facebook Inc. when it lost 26% last year, for example -- but it could also be a serious drag on your performance. Facebook is up 47% in 2019.

Customers also pay a larger upfront management fee for the personalization. Direct-index strategies typically charge about 0.15-0.35%, according to data from Bloomberg Intelligence. That’s less than an active mutual fund, but still at least five times more than some of the most popular, cheap equity ETFs.

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