Schwab Brings Direct Indexing To Average Investors

The financial giant will offer personalized indexing in an SMA wrapper with a minimum portfolio size of $100,000.

Reviewed by: Heather Bell
Edited by: Heather Bell

Charles Schwab will be launching its own direct indexing solution, one of—if not the—first designed for a broader audience beyond high net worth individuals and institutions. The Schwab Personalized Indexing business should be operational by the end of April, and will be aimed at financial advisors and retail investors, the firm said in a press release.

As part of being designed for a broader audience, the account minimum for the services is $100,000, with the press release noting that most direct indexing offerings require at least $250,000. The pricing starts at 0.40%, which is significantly higher than the 0.03% charged by the broad-market Vanguard Total Stock Market ETF (VTI). However, VTI is about as plain vanilla as an investor can get and, of course, comes with no tax management or customization capabilities on its own.

Forty basis points is a midrange cost for an ETF, and while expensive for a plain vanilla fund, perfectly reasonable for a smart beta strategy or even a thematic fund.

“[Thanks] to technology innovations and industry developments like Schwab’s introduction of online commission-free trading, we’re able to lower the barriers to direct indexing for more investors and the advisors who serve them,” said Charles Schwab Corp. President Rick Wurster.

Direct indexing has drawn attention due to its customization capabilities and the potential tax management benefits it can offer. And as technology has improved, it has been possible to offer it at lower and lower price points.

“Personalized indexing will increasingly define what investors want. Our research shows one-third of our clients are interested in direct indexing,” said Schwab Product Management Director Divya Krishnan.

With a direct indexing portfolio, the client owns the individual securities in their personalized index rather than a mutual fund or ETF. The Schwab model takes advantage of the firm’s commission-free online trading and its in-house optimization process that incorporates daily monitoring and tax-loss harvesting technology under the direction of a team of investment professionals. The customized strategies will be delivered to clients via separately managed accounts, according to the press release.

The process used by Schwab Personalized Indexing will optimize a client’s portfolio by considering such factors as their current holdings and unrealized tax profile, as well as taxes, risks and tracking error.

Clients can choose from three base indexes that can be customized to their needs: the Schwab 1000 Index, which is very similar to the Russell 1000 Index; the S&P SmallCap 600 Index; and the MSCI KLD 400 Social Index, one of the original ESG benchmarks, the press release says.  

The firm says it will add additional features and strategies during the next 12-18 months.


Contact Heather Bell at [email protected]

Heather Bell is a former managing editor of She has also held editorial positions at Dow Jones Indexes and Lehman Brothers. Bell is a graduate of Dartmouth college and resides in the Denver area with her two dogs.