When the mutual fund debuted in 1924, it took diversification to new heights. Hands-on risk management could be delegated to a fund manager – for a fee. But 66 years later, those fees were called into question, and the ETF was born. Suddenly, funds could be traded with the ease of stocks – and at a lower price point. Then the innovation paused again. Since 1990, little has improved upon the rapid diversification enabled by mutual funds and ETFs – until now.
Today’s ultra-wealthy invest differently. They take control of their portfolios using direct indexing—a strategy designed to reduce costs, optimize taxes, and build a portfolio tailored to their financial goals. Here’s why this approach is leaving ETFs and mutual funds behind.
1. Fees Can Cost You Thousands
Mutual funds and ETFs often claim to be “low-cost,” but their expense ratios, trading costs, and management fees can make their true cost much higher.
Mutual funds typically charge between 1 and 2 percent annually. Even ETFs—while generally cheaper—still carry hidden costs. On a $10 million portfolio, a “mere” 1 percent fee translates to $100,000 each year. Over a decade, that’s a million-dollar bill.
Direct indexing eliminates these unnecessary costs by allowing you to own individual stocks directly, cutting out the middleman and giving you greater control over your portfolio’s expenses.
2. Over-Diversification Can Stunt Portfolio Growth
Most ETFs and mutual funds are over-diversified, meaning they force investors to own hundreds—if not thousands—of stocks. The unintended cost? Many underperformers dilute returns.
The reality is that a small percentage of stocks drive most of the market’s gains. In the S&P 500, the top 10 companies are responsible for a significant portion of the index’s growth. Why own all 500 when only a fraction consistently outperform?
Direct indexing lets you customize your exposure, allowing you to focus on the sectors you believe in most.
Why Excessive Fees Are Holding Your Portfolio Back—And What to Do Instead
ADVERTORIAL
June 1, 2025
4. New Technology Makes Greater Portfolio Control Possible
Mutual funds and ETFs operate within a predefined structure. You’re at the mercy of your fund manager’s whims, even if some holdings don’t align with your investment goals.
Direct indexing puts you in control, thereby allowing you to:
- Increase exposure to sectors that align with your long-term vision.
- Customize your portfolio for tax efficiency, income generation, or capital appreciation.
Instead of being locked into a predetermined mix of stocks, direct indexing gives you the ability to build a portfolio that reflects your unique financial objectives.
5. Direct Indexing Marries the Benefits of Active and Passive Investing
The financial industry built the mutual fund and ETF model to benefit Wall Street, not individual investors. These products generate billions in fees for fund managers while offering little customization, tax flexibility, or control.
Meanwhile, institutional investors, hedge funds, and ultra-high-net-worth families don’t rely on mutual funds and ETFs. Instead, they:
- Own individual stocks through direct indexing.
- Optimize tax strategies to enhance long-term wealth.
- Actively manage risk instead of being tied to a predefined portfolio.
Thanks to advances in technology, direct indexing is no longer limited to billionaires. With the right strategy, high-net-worth investors can now build a customized, tax-efficient, and cost-effective portfolio.
Mutual Funds and ETFs had their place. But now it’s time for a change.
If your portfolio still predominantly relies on mutual funds and ETFs, you’re likely leaving money on the table. Direct indexing offers lower costs, better tax efficiency, and greater flexibility—allowing you to invest smarter and align your portfolio with your long-term goals.
It’s time to take control of your wealth. Schedule a portfolio review with Evergreen Wealth today to explore how direct indexing can help you achieve your financial objectives.
ADVERTORIAL
Bill Harris, Founder of Evergreen Wealth,
as seen on:
3. Tax Efficiency Can Boost After Tax Returns
One of the biggest drawbacks of mutual funds is their tax inefficiency. Even if you never sell your shares, fund managers frequently trade within the fund, triggering capital gains taxes that get passed down to investors.
Direct indexing offers a major advantage: tax-loss harvesting. By strategically selling losing stocks to offset gains, you can minimize your tax bill while keeping more of your investment returns.
Tax-loss harvesting is a powerful tax strategy that can increase the value of an equity investment portfolio. An academic study* estimated the benefits to be in the range of an additional 1.10% after-tax return each year.
THE POWER OF TAX STRATEGY
- Reduce, offset, defer and eliminate tax
- Compound each year
Compounded over 25 years, this could result in up to a 30% increase in your portfolio.
*The analysis is for educational purposes only and nothing herein constitutes investment advice or an investment recommendation. The analysis assumes a 1% monthly deposit and a mean average return of 8.44%. It does not account for management fees, withdrawals, or variations in market performance. The estimates do not reflect actual investment results of an Evergreen portfolio and are not guarantees of future results. Please consult your tax advisor to see whether tax-loss harvesting is advisable with your accounts. Taxes should not be the only factor to drive an investment decision.
Meet Our Founder
Evergreen Wealth founder Bill Harris has been at the intersection of investments, tax and technology for thirty years. He ran TurboTax for ten years, was co-founding CEO of PayPal, and founded Personal Capital which grew to $23 billion in investors' assets.
© 2025 Evergreen.
All rights reserved.
The information provided is for informational purposes only and this material is not intended as a recommendation, offer or solicitation for the purchase or sale of any security or investment strategy nor should it be relied upon for tax, legal, or accounting advice. Taxes should not be the only factor to drive an investment decision. You should consult your own tax, legal, and accounting advisors before engaging in transactions.
All investing involves risk, including the possible loss of principal and past performance does not guarantee future performance.
Evergreen Wealth Advisors, a wholly-owned subsidiary of Evergreen Wealth Corporation, is a registered investment adviser with the SEC. Registration does not imply a certain level of skill or training. More information about Evergreen's investment advisory services, Evergreen Wealth Corporation and Evergreen Wealth Advisors do not provide tax, legal, or accounting advice. Form ADV Part 2, and Form CRS can be found on https://adviserinfo.sec.gov/.
2https://www.irs.gov/taxtopics/tc409
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