Trump used direct indexing to save on taxes. What is the strategy, how does it work and should you follow it too?

What if you could trade like US President Donald Trump, but without having to make thousands of bets yourself? In 2025, Trump’s 21,000 trades have drawn massive attention, not just for the scale but also possibly because of the strategy his team uses – direct investing. The approach allows investors to build a customised portfolio that mirrors an index while potentially cutting their tax bill.

Direct indexing grew to $864 billion in assets as of the end of 2024, according to Cerulli Associates, more than double its size in 2020

Alex Michalka, vice president of investment research at Wealthfront, which credits itself with coining the term "direct indexing" in 2012 and oversees $99 billion in client assets, told Business Insider one medium-sized direct indexing account on the platform made over 4,500 distinct trades in large-cap companies in 2025 in order to increase tax savings. Here's a look at what direct investing is, how it works, and whether it is a suitable strategy for a retail investor.

What's direct indexing

Direct indexing is an evolving form of index investing. Instead of buying an ETF that tracks an index, investors buy the individual stocks that make up the index. This allows them to trade specific stocks while still aiming for returns similar to the index.

The key to this strategy is to observe how individual stocks perform relative to the overall market. Even when the market rises, not all stocks gain. This difference in performance creates opportunities for investors.

ETFs combine gains and losses, limiting tax-saving opportunities. By owning individual stocks, investors can use losses to offset capital gains. This can reduce taxes and allow the savings to be reinvested.

The strategy is typically meant for wealthy individuals. "We wouldn't even look at it unless we were managing at least $5 million for them," Gabriel Shahin, a financial advisor who founded the advisory firm Falcon Wealth Planning, told Business Insider, citing high management costs and the costs of individual trades.

Over the past five or so years, direct indexing has grown substantially, he said, as more seamless financial plumbing, free trades, and technology that can automate much or all of the strategy have made it within reach for regular investors.

The investing strategy is growing rapidly and, in recent years, has become almost table stakes. Shahin said he uses it with many of his clients

Who is it for?

This strategy is perfect for individuals in the top tax bracket who have a lot of tax savings. Trump, for example, is the perfect candidate for direct indexing. It is really meant for retail investors who are planning to invest small amount of money.

But such a strategy comes at a premium price. Some direct-indexing providers charge higher fees than many ETFs.

Apart from that, there is also a risk of tracking error, meaning the portfolio’s returns may differ from those of the index it follows due to tax-saving strategies and other factors.

Factors that make it worth considering:

• If you have significant capital gains that are worth writing off, for example, if you are an employee who receives company stock or a real estate investor like Trump.
• When an investor has a long investment horizon, they have more time to reinvest the taxes they defer.
• Someone who can keep adding money to the portfolio, as the tax benefits may reduce over time without fresh investments.
• Want to exclude certain companies or sectors for ESG, religious or diversification reasons.

You should rethink direct investment strategy if:

• You expect your tax rate to rise. Deferring taxes is more valuable if you expect to pay a lower rate when you eventually sell, such as in retirement.
• Your investment amount is not substantial. Tracking errors can be higher with smaller portfolios due to limits on buying fractional shares.
• Need the money soon. For example, if you are saving for a home down payment or another major expense, investing that money in stocks may be too risky, even if you can save on taxes.