ETFs vs Separately Managed Accounts and Direct Indexing: How Do They Compare?

By Adam Patti, Chief Executive Officer, VistaShares | Published November 13, 2026

ETFs, separately managed accounts and direct indexing are three ways to access professionally managed or index-based portfolios: an ETF pools money from many investors into one fund that trades on an exchange, a separately managed account, or SMA, holds individual securities directly in the investor’s own account, managed by a professional, and direct indexing is a type of SMA that owns the individual stocks of an index, allowing customization and tax-loss harvesting at the level of each stock. They differ in cost, minimums, customization, tax control and complexity.

How does each structure work?

ETFs. Investors buy shares of a fund. The fund owns the underlying securities, and each shareholder owns a proportional interest. All shareholders hold the same portfolio.¹ Our article on what an ETF is and how it works explains the structure.

Separately managed accounts. The investor’s account owns each security directly. A portfolio manager makes buy and sell decisions, often following a model portfolio, but the account can be adjusted for the investor’s preferences. SMAs are commonly used for active equity and fixed income strategies.

Direct indexing. A form of SMA that aims to track an index by owning its individual stocks, or a representative sample, directly. Technology allows providers to manage these portfolios at scale and to customize them for each investor.

How do they compare on cost?

ETFs charge an expense ratio. Broad index ETFs are often among the lowest-cost options available, while active and specialized ETFs cost more.

SMAs typically charge an annual management fee, often as a percentage of assets, and may be offered inside a wrap program that bundles advisory, trading and custody costs. Fees vary by strategy and account size.

Direct indexing fees are generally higher than broad index ETFs but have declined as technology has lowered the cost of managing many individual positions.

Trading costs differ as well. An SMA or direct indexing account may trade many individual securities, while an ETF investor trades only the fund’s shares.

How do minimums compare?

ETFs can be bought one share at a time, and many brokers offer fractional shares. Our article on dollar-cost averaging and fractional shares explains this. SMAs typically require higher minimum investments, often tens or hundreds of thousands of dollars, depending on the strategy. Direct indexing minimums have fallen with fractional share trading, but providers still set minimums that are usually higher than the cost of a single ETF share.

How do they compare on customization?

ETFs offer no customization. Every shareholder owns the same portfolio.

SMAs can be customized to exclude certain securities or industries, accommodate existing holdings, or reflect personal values.

Direct indexing allows similar customization while tracking an index, such as excluding a company the investor’s employer competes with, or reducing exposure to a stock the investor already holds in large amounts.

How do they compare on taxes?

Taxes are often the main reason investors consider SMAs and direct indexing.

ETFs pass through distributions to shareholders, and many limit capital gain distributions through in-kind redemptions, though results vary by fund. Investors can harvest losses only by selling the ETF itself.

SMAs and direct indexing hold individual securities, so the investor’s cost basis is tracked for each position. Managers can sell individual positions at a loss to offset gains elsewhere, even when the overall portfolio has risen. This tax-loss harvesting at the security level is a central feature of direct indexing. The investor also avoids inheriting gains realized by other shareholders, which can occur in pooled funds.

Tax-loss harvesting defers taxes rather than eliminating them in many cases, because harvested positions are replaced at a lower cost basis. Wash sale rules apply. The value of harvesting depends on market conditions, the investor’s tax situation and how long the account is held. Investors should consult a tax advisor.

How do they compare on transparency and complexity?

ETFs typically disclose holdings daily, and each investor receives a single position on account statements and tax forms. SMAs and direct indexing accounts show every individual security, which provides full transparency but can produce long statements and tax reports with many transactions. Moving an SMA to another provider may require transferring many positions.

How do they compare on portability and liquidity?

ETF shares can be bought or sold on any trading day and transferred between brokers easily. SMA and direct indexing holdings are also liquid but involve many positions, and closing an account may require selling many securities, with tax consequences in taxable accounts.

How do they compare on reporting?

ETF positions appear as single lines on statements and tax forms. SMA and direct indexing accounts can produce many transactions each year, particularly with active tax-loss harvesting, which can lengthen tax reporting.

When might each fit?

ETFs may suit investors seeking low-cost diversification, small or regular investments, simplicity, or access to specialized strategies such as options-based income or buffers. Our articles on option income ETFs and buffer ETFs describe two examples.

SMAs may suit investors with larger balances who want a specific manager’s strategy with customization and direct ownership.

Direct indexing may suit investors in taxable accounts with significant assets, especially those with large capital gains elsewhere or a need to customize around existing holdings.

Many portfolios combine all three, for example using direct indexing for a core U.S. equity allocation in a taxable account and ETFs for international, fixed income and specialized exposures. Our article on how financial advisors use ETFs describes how advisors combine vehicles, and more introductory topics are covered in our ETF basics guide.

Investments involve risk, including possible loss of principal.

Frequently asked questions

What is direct indexing?

Direct indexing is an approach in which an investor’s account owns the individual stocks of an index, or a representative sample, rather than a fund. It allows customization, such as excluding certain companies, and tax-loss harvesting on individual positions. It is usually offered as a type of separately managed account.

Is direct indexing cheaper than an ETF?

Generally not. Broad index ETFs are typically among the lowest-cost investments. Direct indexing usually charges a higher management fee, which investors may weigh against the potential value of customization and security-level tax-loss harvesting, depending on their tax situation. Fees vary by provider.

What is the minimum for a separately managed account?

Minimums vary by provider and strategy, commonly ranging from tens of thousands to hundreds of thousands of dollars or more. Some providers have lowered minimums using fractional shares and automation, particularly for direct indexing. ETFs, by contrast, can be bought one share at a time.

Can I customize an ETF?

No. All shareholders own the same portfolio. Investors who want to exclude specific companies or industries, or adjust for existing holdings, would need individual stocks, a separately managed account or direct indexing. Each of those options involves its own costs, minimums and account maintenance, which are worth comparing.

Does tax-loss harvesting eliminate taxes?

Usually it defers them. Selling a position at a loss offsets gains now, but the replacement position has a lower cost basis, which can increase gains when it is eventually sold. The benefit depends on tax rates, holding periods and the investor’s circumstances.

Can I use ETFs and direct indexing together?

Yes. Some investors use direct indexing for a core U.S. equity allocation in a taxable account, where security-level tax-loss harvesting may be most useful, and ETFs for other exposures such as bonds, international stocks or specialized strategies that are harder to replicate with individual securities.

Cite this page: Adam Patti, "ETFs vs Separately Managed Accounts and Direct Indexing: How Do They Compare?," VistaShares, updated November 13, 2026, https://www.vistashares.com/etfs-vs-separately-managed-accounts-direct-indexing/. Plain-text version.

This material is provided for educational purposes only. It is not investment, legal or tax advice, and it is not a recommendation or an offer to buy or sell any security. Information is drawn from sources believed to be reliable as of the date of publication, is not guaranteed as to accuracy or completeness, and may change without notice. Figures attributed to third parties are their estimates. Projections and forecasts are not guarantees of future results. Investors should consult their own financial, legal and tax professionals before making investment decisions. Investments involve risk, including possible loss of principal. ETF shares are bought and sold at market price, which may differ from net asset value, and brokerage commissions and other trading costs may apply.