Custom Indexing: Take More Control Over Your Portfolio

Imagine reviewing your holdings one day and spotting a stock that clashes with your values. Maybe it’s a company whose practices you dislike. Maybe you already have a large stake in a competing firm and don’t want extra exposure. 

Regardless of the reason, with traditional ETFs, there’s usually no straightforward way to exclude those positions. You either hold the entire basket or none of it.

This is where custom indexing enters the picture.

In this post, we’ll introduce how custom indexing empowers you to stay aligned with a broad benchmark while choosing which companies to include or exclude. You’ll see how custom indexing allows you to keep the overall market exposure you want while shaping your portfolio to better reflect your personal preferences and goals.

A Quick Refresher on Traditional Indexing

Standard index funds pool money from many investors to buy the stocks within a certain benchmark. The entire basket might include hundreds of companies, and each share of an ETF or mutual fund represents fractional ownership in all of them. 

This arrangement is efficient because fund managers track a specific index rather than actively researching which stocks to buy or sell based on changing market data.

Moreover, traditional index funds are popular for several other reasons: 

• Costs are often lower compared to actively managed strategies. 
• Performance usually keeps pace with the benchmark minus a small expense ratio. 
• They’re relatively easy to manage and understand—buy one ticker symbol and you’re immediately diversified.

Although standard index funds are simple, that simplicity can become a disadvantage if you have distinct preferences. In a traditional index fund, you have no direct say over which stocks are included. You’re simply locked into the entire index’s composition.

What Is Custom Indexing?

Custom indexing is a more tailored approach to achieving market-like exposure by owning a diverse set of underlying stocks—rather than buying a single fund that packages them all together. In essence, you’re replicating a benchmark at the individual-stock level, allowing for fine-tuned adjustments that keep the spirit of the index while accommodating personal preferences.

Historically, assembling a broad basket of stocks yourself was a tall order. You’d need to execute many trades, track index changes over time, and manage your capital gains and losses. Modifying your holdings—like removing a company you object to—only added more complexity.

Today’s technology, however, has made the process much simpler. Advanced software can assist with trade execution, monitor rebalancing, and handle real-time tax calculations. When paired with an advisor’s guidance, these tools enable you to remain close to a benchmark’s risk and return profile, while shaping the portfolio around your unique objectives.

Key Benefits of Custom Indexing

Custom indexing isn’t just about matching a benchmark—it’s about leveraging direct ownership for potential tax advantages, personalized allocations, and alignment with your core values. By carefully adjusting specific holdings, you can shape your portfolio to address unique goals that traditional index funds simply can’t accommodate.

Here are a few key benefits to keep in mind:

Personalized Choice and Values Alignment: The core advantage of custom indexing is choice. Custom indexing lets you exclude or reduce exposure to companies that don’t align with your values, or tilt toward ones you find more appealing. Instead of settling for an ETF that may include holdings you dislike, you create a portfolio that matches your personal beliefs and preferences.

Proactive Year-Round Tax Loss Harvesting: In a standard fund, you have little control over when taxable events occur. The fund manager might make trades that trigger capital gains for every shareholder. In a custom index, you can systematically look for losses to realize throughout the year, which can offset gains and potentially lower your taxable income.

Tailored Gains Management: You might set a limit on how much in gains you’re willing to realize in a given year. Likewise, if you plan to sell a business or real estate, large taxable events can be softened by strategically harvesting losses in your custom index. This allows you to replace or adjust specific positions rather than being tied to an ETF’s one-size-fits-all trades.

Flexible Position Management: Some investors hold a large chunk of a single stock—possibly due to years of loyalty, equity compensation, or inherited shares. Selling all at once could trigger hefty taxes, so custom indexing offers a way to gradually reduce that position over time. At the same time, if there are stocks you feel strongly about keeping, you can hold onto them while still mirroring the market for the rest of your portfolio.

Charitable Giving: Donating appreciated shares to charity can reduce your tax obligations. By selecting which positions to donate, you can rebalance your holdings without triggering capital gains, maintaining alignment with your chosen benchmark while supporting causes you care about.

Understanding the Tradeoffs

There are a lot of advantages to custom indexing. But like anything else, there are also tradeoffs you should know about. Keeping these in mind will help you better manage your expectations from the start. 

It’s important to understand these main custom-indexing tradeoffs:

Higher Fees or Minimums: Because custom indexing can involve owning dozens or even hundreds of individual positions, it may carry extra fees or technology expenses compared to a single ETF. Some providers require higher account minimums to offer these services. However, for investors with sizable portfolios or specific tax management needs, the potential benefits often outweigh the extra costs.

Increased Complexity: Instead of seeing just “XYZ Index ETF” on your statement, you’ll likely see a long list of individual stocks. Although modern software significantly streamlines tracking and rebalancing, there’s no denying this approach involves more moving parts. For some, the added involvement is worthwhile; for others, it might feel overwhelming.

Potential for Tracking Error: Anytime you modify a benchmark—by removing certain companies, emphasizing others, or adjusting for personal values—you introduce the possibility that your portfolio’s returns will deviate from the broader index. Sometimes these differences can work in your favor, but they can also mean lagging performance if excluded sectors or stocks experience strong gains. This is an important consideration when deciding how much customization you’re willing to accept.

Common Misconceptions Surrounding Custom Indexing

Because custom indexing still feels relatively new to many investors, misunderstandings about cost, complexity, and performance often arise. In reality, modern platforms and advisory services have made this approach more accessible than ever.

The following misconceptions are worth clarifying:

Only for Wealthy Investors: In the past, setting up a custom indexing strategy required deep pockets. The sheer number of trades and tracking involved was too expensive for smaller investors. Now, technology and competitive platforms have lowered that barrier. While some minimums may still exist, they’re often more attainable than people assume.

Guaranteed Superior Performance: The purpose here is typically to match the performance of a chosen index, but with extra personalization. This can include tax strategies that might improve after-tax outcomes, yet there’s no promise that you’ll outperform the market itself. The main goal is more control over what you hold and when you realize gains or losses.

Overly Complicated for Clients: On the surface, custom indexing sounds intricate. However, many providers offer user-friendly systems that handle the complex calculations, propose trades, and help you monitor positions. An advisor can translate all the details into straightforward decisions, making the experience more approachable than it might initially appear.

Who Benefits Most from Custom Indexing?

While nearly anyone seeking added control might appreciate custom indexing, certain types of investors stand to gain the most from its flexibility and tax-saving features. It’s a powerful option for those with distinct values, substantial portfolios, or specific life events on the horizon.

Below are some common scenarios where custom indexing really shines:

High-Net-Worth Individuals: Although custom indexing has become more accessible to a larger pool of investors, those with larger portfolios can often reap greater advantages. Their higher net worth typically comes with more complex tax obligations, estate planning, and philanthropic objectives, making a tailored indexing approach particularly compelling. In addition, the opportunity for ongoing tax loss harvesting can significantly reduce taxable income, further enhancing the benefits of this strategy.

Investors with Specific Ethical or Social Preferences: For investors who are deeply engaged or hold particularly strong convictions about specific causes or sectors, custom indexing can be especially appealing. It offers the freedom to precisely shape your portfolio to mirror your ideals—whether that means avoiding certain industries, business practices, CEOs, or increasing exposure to those you wholeheartedly support.

People Dealing with Major Life Events: Selling a business, inheriting a large estate, or receiving a big windfall can lead to unforeseen taxes. A custom index can be shaped around your upcoming liabilities, letting you manage gains or losses more precisely.

Why Our Firm Uses Custom Indexing

Our firm offers custom indexing because we believe that a deeper level of personalization leads to better outcomes and greater peace of mind for some investors. By holding individual stocks, we can coordinate tax strategies and personal preferences in a way that broad-based funds cannot.

We still find that many individuals benefit from a basic ETF-based approach, especially in the early stages of building wealth. Simple, low-cost funds do an excellent job when your investment goals are relatively straightforward. As your portfolio grows and your preferences expand or become more specific, the door opens for a more customized approach.

Hypothetical Example of Custom Indexing in Action

Imagine you discover that one of the companies in your portfolio is doing things you just can’t stand behind. Instead of dumping your entire index investment—and losing the benefits of all the other companies you still like—you decide to try custom indexing. With this approach, you replicate a broad market benchmark but exclude that one troubling stock, so you stay diversified while feeling better about where your money’s going.

At the same time, you’re excited about the emerging market of AI. Rather than hunting for a specialized fund (which might include holdings you’d rather avoid), you simply lean your custom index more toward AI-focused businesses. This gives you a chance to tap into a growth area you believe in, without giving up the overall market balance you want.

Now, there’s also the matter of a mutual fund you’ve held for years, brimming with unrealized capital gains. Selling it in one go could hit you with a hefty tax bill. Instead, you use custom indexing to gradually reduce this position, strategically harvesting losses in other parts of your portfolio to help offset any gains. 

Over time, you reshape your investments to reflect your evolving preferences—whether that means removing certain companies, leaning into AI, or even donating some of those highly appreciated shares to a nonprofit. By donating directly, you bypass capital gains altogether, then rebalance your custom index to stay on track with your broader financial goals and personal values.

Step-by-Step: How to Explore Custom Indexing With Us

Our process is designed to keep things straightforward, even though the mechanics behind the scenes can be complex. We work closely with you from initial discussions through ongoing adjustments, so you stay informed every step of the way.

Here’s an overview of the process:

Step 1) Initial Consultation: We’ll begin by discussing your goals, risk tolerance, and any ethical or personal constraints you want to consider. This is also where we figure out if custom indexing suits your situation, or if a simpler strategy remains the best option.

Step 2) Portfolio Analysis: Next, our team reviews your current holdings. We note any significant capital gains, large single-stock positions, or funds that don’t match your preferences. We also assess how your portfolio’s risk profile compares to the market you want to track.

Step 3) Customized Strategy Proposal: We then develop a custom indexing plan. This includes identifying companies you might want to exclude or sectors you’d like to emphasize. We also outline potential tax management techniques, such as harvesting losses to offset gains.

Step 4) Implementation: Once you approve the plan, we set up your account. Our software tracks each position, looks for opportunities to harvest gains or losses, and keeps tabs on market shifts. You receive updates as needed, without having to micromanage each transaction.

Step 5) Review and Adjust: Over time, personal circumstances, market conditions, or your values may change. We’ll regularly revisit your portfolio to make sure it still aligns with your goals. If you anticipate a major capital event—like selling a property—we can adjust the strategy to manage the tax implications more effectively.

Let’s Take Control of Your Portfolio!

Custom indexing is, at its heart, about empowerment. You’re not forced to invest in companies you disagree with, nor do you have to forgo broad diversification to avoid them. By selectively including or excluding positions, you can still mirror the market’s overall performance while tailoring your portfolio to your unique objectives.

That said, custom indexing involves costs, complexity, and risks of its own. It’s important to have a clear conversation with a qualified advisor about your goals and the potential benefits of this approach.

If you’re curious about whether custom indexing is right for you, we invite you to reach out. We’ll evaluate your situation, discuss your preferences, and help chart a course that balances personalization and broad market exposure—putting you firmly in control of your investment strategy. Use the button below to get started!