Recently, there has been a rise in the popularity of direct indexing options. However, these solutions are mostly used by wealthy investors. Anton Honikman, the CEO of MyVest, estimates that around $400 billion is managed through direct indexing strategies. He predicts that the growth of direct indexing in the future will rely on younger and less wealthy investors.

Initially, direct indexing was attractive because it helped investors save on taxes. As direct indexing becomes more widely available, providers and advisors will need to make changes to cater to a broader range of investors.

Honikman points out that technology providers will need to support fractional shares for direct indexing to benefit smaller investors. Companies like Schwab and Fidelity have already made this change, making direct indexing accessible to more people.

Normally, direct indexing comes with a cost premium compared to investing in low-cost ETFs. With the increasing options of ETFs in recent years, Honikman believes that the appeal of direct indexing may diminish for many investors.

He also predicts that the premium associated with direct indexing will decrease over time to compete with low-cost ETF portfolios. He suggests that the next wave of direct indexing will be led by younger investors who prioritize aligning their investments with their values rather than focusing solely on saving taxes.