Index investing that
gets youmore.

With an index ETF, you own a piece of the ETF fund. Meaning, you don’t own the stocks that are part of the index. However, with direct indexing, you own the underlying stock. You might be wondering: why go through all this trouble? The answer is tax savings. In an index ETF, the underlying stocks cannot be traded by you. But with direct indexing, you unlock the ability to sell stocks that are down to claim a loss, temporarily buy a different one while still tracking the index, and buy back the stocks you sold later.

It’s kind of like earning points with your favorite airline, but instead of points, you earn “losses” that can be used as deductions against your tax bill. Plus, our software handles all of the individual stock trading for you without any work on your part, all while generating net new tax savings that you wouldn’t have gotten by just investing in the index. Keep in mind that you should consult your legal, tax, or financial advisor before making any financial decisions.

Frec’s brokerage firm, Frec Securities LLC, is a member of SIPC, which protects securities customers of its members up to $500,000 (including $250,000 for claims for cash). Explanatory brochure available upon request or at www.sipc.org.

Frec is not FDIC insured because we’re not a bank. FDIC insurance is only available for money held at FDIC-insured banks and protects deposit products like checkings and savings accounts.

Your funds are held in your name at clearing house Apex Clearing, which works with other prominent financial technology companies .This means that you can easily access your funds and even create an account with Apex to monitor your assets outside of Frec.

Our Registered Investment Adviser, Frec Advisers, is a fiduciary, meaning we are legally obligated to prioritize your interests over our own. Frec Advisers provides advisory services for our direct index strategies and Treasury services.

You can easily transfer stocks from your other brokerage to Frec without selling them during the process (with the exception of fractional shares). Meaning, you if you own 10.5 shares of AAPL, you can only transfer 10 of the 10.5 shares. The 0.5 shares can remain at the other brokerage firm or will be liquidated if you initiate a full transfer.

Note that there are two types of transfers: full transfers and partial transfers. With a full transfer, you are moving your entire portfolio to Frec (including ETFs, stocks, and other securities). With a partial one, you select which assets to transfer.

Remember, once your stocks arrive into your self-directed account on Frec, make sure to choose your direct index and select “stocks” to fund your portfolio. This is when our algorithm starts diversifying your holdings into direct indexing.

There are limitations on the type of securities that can be transferred into Frec. Learn more here.

You can withdraw from your direct indexing portfolio at any time. We will deplete the cash balance in your direct index portfolio first, then attempt to sell out of your portfolio in a tax efficient manner that avoids wash sales and sells out of lots with a loss. However, depending on the size of your portfolio and the amount you want to withdraw, you could incur capital tax gains.

You can also direct the dividends earned on stock within your direct index into cash or Treasury. You would then be able to withdraw from those accounts at any time without withdrawing from your direct indexing portfolio.

Alternatively, Frec offers a portfolio line of credit which allows you to borrow up to 70% of your portfolio value (See rates). Through Frec’s portfolio line of credit, you can get cash in your bank account as soon as the same day. Borrowing against a portfolio line of credit adds to your risks. Read more about those risks in Frec’s Margin Disclosure.

You can also transfer your portfolio out of Frec by initiating an ACAT transfer at another brokerage firm (ACAT fees will apply). We will then transfer your stocks in-kind to that firm. Note that fractional shares cannot be transferred and will be sold and transferred as cash.

Tax loss harvesting solutions offered by robo-advisors typically do ETF level tax loss harvesting, meaning the software will sell an ETF and purchase a similar but not “substantially identical” ETF to harvest losses instead of tax loss harvesting at the individual stock level. The downsides to this approach are there are less opportunities to tax loss harvest with ETFs, and the ETFs that are being sold and purchased may be very different from one another. With Frec Direct Indexing, we check for daily tax loss harvesting opportunities at the individual stock level and track a single index very closely.

Plus, common robo-advisors^* charge a 0.25% advisory fee and you have to pay ETF expense ratios on top of that (for example, the ETF SPY which tracks the S&P 500 has an expense ratio of 0.09%). At Frec, you can direct index for as little as an annual 0.10% advisory fee with no additional ETF expense ratio fees.

^* Wealthfront and Betterment are considered robo-advisors and both charge a 0.25% advisory fee as of September 21, 2023. Pricing based on terms & conditions may vary.

No, direct indexing has been around for decades and was primarily used by high net worth clients with financial advisors investing large sums of money. However, fractional and commission-free trading and modern software have made the strategy more accessible to more people. At Frec, our fees are as little as 0.10% for indices like the S&P 500 (compare this to SPY’s expense ratio of 0.09%) so that this strategy can be accessible for those who already adopt a passive investing strategy but want the benefit of tax loss harvesting. Note that direct indexing fees are AUM (assets under management) fees while ETF fees are fund fees expressed as an expense ratio.

Direct indexing is ideal for individuals who are anticipating any type of capital gain in the future like selling stock or a house for profit. The same is true if you want to customize an index by removing or adding stocks / sectors. Direct indexing is less ideal for individuals who may not pay taxes or have capital gains now or in the future they will need to offset. It’s also not ideal for certain indices that have a high turnover of stocks, or an equal market-cap weighted index, or an actively managed ETF. The tax benefits of direct indexing are not relevant for non-taxable accounts.

No. Even though Frec makes hundreds of trades on your behalf to save you on taxes, the filing process is as simple as entering a number. At the mid or end of February every year, you’ll receive a 1099 consolidated tax form from Frec. There is a tax summary on page 2 of the form that shows your total net short-term and long-term gains or losses. You enter these consolidated numbers on your tax return. That's it.

Yes, we permit those who currently work for or are affiliated with Broker Dealers or Registered Investment Advisers to open accounts at Frec. You should check with your employer about any potential trading restrictions you may be required to follow prior to opening an account with us. You will also be required to disclose your employer to us. If your employer only permits you to open managed accounts, we can restrict trading on your account for you and provide your compliance department with written documentation stating such.

You can stop direct indexing at any time by moving all of the stock from your direct indexing portfolio into your self-managed account. Once this is complete you will no longer be charged an annual AUM fee and you will be responsible for any trading.

You can also request to move your stock off Frec’s platform to another brokerage firm. You can do this by initiating an ACATS transfer at the external brokerage firm (ACATS fees will apply). If you initiate a full transfer, all of your whole shares of stock will be transferred in kind and any fractional shares will be sold and transferred as cash.

If you don’t want to hold as many individual stocks, you can always sell out of positions with smaller market cap and offset any potential capital gains from those sales with tax losses you’ve harvested. For example, by the end of June 2024, the top 20 stocks in the S&P 500 made up 45% of the index. You could keep just a few of these top stocks, still capture most of the index's value, reduce the number of stocks you own, and lower your potential capital gains. This strategy can vary depending on the index you invest in.

You can add or exclude up to 10 stocks for all indices. You can also exclude up to 2 sectors for all indices except for the S&P 500^Ⓡ Information Technology Index and the MVIS^Ⓡ US Listed Semiconductor 25 Index.

The initial investment minimum to start a Frec Direct Indexing portfolio for most indices is $20,000. For indices that have a greater number of positions, the minimum is $50,000. This is the minimum starting amount in order to purchase almost every stock in the index, resulting in more accurate tracking of the index.

Yes, you hold the underlying individual stocks that make up the index being tracked by your direct index portfolio. We manage the trading of those stocks for you by automatically buying and selling them in a way that aligns with our tax loss harvesting and index tracking strategy.

Our direct indexing algorithm attempts to track your index within a less than 1% tracking error of its benchmark ETF. Taking data licensed directly from the target index, our software aims to track an index’s performance closely while balancing this with tax loss harvesting opportunities. Tax loss harvesting causes a slight deviation from the benchmark ETF performance because tax loss harvesting requires selling of stock. You can learn more about our methodology here.

Direct indexing can be a good way to reduce your tax burden if you have a concentrated stock position. First, you’re able to remove that concentrated position from your index if it’s part of it, decreasing further concentration while still investing in the index. Additionally, you can slowly sell out of your concentrated position and invest into direct indexing. The tax losses from these sales can offset any capital gains, helping to reduce your tax burden. Start by selling stocks with a higher cost basis to lower your initial capital gains tax. Over time, the losses in your direct indexing portfolio can help offset larger future capital gains. This approach allows you to gradually reduce your concentrated stock position while managing your tax liability.

In the unlikely event that something happens to Frec, your assets will be fully accessible since they are held in your name at Apex Clearing. You can easily transfer your assets via ACAT to another brokerage at any time. Frec also has a six month process to notify customers in the very unlikely case we run out of funds and decide to shut down. Frec is very well-funded by top Silicon Valley venture capital firms.

Frec’s goal is to offer its services for years to come and eventually scale to the largest direct indexing provider in the US. However, if Frec were to be acquired, your assets will continue to be managed by the new owner or you will always have the opportunity to move your assets to a different firm.