Use existing ETFs to fund or grow a direct index

Previously on Frec, if you wanted to fund or grow a direct index with ETFs, we’d sell the ETFs first and use the proceeds. Now, you can use eligible ETFs to partially fund or grow a direct index, while keeping as many of your original ETF shares as possible.

This update makes it much easier to meet strategy minimums using assets you already have, unlocks tax loss harvesting opportunities you might miss by just holding the ETF, and lets you consolidate positions tax-efficiently. 

(Note: This update is only available for classic and long short direct indices, not Diversify.)

How it works

We updated our risk model to analyze the market exposure inside your ETFs. Instead of starting from scratch, we’ll incorporate your existing ETF that has overlapping exposure with the index you select. 

When setting up or adding to long short strategies, the optimizer takes into account the ETF’s market exposure when building or adjusting the extensions. For example, if your contributed ETF is heavily exposed to tech, the rest of your portfolio is designed to help offset that concentration.

While our primary goal is to retain your shares, eligible ETFs may still be partially sold if holding the full position would cause over-concentration.

Rules and limitations

To keep your portfolio balanced and closely tracking its benchmark, we have a couple of limitations on funding or contributing with ETFs.

ETFs can make up to 70% of your direct index, and no single ETF can make up more than 50% of the total portfolio value. When funding a new direct index, the remaining balance can be funded with cash, stocks, or a mix of both.

Here’s what that looks like in practice: for a $500,000 classic or long short direct index, you could fund it with $200,000 of SPY, $150,000 of QQQ, and $150,000 in cash.

If your contributed holdings exceed these caps, we’ll show you a current breakdown of any estimated capital gains at that time. As with any tax-related estimate, we recommend consulting a qualified tax advisor about how this may affect your specific tax situation.

Supported and unsupported ETFs

See below for all the supported ETFs. Fixed-income and leveraged ETFs, such as TQQQ, aren’t supported yet. If you fund or contribute to a direct index using an unsupported ETF, we’ll sell it and reinvest the proceeds into that direct index.

Get started

You can start a new direct index or contribute to an existing one on both mobile and web. To start a new direct index, log into your account, go to the Invest page, and choose a classic or long short direct indexing portfolio. Select the ETFs or stocks you’d like to fund with, including specific tax lots if you choose.

To move ETFs into an existing direct index, select the index from the Overview page, click Transfer, then click Move stocks. Select the ETF(s) you’d like to move, including specific tax lots if you choose.

If you don’t already have stocks on Frec, you’ll need to transfer them in first, which takes about 4–6 business days. Before you confirm, we’ll show you any current estimated taxable gains, along with a breakdown of how much of your ETF will be incorporated versus sold if applicable.

---

Investing involves risk, including the risk of loss. Long short strategies increase risk through margin borrowing and short positions. Tax-related estimates in this article are hypothetical, are not tax advice, and depend on your individual tax circumstances. Please consult a qualified tax advisor about your specific situation.