Editor: Jessica L. Jeane, J.D.

“How can an investment lose money yet still make money?” was my first thought after meeting with a wealth adviser colleague to discuss tax–advantaged investments. These were investments designed to generate capital losses yet still deliver a positive investment return. It seemed far–fetched — my CPA brain was skeptical. Despite my best efforts to poke a hole in the strategy, however, I could not do so.

What this wealth adviser was pitching was not a brand–new idea. The strategy, direct indexing, emerged in the 1990s as a way for affluent investors to own the individual securities of an index fund directly, thus enabling efficient harvesting of tax losses. What is new is that…