Wealthsimple's direct indexing brings a tax-saving investing strategy to a wider group of investors, but the number likely to benefit from it is still small.
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Wealthsimple, the country’s largest and most aggressive fintech challenger to the big six banks, has been steadily rolling out new features over the past year, each aimed at giving retail investors access to tools that were once reserved for institutions or high-net-worth clients.
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Back in December 2025, I looked at one of those launches: physical gold trading. The conclusion was “it depends.” If your goal is portfolio diversification, gold funds are still the more efficient option. If physically owning gold matters to you, then paying a fee to have it delivered could make sense.
Wealthsimple has not stopped there. One of its more recent additions is direct indexing, a phenomenon that has gained traction in the United States, particularly in advisor-managed accounts. It allows investors to replicate an index by holding the individual securities directly, rather than through an exchange-traded fund (ETF).
Until recently in Canada, this has largely been out of reach for everyday investors, which makes its introduction on a retail-focused platform notable. At the same time, the list of available features continues to grow. Beyond gold and direct indexing, investors are being offered access to private equity, private credit, cryptocurrency, and portfolio lines of credit.
But the pace of innovation raises a question: just because you can access these strategies, does that mean you should? Here is what you need to know about Wealthsimple’s direct indexing, how it works, and whether it makes sense for your portfolio.
What is direct indexing?
An index is not an investment you can buy; it’s a set of rules that determines which securities are included in a group and how much weight each one receives. You can track how an index has performed over time and do back tests but, on its own, it is just a mathematical construct.
To actually invest in an index, you need a vehicle that implements those rules. Traditionally, that has meant buying an index ETF or mutual fund. You give your money to a fund provider, and they go out and purchase the underlying securities. In return, you receive units of the fund, which represent a proportional stake in all the holdings.
Direct indexing takes a different approach. Instead of pooling your money with other investors inside a fund, your portfolio holds the individual stocks directly. With the help of technology, a provider builds and maintains a basket of securities in your account that mirrors a chosen index.
In practice, the experience is still hands-off. You are not manually buying hundreds of stocks yourself. You give your capital to the provider—in this case, Wealthsimple—and their system handles the trading, rebalancing, and ongoing management.
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Wealthsimple’s offering is based on the Morningstar US Target Market Exposure Index and the Morningstar Canada Domestic Index. While the names differ, the end result is similar. You are getting broad exposure to the U.S. and Canadian equity markets, but through direct ownership of the individual securities, rather than through a fund.
The benefits of direct indexing
Before getting into the advantages, it is important to be clear about who this is for. Direct indexing is designed for investors using a non-registered, taxable brokerage account. Wealthsimple’s offering is not available in registered accounts such as a tax-free savings account (TFSA), registered retirement savings plan (RRSP), or first home savings account (FHSA). That limitation exists because the primary benefit of direct indexing is tax-loss harvesting.
In Canada, when you sell a security for less than what you paid for it, you realize a capital loss. That loss can be used to offset capital gains, reducing the amount of tax you owe. If you do not have gains in the current year, you can carry those losses back up to three years or forward indefinitely to offset gains in the future. Over time, this can become a meaningful way to improve after-tax returns.
There is an important restriction called the superficial loss rule. If you sell a security at a loss and then repurchase the same or a “substantially identical” security within 30 days before or after the sale, the Canada Revenue Agency (CRA) denies the loss for tax purposes. In other words, you cannot sell a stock, claim the loss, and immediately buy it back.
Tax-loss harvesting works around this by maintaining similar market exposure without violating that rule. For example, if you sold shares of BCE Inc. at a loss, you could replace them with Telus Corp. The same idea applies in the U.S., such as selling Visa and buying Mastercard. Both companies operate in the same industry, have similar business models, and are exposed to similar economic factors, but they are not considered identical securities.
Direct indexing takes this concept and applies it at scale. Within a broad index, there are always winners and losers at any given time. Even when the overall portfolio is up, that performance is often driven by a relatively small number of stocks, while others may still be trading below their purchase price.
Direct indexing platforms can systematically identify those positions, sell them to realize losses, and reinvest the proceeds into similar securities that maintain the portfolio’s overall exposure. This process can be repeated throughout the year, creating a steady stream of realized losses that can be used to offset gains elsewhere in your portfolio. Wealthsimple refers to the benefit as “tax alpha” and suggests it can add up to about 0.5% in additional after-tax return over time.
The fine print you need to watch out for
Tax-loss harvesting is something experienced advisors have been doing for years, particularly in discretionary accounts where they have flexibility to trade individual securities. In that sense, Wealthsimple is bringing an institutional practice to retail investors. That said, the offering is not as simple as it first appears. There are a few things investors should understand before committing to direct indexing.
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One feature Wealthsimple highlights is customization. Investors can remove individual companies from the index based on personal preferences. If you do not want exposure to Tesla, for example, you can exclude it. If you want to avoid fossil fuels, you can remove energy companies from the index.
There is flexibility here, but it cuts both ways. Indexing works because it is rules-based and comprehensive. You own the market as it is. Once you start removing pieces, you introduce discretion. That opens the door to tinkering, which can quietly undermine long-term results. Small changes can compound into meaningful deviations from the benchmark, called tracking error.
The second consideration is currency. Wealthsimple does not currently offer U.S. dollar accounts for direct indexing. You will need to convert Canadian dollars into U.S. dollars. Wealthsimple applies a reduced corporate FX spread of 0.05%, which is lower than its standard rate, but it is still a cost. On a $10,000 investment, that is about $5 up front.
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The larger issue is that this conversion does not happen just once. Dividends from U.S. stocks are paid in U.S. dollars, converted back into Canadian dollars at a higher 0.4% rate, and then converted again if reinvested. Over time, those repeated conversions create a small but persistent drag.
The third point is how returns are presented. Wealthsimple highlights that the Morningstar US Target Market Exposure Index has delivered a 14.3% average annual return over the past 10 years. While they include the standard disclaimer about past performance, it is important to put that number in context. The last decade has been an unusually strong period for large-cap U.S. equities. By comparison, a longer-term view tells a different story. Using the SPDR S&P 500 ETF Trust (SPY), which has data going back to 1993, as a proxy, the U.S. market has returned closer to 10.5% annualized over time. A 14% annualized return is possible over certain periods, but it is not a baseline expectation.
Finally, direct indexing is not the only way to implement tax-loss harvesting. It can still be done with low-cost ETFs, albeit with fewer individual positions to work with. For example, if you hold the Vanguard S&P 500 Index ETF (VFV) and it is trading below your cost basis, you could potentially sell it to realize a loss and replace it with the iShares Core S&P U.S. Total Market Index ETF (XUU). The benchmarks are different, but both are market-cap-weighted U.S. equity exposures with many overlapping holdings. That allows you to maintain similar exposure while staying within the rules.
Direct indexing scales that process across hundreds of securities. That is the advantage. But it is worth remembering that the underlying concept is not new, and in simpler cases, it can be replicated without the added complexity or fees.
The final word on direct indexing
More choice for Canadian investors is generally a good thing, especially when it comes with transparent pricing and accessible minimums. On that front, Wealthsimple’s direct indexing offering is competitive. The 0.15% annual fee is in line with many index ETFs, and the $1,000 minimum lowers the barrier to entry significantly. From an operational standpoint, reporting is also straightforward, with transactions captured on a T5008 tax slip and available for autofill through the Canada Revenue Agency.
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The bigger question is how many investors will actually benefit from it, as most Canadian investors still have significant room for tax-advantaged contributions to registered accounts. Between the annual TFSA limits, the $40,000 lifetime FHSA limit, and contributions of up to 18% of earned income for RRSPs, there is already a large amount of tax-sheltered space available. Add in registered education savings plans (RESPs) for families and workplace pension plans, and for many investors, the priority is still filling those accounts first.
That naturally limits the use case for direct indexing. Its main advantage, tax-loss harvesting, only applies in non-registered accounts. For investors who are still building toward maximizing contributions to registered accounts, the benefit is largely irrelevant.
In practice, this ends up being a more niche solution. It may make sense for investors who have already maxed out all available registered accounts, are consistently investing in a taxable account, and are comfortable maintaining a fully equity-based portfolio. For that group, direct indexing could be worthwhile. For everyone else, simpler approaches using low-cost ETFs inside registered accounts will likely remain the more practical path.
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Tony Dong has been published on USA Today, U.S. News & World Report, TheStreet and more. He is also the lead ETF analyst for ETF Central, and he holds The ETF Institute’s Certified ETF Advisor designation.
