“Build your own ETF” sounds like a gimmick. In reality, it’s a concise way to describe a serious portfolio engineering approach more formally known as custom indexing or direct indexing as an ETF alternative.
For experienced investors, this isn’t about novelty or DIY bravado. It’s about control: over exposures, taxes, and how success is measured. Done well, a custom indexing strategy can outperform an off-the-shelf ETF on an after-tax basis. Done poorly, it introduces complexity with little to show for it.
This guide explains what building your own ETF actually means, when it makes sense, and how to evaluate whether it’s working.
What “Building Your Own ETF” Actually Means
When you buy a traditional ETF, you’re outsourcing portfolio construction, rebalancing, and tax management to a fund provider. You get simplicity, tight tracking, and low explicit costs—but very little control.
Building your own ETF flips that model.
Instead of holding one fund, you hold the underlying securities directly—weighted to resemble a benchmark index. This is the core of a custom indexing strategy:
- You own individual stocks, not fund shares
- The portfolio targets index-like exposure
- Rebalancing and tax decisions happen at the security level
Functionally, you’re replicating the role of an ETF issuer inside your own account.
To manually build a personal ETF has historically been incredibly time consuming and difficult to manage. Now, with advances in AI-based investing strategies and portfolio automation, a more automated and turnkey approach to direct indexing is possible for everyday investors.
Explore automated ETF creation with Accountable Finance
When Custom Indexing Beats Off-the-Shelf ETFs
Custom indexing doesn’t need to beat ETFs on every dimension to be worthwhile. It needs to win where ETFs are structurally limited.
Control Over Exposures
ETFs offer standardized exposure. Custom indexing allows:
- Factor tilts layered onto a core index
- Intentional over- or underweights
- Constraints that reflect personal or regulatory needs
If your desired portfolio deviates meaningfully from what ETFs offer, building your own ETF can be cleaner than stacking multiple funds.
Control Over Taxes
ETFs are tax-efficient on average. Custom indexing can be tax-efficient by design.
By owning individual securities, investors can harvest losses continuously, manage gains deliberately, and coordinate tax decisions across the entire portfolio.
This is where a direct indexing ETF alternative can be a more tax-efficient investing strategy that is meaningful when investment assets are substantial.
Dive Deeper >> Direct Indexing for Investors: Strategy, Trade-Offs, and When It Beats ETFs
Factor Tilts, Exclusions, and Concentration Control
Building your own ETF allows precision around factor tilts, exclusions, and concentration that ETFs rarely provide.
Factor Tilts Without Replacement
Rather than replacing a broad ETF with a factor ETF, investors can:
- Tilt toward value, momentum, or quality
- Maintain broad market exposure
- Adjust tilts dynamically over time
Exclusions That Don’t Break the Portfolio
Custom indexing supports:
- ESG or values-based exclusions
- Single-stock restrictions
- Employer stock constraints
Unlike ETFs, exclusions don’t require abandoning the index entirely.
Managing Concentration Risk
Investors can cap position sizes, manage mega-cap exposure, or prevent single stocks from dominating returns—something ETFs can’t easily do.
Tax Loss Harvesting Advantages vs ETFs
The most durable advantage of building your own ETF is tax loss harvesting at scale.
- Losses are harvested at the individual security level
- Dispersion creates opportunities even when the index is up
- Losses can offset gains elsewhere in the portfolio
ETFs consolidate gains and losses inside one wrapper. Custom indexing surfaces them.
Over time, harvested losses can accumulate into meaningful carryforwards—improving after-tax outcomes without changing market exposure.
Learn More >> Direct Indexing & Tax Loss Harvesting: How They Work Together — and When It’s Actually Worth It
Tracking Error and Rebalancing Discipline
There are significant risks to self-managing an ETF, namely in managing the increased complexity as well as staying on top of rebalancing and tax-loss harvesting opportunities.
Tracking Error Is a Feature and a Risk
Custom indexing portfolios rarely match an index tick-for-tick. Loss harvesting, exclusions, and tilts introduce deviation.
The goal isn’t zero tracking error—it’s intentional tracking error with a clear rationale.
Rebalancing Requires Discipline
Without rules-based rebalancing, portfolios can drift:
- Factor tilts can become unintended bets
- Harvesting can distort weights
- Risk characteristics can change quietly
Successful custom indexing relies on consistent, repeatable processes and regular monitoring—not ad hoc decisions.
Cost, Complexity, and Minimum Portfolio Size
Building your own ETF is not free. Though you may not be paying ETF fees, there are both time and monetary costs to a direct indexing investment strategy.
Explicit and Implicit Costs
- Trading costs and spreads
- Technology and data requirements
- Time and attention
Portfolio Size Matters
Custom indexing tends to make sense when:
- Portfolio size is large enough to diversify effectively
- A traditional ETF can be bought for as little as few dollars, but direct indexing effectively requires several thousand dollars to adequately diversify holdings.
- Potential tax savings outweigh incremental costs
- The investor values customization and measurement
For smaller portfolios, ETFs often deliver most of the benefit with far less friction.
Measuring Success vs a Benchmark ETF (After Tax)
The most common mistake in custom indexing is evaluating it incorrectly.
Success should be measured:
- Against a relevant benchmark ETF
- On an after-tax basis
- Over multiple years
Pre-tax returns alone are misleading. A custom portfolio can underperform slightly before tax and still win meaningfully after tax.
Without after-tax benchmarking, it’s impossible to tell whether you’ve built a better ETF—or just a more complicated one.
Why Building Your Own ETF Appeals to Active Investors
Custom indexing resonates with investors who want:
- Thoughtful customization, not product constraints
- Smarter tax outcomes, not just low expense ratios
- Quantitative validation, not anecdotes
But it’s not a shortcut. Building your own ETF is portfolio engineering. It requires clarity of intent, disciplined execution, and rigorous measurement.
For serious investors willing to do that work, custom indexing can turn an index from a product you buy into a strategy you control.
👉 Create and evaluate your own custom ETF with Accountable Finance
