ETFs vs Separately Managed Accounts

ETFs vs Separately Managed Accounts: Which Is Better?

Comparisons7 min readUpdated March 17, 2026

Key Takeaways

✓SMAs provide individual stock ownership with full customization and personalized tax management.
✓ETFs are simpler, cheaper, and more accessible — ideal for most investors.
✓SMAs shine for high-net-worth investors who benefit from direct indexing and tax-loss harvesting.
✓The minimum for SMAs is typically $100,000-$250,000, making them inaccessible to most retail investors.

For investors with larger portfolios, separately managed accounts (SMAs) offer a compelling alternative to ETFs. Direct indexing — the most popular SMA strategy — has attracted billions in assets as technology makes it accessible to a broader audience.

How SMAs Work

Instead of buying an ETF like VOO that holds 500 stocks in a single fund, a direct indexing SMA buys the individual stocks of the S&P 500 directly in your account. You own the actual shares of Apple, Microsoft, and every other index constituent. A portfolio manager (usually an algorithm) manages the positions to track the index.

The Tax Advantage

This is where SMAs shine. Because you own individual stocks, you can sell specific losers for tax losses while maintaining overall index exposure. On any given day, some S&P 500 stocks are down from their purchase price. The SMA sells those for losses, immediately buys similar-but-not-identical stocks to maintain exposure, and harvests the tax benefit.

How Much Is the Tax Benefit Worth?

Studies suggest direct indexing tax-loss harvesting can add 1-2% per year in after-tax alpha for high-tax-bracket investors, especially in the early years of a portfolio. The benefit diminishes over time as cost bases adjust. For investors in the 37% federal bracket with large taxable portfolios, this can easily justify the SMA's higher management fee.

Customization

SMAs allow you to exclude specific companies or sectors. Want S&P 500 exposure but without tobacco, weapons, or fossil fuels? An SMA can do that while ETFs cannot (unless you find a specific ESG-screened ETF). You can also overweight sectors where you have positive views or underweight those where you already have exposure through employer stock.

When ETFs Win

For simplicity: one trade buys the whole index. For small accounts: SMAs need $50,000+ to hold enough stocks for adequate tracking. For retirement accounts: no tax benefit to direct indexing inside an IRA. For cost: ETFs charge 0.03% while SMAs typically charge 0.15-0.40%. Explore more at our education center.

Frequently Asked Questions

What is direct indexing?

Direct indexing is a type of SMA that holds individual stocks to replicate an index. Instead of buying VOO, you buy all 500 S&P 500 stocks individually. This allows personalized tax-loss harvesting (selling individual losers while maintaining index exposure) and customization (excluding companies or sectors you want to avoid).

When is an SMA worth the extra cost?

SMAs typically cost 0.15-0.40% versus 0.03-0.10% for comparable ETFs. The extra cost may be justified for investors with large taxable portfolios (over $500,000) where personalized tax-loss harvesting generates enough tax savings to offset the fees. For most investors, the simplicity and lower cost of ETFs wins.

Are SMAs becoming more accessible?

Yes. Companies like Wealthfront, Schwab, and Fidelity have lowered SMA minimums to $1-$100,000 through technology-driven direct indexing platforms. As fractional share technology improves, direct indexing is becoming available to smaller accounts, potentially disrupting the ETF market for tax-sensitive investors.