Because the investor owns the underlying shares, losing positions can be sold individually to realise losses while the overall exposure is maintained with a similar replacement, a process described under tax-loss-harvesting. Inside a pooled fund the same losses are trapped at the fund level.
Customisation is the other draw: excluding an employer's stock to reduce concentration-risk, or screening out categories the investor does not want to own. The cost is complexity, a higher fee than a plain index fund, and many more tax lots to track.
The benefit is largest for taxable accounts with large unrealised gains elsewhere and meaningful dispersion among constituents, and close to zero inside a tax-advantaged-account. Wash-sale rules constrain which replacements are permitted; see wash-sale-rule.
Related: tax-loss-harvesting, separately-managed-account, wash-sale-rule, tax-advantaged-account, concentration-risk, index-fund