Displaying items by tag: direct indexing

Direct indexing is an investment strategy where investors own the underlying components of the index, and is rapidly widening in popularity. The full potential may yet to be unleashed however because the strategy could develop as a way to increase charitable contributions. Custom indexing could be used as a means to increase charitable flexibility by gifting stocks or bonds that couldn’t be traded in a comparable ETF. In addition to giving for charity investors could select stocks or bonds that have exhibited losses in order to offset the taxable amounts. This benefit could be double-sided, because charitable contributions reduce tax burden as well. A financial advisor in conjunction with a CPA could harness the full power of direct indexing to maximize investor alpha.

Finsum: While deciding between cash and equity charitable givings is difficult, direct indexing adds a whole new dimension to charitable giving that could unlock new potential.

Direct Indexing is being touted as the best way to generate tax alpha in a portfolio but is it all that it's cracked up to be? Experts say it has limits and diminishing marginal returns over time because as stocks are dropped, replacements with a lower cost basis will be more expensive to unload later on. Moreover one of the less talked about aspects is that as opportunities narrow as stock is unloaded there is less upside to growth opportunities as the portfolio is smaller. Investors should look to capitalize on direct indexing as they offload specific accounts for inheritance and retirement which is a relatively more minor portion of the portfolio.

Finsum: There may be a shift from custom indexing as a primary ESG focus if it fails to deliver tax alpha and is better suited to dropping greenwashers.

Charles Schwab, Vanguard, Fidelity, BlackRock, Morgan Stanley, and others are all launching direct indexing products and trying to rapidly spread the word, but are they actually right for as many people as they are targeting? They promise to be customizable, generate tax alpha, and are professionally managed. The most significant edge is definitely tax advantage, but its benefits hardly offset the energy and expense for the average consumer. However, for more wealthy individuals with large amounts of capital gains, it could be worth it. Specifically for very high short-term gains which are generated from hedge funds as an example. Here direct indexing has its most significant benefit.

Finsum: While companies are racing to create smaller minimums chances are the tax effect might not matter for those individuals, particularly with their lower flexibility, but for higher net worth clients it could be worth it. 

Financial companies are rushing to deliver low initial investment direct indexing products to investors, but is DI here to stay? The benefits of custom indexing are obvious: It gives ESG investors an opportunity to punish the greenwashers of their own volition, and optimizers a chance to gain tax alpha easily. However, this isn’t free; investors usually pay much higher fees than traditional ESG funds and the minimum investments are usually high. For the few funds without high initial investments, investors get very little if any flexibility in dropping assets from their portfolio. Now they aren’t an ‘active- wolf’ in sheep's clothing, but those are real drawbacks investors should consider.  In the long run, we will see a combination of lower fees with more accessibility as competitors enter the market, and direct indexing could be here to stay.  

Finsum: Direct indexing isn’t for everyone…for now, but as fees shrink, and minimums drop more investors should consider adding them to their portfolio.