Displaying items by tag: direct indexing

Ben Hammer, the Head of Client Development for Vanguard, recently spoke to an audience of financial advisors about direct indexing. The asset manager clearly sees it as a major growth avenue especially as most advisors and investors remain unfamiliar with the concept and its benefits.

According to surveys of investors and advisors, the most appealing part of direct indexing is the potential tax savings which is not possible with traditional passive investing. By recreating indexes within an individual investors’ account, losing positions can be sold while stocks with similar factor scores are added in substitution to maintain consistency with the benchmark. Another benefit is customization as investors can adjust a portfolio’s holding based on their own situation, values, or preferences. 

Hammer also stressed that direct indexing wouldn’t be available to a wide swathe of the investing universe because of its cost and complexity. However, these issues have been solved by technology as trading costs have plummeted, while software handles the regular scans for tax loss harvesting opportunities and rebalancing.

Still, direct indexing is probably not necessary for most investors. It can be the perfect solution for those who want more tax savings and customization while retaining the benefits of passive investing. 

Finsum: At a recent conference for financial advisors, Vanguard’s Ben Hammer spoke about the evolution of direct indexing and its growth prospects.

An informed consumer is an…. Yep; you get the idea

That brings us to direct indexing, which yields a host of benefits for investors, according to avaloninvest.com. By toting a firm grasp of directing indexing’s concept, what can investors do? Why, make informed decisions about their portfolios and the most of their returns, that’s what.

Meantime, preferences and goals are always nice and with direct indexing, investors can customize their investments based on both of those elements. Not only that, investors can leverage direct indexing to generate exposure to specific companies within an index. That can come in especially handy among investors who believe deeply in specific companies or sectors.

Investors are opting more and more for direct indexing to spark customized portfolios, according to etftrends.com.

Delving a bit deeper, with direct indexing accounts, such as, for example, Vanguard Personalized Indexing, which offers screens and tilts. They allow advisors to customize the portfolios of their clients, not to mention positions advisors – on the behalf of their clients -- to request custom options.

“You can help clients express environmental, social, and governance (ESG) or socially responsible investing (SRI) preferences,” according to Vanguard. “You can tilt their portfolios toward stocks with certain characteristics like momentum or value, known as factors.”

In the wealth management arena, direct indexing is one of the fastest growing areas and presents a unique opportunity for investors and advisors. Demand for these services is likely to grow due to more awareness of the benefits, desire to lower tax bills, lower costs, and easier implementation.

According to Cerulli Associates, direct indexing assets under management (AUM) are likely to grow at a faster rate than traditional categories like ETFs, mutual funds, and SMAs over the next five years and reach over $1 trillion by the end of the decade. Despite these bullish trends, less than 20% of advisors are familiar with the strategy and recommend it to clients. 

For investors, the biggest appeal of direct indexing is the potential to lower the tax bill and use harvested losses to offset gains in other parts of the portfolio. Continued adoption and awareness at the investor and advisor level are likely to be the biggest growth drivers over the next few years.

Direct indexing is a form of passive investing except investors are able to access the increased customization and tax loss harvesting benefits of active investing. This is done by recreating an index in a personal portfolio with appropriate adjustments to account for an individual’s situation or financial goals. 

Finsum: Direct indexing assets under management is on pace to exceed $1 trillion by the end of the decade. Here are some of the major growth drivers.

VettaFi announced that it would be acquiring EQM Indexes, a provider of custom thematic indexing specialists. It marks VettaFi’s second acquisition in the space as the indexing and ETF data provider continues increasing the amount and quality of offerings for asset managers. In April, it acquired ROBO Global Index suites.

EQM uses a quantitative approach to construct customized, niche indices for industries like e-commerce, rare earths, block chain technology, etc. Most of its customers are advisors and wealth managers who are based in North America, Europe, or Asia. 

Following the completion of the deal, VettaFi will have more than 300 indexes that comprise $19 billion in assets including ETFs and direct indexing products. The firm was founded in 2022 through a merger of various entities in the ETF data and indexing space.

Clearly, the firm believes that direct indexing has more room for growth. According to Brian Coco, VettaFi’s head of Index Products, “A great investment idea can often remain just that: an idea. But with a well-constructed index, great investment ideas can become great investments. Building custom indexes is something at which EQM has long excelled, and we are very excited to add EQM’s expertise to our index offerings.”

Finsum: VettaFi announced the acquisition of EQM Indexes, a provider of custom indexing solutions. It marks a continuation of the firm’s investment in the direct indexing space.

For Vettafi’s ETFTrends, James Comtois discusses some of the key advantages of direct indexing for investors, and why the category is expected to continue growing at a healthy clip over the next decade. In essence, it’s become increasingly evident over the past decade that investing passively and consistently in low-cost, diversified funds is the key to outperformance. Currently, there is $260 billion in assets managed via direct indexing with this figure expected to exceed $500 billion over the next decade. 

At the same time, society continues to evolve in a manner that serves consumers with content, products, and services that are customized to their taste. Concurrently, there has been technological innovation in the financial space that has resulted in drastic declines in the cost of stock trading and money management. 

Direct indexing is at the intersection of all these trends. It captures the best parts of passive index investing as it recreates an index in an investors’ account with some tweaks if necessary to reflect one’s personal values and beliefs or unique financial situation. It utilizes technological innovations to scan for tax loss harvesting opportunities which then can be used to lower an investors’ tax bill. Due to this factor, direct indexing strategies outperform especially in more volatile environments. 

Finsum: Direct indexing is one of the fastest growing areas in wealth management. Here are some factors behind its increasing popularity.