Displaying items by tag: direct indexing

Financial giants are snatching up direct indexing clients as fast as they possibly can, but they need to do more work to solidify their position with investors. Cerulli Associates is predicting direct/custom indexing will grow at a shocking 12% growth in the next five years which will outpace both mutual funds and ETFs for example. Part of what is responsible for that growth is lower exchange costs which make it possible to hold the underlying asset in an index that was previously untenable for anyone outside the ultra-wealthy. In order to fully realize the benefits of a direct indexing fund, directors will have to be like goldilocks of customization but not straying too far from the fundamental index. However, direct indexing is giving managers their best opportunity in years to take back the reins for clients and outperform ETFs and index platforms. Without a doubt tax loss harvesting is the best edge a director will have in customizing a direct index for their clients and it's the necessary part of how to stand out in the crowded space of custom indexing.

FINSUM: Investors should be in an open dialogue as to their clients preferences in diverging from the underlying index when customizing. The ship can steer quickly in the wrong direction.

Morgan Stanley acquired custom indexing provider Parametric Portfolio associates in March and are benefiting greatly from the acquisition. Parametric has developed their existing client base by allowing them to pitch a new set of custom-built portfolios and increased AUM by 50% year over year. These custom indexing tools allow investors at Morgan Stanley to build tailored portfolios to meet ESG or tax objectives. On top of this, it furthers client relationships by allowing a more connected investment strategy and personal experience. Parametric is leading the industry in direct indexing by asset size.

FINSUM: Direct indexing will be an incredibly important tool in order to mitigate all of the tax changes in the new administration.

Envestnet’s CEO told investors that it oversees $49 billion in direct investing assets and that they see this number going higher in the future. Direct investing is a part of a growth area for the company along with other personalized portfolios, tax overlays, and ESG and impact investing. Direct indexing allows investors to hold the underlying assets and then add or drop stocks for offsetting tax purposes or to hit other financial objectives. Other giants in the financial industry such as Vanguard and Franklin Templeton have acquired direct indexing portfolios and many firms are ramping up competition in this space.

FINSUM: Direct investing makes a lot of sense over traditional hard indexing because of the customization and tailoring to your financial needs, but it does usually come at the cost of higher fees.

Direct Indexing is the process of holding the stocks in the weights of the underlying Index, rather than buying an ETF that tracks an index, and this new opportunity is being adopted by financial heavyweight Charles Schwab and will be available to investors. Starting with the large-cap Schwab 1000 Index, S&P Small Cap 600 Index and MSCI KLD 400 Social Index, Schwab will be available to mix and match to customize a portfolio to hit the investor’s exact needs. However, this option won’t be available to just any investor. The indexing platform will require a $100,000 account size. Adoption of direct index investing is one piece of Schwab’s expansion into personal investing, that goes hand-in-hand with environmental, social, and governance investing and other thematic investing.

FINSUM: Schwab is the latest of Vanguard, Fidelity, BlackRock and Morgan Stanley to jump into index investing. However, Schwab’s pricing format is not revealed and its advantages over a low fee ETF are not yet clear.