For ETFTrends, James Comtois discusses the pros and cons of direct indexing as opposed to the traditional approach of investing in open-ended funds such as ETFs and mutual funds. Currently, direct indexing is in the midst of a surge in adoption due to technology and providers making it available to a wider swathe of investors beyond only those with a high net-worth. Another factor is increasing familiarity from advisors and clients.

Despite these positive trends, it’s still warped by traditional investing in ETFs and mutual funds which is how the vast bulk of advisors and investors manage their portfolios. While both methods are intended to track the performance of an underlying benchmark, the key difference is that with direct indexing, the investors actually buy the individual holdings of an index.   

This means that investors have an opportunity for more customization based on a clients’ values or personal situation. For instance, a client may feel strongly against investing in companies that manufacture firearms, so these stocks can be excluded and replaced with different stocks that have similar factor scores. 

Another benefit is that direct indexing can lead to tax-loss harvesting opportunities which aren’t available with investing in close-ended funds. Losing positions can be sold and offset gains from other positions, leading to a lower tax bill. This has been proven to result in increased alpha and better performance especially in years with more volatility.

Finsum: Direct indexing is a recent innovation. For certain investors, it is a better option than investing in close-ended funds due to tax-loss harvesting and the ability to customize portfolios.

In an article for Investopedia, Roger Wohlner shares some tips from financial advisors on how to convert prospects into clients. In theory, clients simply want an advisor who offers them insight and a plan to achieve their financial goals. In reality, this requires building trust and demonstrating expertise around these topics.

However, the ultimate challenge for advisors is that this must be achieved in a limited time in a competitive atmosphere with so many advisors vying for your clients as well. Wohler recommends that you start off by asking clients about their goals and tolerance for risk in order to build a rapport. One suggestion is to send a small questionnaire to prospects which can help you better communicate with them. He also recommends doing some research online to get a better understanding of who they are. 

Another approach is to ask open-ended questions which will force the client to reveal more about themselves and their personality. It also will give you an opportunity to pursue topics that are more important and meaningful to your client, leading to a more authentic connection. Finally, advisors should try to dig deeper into a client’s motivations and understand their values in order to build trust and form a deeper relationship. Ultimately, it comes down to the client believing that you have their best interests in mind. 

Finsum: Financial advisors need to consistently convert prospects into clients. It can be challenging given a limited amount of time to form connections, but here are some tips. 

Direct indexing is increasingly becoming a core offering for many financial advisors. Maybe the best indication of its growth is that there have been 12 major acquisitions by wealth management firms of direct indexing providers over the past couple of years.

Although its ubiquity and availability to all sorts of investors is a recent development, direct indexing has been around for many years albeit only for high-net-worth investors. In a recent SmartAsset interview of Vestmark’s SVP of Direct Indexing, Dave Gordon, he discussed what financial advisors need to know, and why wealth management firms are so bullish on the trend. 

Gordon cites the growth of direct indexing due to clients demanding more customization and lower tax bills while wanting to retain the benefits of low-cost index investing. Direct indexing is a way for clients to have their cake and eat it as well due to technology which is making it possible for firms to offer these services to all types of clients. 

However, there are some differences in terms of direct indexing offerings and approaches. For instance, some direct indexing providers will rebalance losing positions into sector or index ETFs for a temporary period to maintain factor scores and then re-invest in the same securities while others will choose to invest in different securities with similar factor scores. 

Overall, he believes that direct indexing is more about data and technology than it is about securities and investing. Therefore, he believes in finding the providers with the best platform and resources.

Finsum: Direct indexing is here to stay, and wealth managers are betting big on the trend. Here are some important things for advisors to understand. 

Cerulli Associates conducted a survey of ETF issuers which revealed some interesting findings. Already we are seeing fixed income ETFs gaining market share and seeing a surge of inflows due to higher yields and an uncertain economic outlook, but issuers anticipate fixed income ETFs to continue to outpace equity ETFs in coming years.

Within the fixed income ETF universe, they are particularly bullish on active fixed income. This is different from equities where passive funds dominate active in terms of inflows. But, active fixed income funds have a better track record of outperformance. Further, they are able to take advantage of more opportunities in terms of duration and credit quality as compared to passive fixed income funds, leading to better performance. 

According to the survey, issuers expect growth in fixed income ETFs to be driven by institutional advisors and increased familiarity from financial advisors. Based on the findings, Cerulli recommends firms interested in active fixed income products to look for categories with few competitors to offer funds with low fees and attractive pricing. The firm also believes that many fixed income ETF issuers are failing to differentiate their product.

Finsum: Cerulli Associates conducted a survey of ETF issuers and came out with some interesting findings regarding passive and active fixed income funds.

What scent are they picking up on? The lay out: they want to leverage climbing interest rates, which are tugging the total in MMFs past $5tn. That said, many members of that pack were ready to segue into fixed income – when investors felt gob smack sure that yields would sidestep taking a hit by additional action on the Fed’s part, said Blackrock, according to ft.com.

“There is finally income to be earned in the fixed income market and we are expecting a resurgence in demand,” said Rob Kapito, president.* “There are trillions . . . that are ready, when people feel rates have peaked, to flood the market and we need to position ourselves to capture that.”

Like a boxer holding his own despite absorbing more than his share of a pummeling, while the U.S. economy continues to hold tough, when it comes to core fixed income, the macro outlook’s looking up, according to sageadvisory.com.

Over the upcoming quarters, a cocktail of appealing yield carry and escalating returns rates skews returns north.