While there is a difference in opinions as to how much direct indexing will take market share away from ETFs, there is no doubt that the strategy is growing. In fact, personalized portfolios in general are starting to really take shape. A big reason for this is that volatility is expected to continue next year and many investors want more control over their portfolios. While direct indexing lets investors cherry-pick which stocks to buy in a benchmark index, Edward Jones recently announced that it is providing advisors with a new and more personalized investing model for clients using ETFs and mutual funds. According to documents filed at the SEC, the personalized research models will consider client specifics such as existing assets, potential capital gains and losses, and the characteristics of the overall portfolio. Edward Jones is initially introducing these models on a limited basis. According to Scott Smith, director of advice relationships at Cerulli Associates, the personalized research models exemplify an industry trend toward personalization. He stated, “We’re seeing this across the industry, from direct indexing, where you’re knocking out individual securities, to this, where you’re tilting the portfolio. It’s all about using scalable technology to offer better client solutions.”

Finsum:As part of the trend towards personalized portfolios, Edward Jones recently announced that it will offer personalized research models using mutual funds and ETFs.

While ESG has continued to come under fire from both politicians and regulators, ESG fund assets have continued to grow. In fact, sustainable fund assets grew 0.84% through November, which is better than the 1.1% decline for all funds, according to Morningstar. However, the performance of these funds has not been great; but that's not due to political or regulatory pressure. According to analysts, the reason that ESG funds have underperformed this year is that they missed out on the best performing sector this year, which was energy. ESG funds typically don’t hold stocks of oil companies such as ExxonMobil and Chevron that have performed so well this year. According to Morningstar, the average large-cap stock ESG fund has lost nearly 20% through Dec. 21st. That’s about 2.4% worse than the S&P 500 Index. The question is, will that continue into 2023? The answer depends on whether oil companies will continue to outperform. Energy strategists differ in their opinions. Morningstar energy strategist Stephen Ellis thinks it’s unlikely, since “we see the stocks as fairly valued to expensive,” while Fidelity portfolio manager Maurice Fitzmaurice wrote recently “that oil and gas demand should keep growing as effects of the Covid pandemic pass, while lost supplies from Russia prod oil prices to rise.”

Finsum:The performance of ESG funds next year will likely depend on whether oil companies will continue to outperform.

LPL Financial recently announced that it has appointed Garrett Fish as Senior Vice President and head of Model Portfolio Management to the firm’s investment research team. In this new role, Fish will lead LPL’s investment model portfolio function, leveraging his years of active portfolio management experience to guide the firm’s model management, which includes directing the investment process and communicating with advisors. Fish will also sit on the firm’s Strategic & Tactical Asset Allocation Committee, a body responsible for the multi-asset, capital market view of LPL. He comes to LPL from J.P. Morgan Asset Management, where he spent nearly two decades as an industry-recognized fund manager leading a variety of investment vehicles for institutional and wealth management. He has managed against large-cap equity, multi-asset, and sustainable mandates during his career. LPL’s Chief Investment Officer Marc Zabicki, had this to say as part of the announcement. “Garrett’s extensive active portfolio management experience, including his international purview, will deepen our investment model management capabilities for the benefit of LPL advisors and their clients. As he joins LPL’s seasoned team of research professionals, his background and experience will also be brought to bear across our entire organization as we work collectively to provide the expertise, rigorous analysis, and valued insights on which advisors and their clients can rely.”

Finsum:LPL bolstered its research team with the appointment of Garrett Fish as Head of Model Portfolio Management.

Direct indexing has been all the rage this year with many researchers predicting it will be the "next big thing" in investing. For instance, a few weeks ago, a report from Cerulli Associates estimated that direct indexing is poised to reach more than $800 billion in assets by 2026. But not all research firms share this sentiment. According to a recent study by asset management research firm Blackwater Search & Advisory, direct indexing is a “niche service that mostly benefits specific high-net-worth investors.” The firm believes that without a wide range of investors, the growth of direct indexing may not be as large as previously thought. According to the report, “Direct indexing is not necessarily the best option for everyone. Not everyone needs or wants the degree of customization that direct indexing offers, and the variety of funds already existing on the market is more than enough to craft interesting portfolios.” Many pundits talked about direct indexing as an “ETF Killer” due to greater personalization and tax advantages. However, ETFs offer a broad range of funds that appeal to a much wider number of investors. So, while direct indexing may continue to grow its market share, it appears that it isn’t the “ETF Killer” it was once projected to be.

Finsum:Based on the results of a recent study, direct indexing may not see as much growth as previously thought due to the strategy mainly benefiting affluent investors.

If DataTrek Research is correct, we can’t expect a new bull market to commence until volatility declines. The research firm said that volatility isn’t expected to decline until two things happen. The first is the Federal Reserve stopping its interest rate hikes and the second is more clarity on corporate earnings expectations as we head into a potential recession next year. The firm believes that if investors can gauge those two factors, then they can capitalize on large stock market returns. They listed the S&P 500's 28% gain in 2003 after the dot-com bubble, the 26% gain in 2009 after the Financial Crisis, and the 61% surge from the COVID-19 low until the end of 2020 as examples. DataTrek co-founder Nicholas Colas stated, "For volatility to structurally decline and drive those high returns, investors need to have growing confidence they know how corporate earnings will develop. This means they must have a handle on monetary/fiscal policy." At present, investors are not sure about those factors. The Fed recently surprised the market when it indicated that it will likely raise rates by another 75 basis points next year and leave them higher for longer. In addition, analyst earnings estimates are all over the place.

Finsum:According to DataTrek Research, investors shouldn’t expect a new bull market in stocks until the Fed stops rising rates and there is more clarity on earnings expectations.