Until very recently, direct indexing was simply not an option for the vast majority of investors.  This is because the strategy is quite tedious to execute and could become cost prohibitive in the previous era when commission-free trading and fractional shares were not available.

This is because the strategy requires creating an actual index within an investors’ portfolio. It’s now feasible and quite easy to do due to technological advances. Additionally, the real alpha in the strategy is created through routine tax loss harvesting. 

This is an automated process where the portfolio is regularly scanned to sell off losing positions. Then, these losses can be used to offset capital gains elsewhere in the portfolio. Proceeds from the sold positions are then reinvested into stocks with similar factor scores to the ones that are sold in order to ensure integrity with the underlying index even if the holdings temporarily deviate. 

Clearly, this strategy wouldn’t be tenable without cheap and/or free trading and fractional shares for smaller sums. In the previous era, the high volume of trades would offset any additional returns. Without fractional trading, smaller sums also would not be able to track the underlying index and not be able to invest in higher-priced stocks that comprise large portions of indices. 

Finsum: Direct indexing’s proliferation is only possible due to 2 specific fintech breakthroughs - commission-free trading and fractional shares. 

In Kiplinger’s, Peter J. Klein, CFA and the founder of ALINE Wealth, discusses some downsides of investing in alternatives. Alternative investments include private equity, private credit, real estate, collectibles, etc., and it’s seen a surge of interest especially following its outperformance in 2022 while stocks and bonds saw double-digit losses. Additionally, accessibility has also increased due to regulatory changes and technology.

Over the next 5 years, the global market for alternatives is expected to nearly double from $9.3 trillion to $18.3 trillion. While many are focused on the potential for outperformance and diversification benefits, Klein points out some downsides that investors should consider.

Alternatives come with substantially less liquidity than investments in stocks and bonds which are liquid and transparent. In contrast, alternatives often require money to be locked up for long periods of time with a hefty fee to access it early. Many alternatives also come with ‘gates’ which mean that money can’t be withdrawn once redemptions reach a certain threshold. 

Another consideration is that alternatives often require more complicated tax reporting. For many investors with smaller sums, this complication offsets any benefit in terms of additional returns. Further, there is no track record of alternatives outperforming over longer time frames especially when accounting for the additional fees. Short-term results may be skewed as the asset class outperforms due to the asset class becoming more accessible. 

Finsum: Alternative investments have been gaining in popularity especially after strong performance in 2022. However, there are some drawbacks that should be considered. 

LPL continues to add advisors with its recent addition of 4 advisors from Edward Jones who managed $410 million in assets and a Merril Lynch broker, J. Brendan Wood, with $130 million in client assets. 

Wood is launching a solo practice - Wood Wealth Management - through LPL’s employee channel, Linsco. Previously, he had been ranked as one of the top #100 advisors in Massachusetts and worked as part of Foundation Management Group which managed $654 million in assets. 

Linsco was created to appeal to wirehouse brokers who want more independence and want to build a business. It gives more flexibility but doesn’t burden advisors with administrative tasks. In June, another Merril broker with $315 million in assets moved to Linsco as well as the channel now counts 100 advisors in total.

In addition to Merril Lynch, LPL has had success in luring brokers from Edward Jones. 4 brokers and $400 million in assets moved to LPL’s Strategic Wealth Services unit and will operate as Omnia Wealth Group in Elkhorn, Wisconsin. Strategic Wealth Services offers support for marketing, compliance, and administrative tasks for a fee. 

Prior to the latest move, 5 Edward Jones brokers had moved to LPL already this year. LPL is now the largest independent broker-dealer with 21,000 advisors while Edwards Jones is a full-service brokerage with 18,900 brokers. 

Finsum: LPL Financial is the largest independent broker-dealer, and it continues to lure brokers from more established firms like Merril Lynch and Edwards Jones.

For Advisors’ Edge, Maddie Johnson discusses why fixed income ETFs have experienced strong growth in recent years, and why it should continue in the coming years. ETFs have been around for more than 30 years but have become ubiquitous in the last couple of decades.

Interestingly, the trend began with passive equity ETFs taking market share away from equity mutual funds due to offering lower costs and better returns over longer time periods. In the fixed income world, change was much slower but now we are starting to see fixed income ETFs outpace equity ETFs in terms of inflows. A major factor is that there are more options when it comes to actively managed ETFs. Additionally, investors seem to be favoring fixed income given an uncertain market environment and attractive yields. 

In the first half of the year, fixed income ETFs had inflows of $160.1 billion which dwarfed the $52.8 billion of inflows in fixed income ETFs. A major recipient of inflows have been short-duration bond funds which offer yield close to 5% in many cases. 

If the Fed does indicate that it’s ready to hit the ‘pause’ button rate hikes or actually start cutting then look for long-duration funds to start outperforming as investors look to lock in these higher levels of yield. 

Finsum: Fixed income ETFs have seen the majority of inflows in 2023 due to an uncertain market environment and high levels of yield. 

In a piece for AdvisorHub, advisor transition company - 3xEquity - shared some lessons for advisors from Twitter’s rebrand. While Twitter has been on a strange journey over the last few years and is now known as X, there are some important takeaways for advisors who are starting with a new firm. 

For one, the most important task is to introduce the new brand to existing clients and stakeholders. With this, it’s important to be consistent with the new branding to ensure there is no confusion among your clients. 

For advisors who are considering moving to a new firm, they should ensure that the new firm’s transition team is sufficient enough to handle the workload in order to ease the move. Additionally, an advisors’ time should be spent communicating with clients rather than handling paperwork or back office functions. 

Re-branding is also another consideration for advisors who are selling their firm, especially as many advisors now are choosing a hybrid phased selling model. With this model, advisors may work as employees and are slowly phased out of the new firm to maximize client retention. This can also lead to confusion among clients so it requires constant communication about the transition process.

Finsum: The transition process can be difficult for advisors who are moving to a new firm. Here are some lessons from Twitter’s re-branding for advisors on what to do and what not to do.

Active fixed income has underperformed for the last 4 quarters due to the sharp increase in rates and tightening of spreads. However, the asset class could be poised to outperform as the Fed pauses and offers the best way for investors to take advantage of higher yields according to Sage Advisors Chief Investment Officer Rob Williams. 

Williams sees the Fed’s current rate path as being data dependent. This period could last for several quarters and offers specific advantages for active fixed income given its ability to tap a wider variety of duration, sectors, and risk to generate alpha. 

Eventually, Williams sees the yield curve steepening as the Fed inevitably shifts from ‘pausing’ to cutting. This process is likely to be volatile given the underlying resilience of the economy and labor market, and active fixed income tends to outperform in volatile markets.  

Active managers also have the ability to identify value in the fixed income space to improve return and risk factors. Due to volatility compressing in 2023, spreads have also tightened as well. This means that security selection has a more meaningful impact on returns and risk. 

Finsum: Active fixed income offers specific advantages to investors that are especially relevant if the Fed is pausing rate hikes and remaining ‘data-dependent’. 

In Marketwatch, Christine Idzelis discusses with Blackrock’s Rick Rieder his current thinking about fixed income given the recent selloff in Treasurie. Rieder is the Chief Investment Officer of Fixed Income for Blackrock and also the manager of the Blackrock Flexible Income ETF, its recent active fixed income ETF launch. The fund offers a 7% yield and invests in a mix of government debt, corporate credit, and securitized assets. 

Since inception in late May, the ETF has generated a 1.2% total return. In contrast, popular bond ETFs like the iShares Core U.S. Aggregate Bond ETF and Vanguard Total Bond Market ETF are down about 2% over the same time period. He attributes his outperformance to keeping “interest-rate exposure low” with a duration of 2 years. 

The majority of weakness in the fixed income market in recent weeks has been concentrated in long-duration assets. He believes that active fixed income ETFs offer exposure to areas like mortgage-backed securities and high-yield bonds. Rieder also believes that active fixed income is best suited to navigate the current market environment which offers very attractive yields but performance is likely to be bifurcated as long as rates continue to rise.   

Finsum: Rick Rieder, the CIO of Blackrock Fixed Income and portfolio manager of its active fixed income ETF, shares his thoughts on the current macro environment and benefits of active fixed income.

As the summer ends and fall rolls around, it’s natural to expect a surge in market volatility. This is even more relevant this year given that stocks have enjoyed a period of low volatility and gently rising prices throughout most of the summer despite a variety of challenges such as rising rates, stubborn inflation, and pockets of weakness in the economy.

Further, history shows that periods of sharp increase in rates can often trigger stress in parts of the financial system that can have knock-on effects in the real economy. The most recent example is the crisis in regional banks due to an inverted yield curve which could have negative effects on the flow of credit in the economy.

For ETFTrends, Ben Hernandez discusses how direct indexing benefits from these surges in volatility. Direct indexing differs from traditional investing in funds as it allows investors to re-create an index in their portfolio. 

This allows tax losses to be harvested as losing positions can be sold with the proceeds re-invested into stocks with similar factor scores. Then, these losses can be used to offset gains in other parts of the portfolio, leading to a lower tax bill. 

Finsum: Direct indexing has many benefits but the most impactful in terms of alpha is its ability to generate tax savings for clients during volatile markets. 

REIT stocks are slightly down YTD. On the bright side, yields are at their highest level in decades, defaults have not materially risen and occupancy rates have been stable. However, this has not been substantial enough to offset the headwind from rising rates.

This headwind is only getting more potent with yields on longer-term Treasuries breaking out to new highs which is bearish for the asset class given its embedded leverage and exposure to rates. Higher rates also are impacting demand and leading to lower affordability. 

The most damage is evident in commercial real estate, where REITs are trading close to their lows while REITs with exposure to healthcare, industrial, or residential sectors are performing much better. This is mostly a reflection of a structural change following the pandemic as companies cut back on office space. 

In the event that rates remain at these lofty levels, REIT stocks are likely to underperform. However, the current weakness in the sector could present a long-term opportunity to accumulate REITs that continue to grow their earnings and use the weakness in the sector to add high-quality holdings at attractive prices.

Finsum: REITs are moving lower as Treasury yields break out to new highs. While higher yields are a major headwind, the current selloff is likely to create some attractive opportunities.

Entering 2023, many were expecting a big year for gold due to high inflation, rising recession risk, and considerable amounts of geopolitical turmoil. Yet, this hasn’t come to fruition. Gold prices enjoyed a decent rally in the first-half of the year but has given back the majority of these gains in recent weeks.

The most likely culprit is that real interest rates continue to rise as inflation moderates, but the Federal Reserve continues to hike rates. When real rates are rising, gold becomes less attractive as an investment because it offers no return to inventors. However when real rates are negative and/or falling, gold becomes more attractive to own. Thus, the best combination for gold prices would be a weak economy coupled with high inflation. As long as the economy continues to defy skeptics, a breakout for gold prices is unlikely.

The metal hit an all-time high of $2,078 in March 2022 following Russia’s invasion of Ukraine when geopolitical tensions culminated. It re-tested these levels in March of this year following the crisis in regional banks when many thought the Fed would have to intervene and possibly cut rates to support the banking system. Since then, prices have declined by about 6%. 

Finsum: Gold prices have stagnated following strong performance in the first-half of the year. Currently, prices are likely going to move lower as long as Treasury yields keep chugging higher.