Recent market volatility has many investors swept up like Dorthy in the Wizard of Oz with no place to turn to, but Direct Indexing could be the ruby red slippers to take you home or at least mitigate some losses. Direct indexing is where investors own the underlying asset of an index, with a core advantage of being able to add/drop individual equities from their holdings. In these highly volatile times when the stock market and particularly subsectors like tech/crypto have taken a beating, investors can drop stocks because of taste or taxes. Rather than being stuck with the whole distribution of gains or losses you can leverage the failure of an asset by selling it off and for tax-loss harvesting. This generates additional alpha that a mutual fund can’t match, and while ETFs are fairly tax-efficient direct indexing is even more so.

Finsum: A small antidote to the volatility could be realizing some losses for those stocks that might not rebound right away. 

Model portfolios are becoming widely adopted in the financial services industry. Part of what is driving that adoption is the increasing fintech that supports the industry. For example, Parmenion 30% of which is owned by AssetCo, has been able to advance and grow its abilities under the partial acquisition. They have rapidly expanded their offerings in a way they felt bottled previously. They have poured resources and interest into advised models as part of their platform. The company has made it clear that models will be a growing part of their business moving forward. Their experience and track record will be the primary advantages as new competitors enter the industry.

Finsum: Weather its ESG, models, or custom indexing leveraging fintech platforms has reaped huge gains for traditional financial firms the last couple of years. 

Fixed income ETF inflows have faltered over the last year, and new survey data could explain exactly why that has happened. According to the Global ETF Survey in 2022, nearly a third had absolutely no bond ETF exposure. Maybe you would expect investors to hold underlying bonds, but even still this is almost a 10% increase from the prior year's survey. Those surveyed cited a number of reasons as to why the demand has weakened considerably. Primarily it was the macro factors like inflation and rising interest rates which has made investing considerably more risky. However, well over a third of the investors polled said that it was the limited range of options that were available, and almost half said it was two difficult to discern strategy differences.

Finsum: Maybe fixed income needs to simplify the framework if they want to draw in more investors. 

Anyone paying attention has seen financial firms, with the acquisition of fintech companies, race to offer direct indexing options at an increasingly low minimum because of technological innovations. Fidelity has lowered the bar once again by announcing that a $1 per stock investment could be the price of the ticket to one of the most coveted asset classes in Wallstreet. Traditionally, DI was exclusive to the ultra-wealthy because it wasn’t feasible to deliver at low minimums, but with the aid of a monthly fee Fidelity Solo FidFolios will be providing opportunities to many more investors. Their model portfolio selection will be core to the construction and offerings to investors as 13 base models will be available. These range from REITs and fintech all the way to AI and robotics.

Finsum: Could this be a world-beating financial marriage between models and direct indexing that paves the path toward accelerated growth?

The closely watched 10-2 Year Treasury Yield curve has inverted which has historically been the gauge of a recession possibility in the post-war era. This comes after the Fed put forth the highest rate hike in several decades (75bps) in response to the runaway inflation that is affecting many Americans. While the inversion was brief it is the best gauge of a recession and many economists are jumping out in front and calling for a recession. However, the hike was enough to calm bond markets' expectations of future inflation as 5-year break-even rates in TIPS spreads signaled 2.63% inflation which is as close to Q3 last year as we have seen since.

Finsum: There is a slight possibility that this won’t signal a recession because there has been so much inflation risk in 10-year yields, as that comes down investors could still expect above-average expectations at the 2-year horizon.