Displaying items by tag: custom indexing

ETFs remain a favorite for investors due to their diversification and tax efficiency, making them easy additions to retirement portfolios. However, direct indexing is an increasingly attractive strategy, allowing investors to hold individual stocks that mirror an index and personalize holdings.

This approach enables adjustments for specific preferences, such as excluding certain sectors, while also offering tax advantages through targeted loss harvesting.

Direct indexing can lower tax liability by selling underperforming stocks to offset gains, a flexibility that ETFs don’t provide. Costs have decreased, making direct indexing more accessible and competitive with ETFs. 

Finsum: A combination of direct indexing and ETFs could form a well-rounded balance for customization and tax needs

Recent research from FTSE Russell reveals that direct indexing is on the verge of rapid growth among U.S. investment advisors. Currently, only 21% of advisors are using direct indexing, but nearly half plan to adopt it in the next 1 to 5 years. 

This method enables advisors to craft highly personalized portfolios for clients, addressing both tax efficiency and the need for customization. Direct indexing is particularly valuable in managing concentration risk, especially in large-cap equities, where certain companies dominate traditional indexes. 

With the rise of fractional share ownership, building tailored portfolios has become more accessible for investors with smaller amounts of capital. As the benefits of direct indexing—such as tax advantages and diversification—become more widely known, its adoption among advisors is expected to accelerate. 

Finsum: The expanding technology and investment solutions in this space position direct indexing to become a key tool for advisors seeking innovative ways to serve their clients.

The Bloomberg Compact Index Series offers a novel approach to index investing by balancing exposure across all market sectors with a limited number of securities. Unlike traditional market-cap-weighted indices, these indices minimize concentration risk by equally weighting the two largest stocks from each sector, resulting in reduced volatility and higher risk-adjusted returns. 

They simplify the process of monitoring and rebalancing by maintaining a straightforward, transparent methodology with fewer securities. This streamlined structure also enhances sector diversification by including only top-tier companies based on their market cap and primary revenue sources. 

Additionally, these indices are designed to be more resilient during market downturns, featuring high-quality companies that can better withstand economic fluctuations.

Finsum: This is a really interesting strategy and speaks to the wealth of opportunities in custom and direct indexing markets.

Determining when to opt for direct indexing over ETFs depends on specific client situations, as outlined in Dr. Stephanie Lo's recent research for NDVR. She suggests that direct indexing may offer advantages only under certain conditions, particularly when considering after-tax returns over the long term. 

The key factors involve embedded capital gains in an existing ETF portfolio; transitioning to direct indexing may trigger immediate tax liabilities that could outweigh the benefits of tax-loss harvesting. However, for new investors starting from cash, direct indexing might be more advantageous, assuming the fees are competitive and the investment horizon is long enough. 

The decision also hinges on the investor's tax profile, inheritance plans, and desire for portfolio customization or specific exposures, such as building around a concentrated position. Advisors should assess each client's goals, costs, and preferences to determine if direct indexing aligns better with their investment strategy than traditional ETFs.

Finsum: As with all strategies you need determine if the tax alpha is really the advantage promised but in some cases the returns can be great. 

SEI has expanded its suite of Separately Managed Accounts (SMAs) and Unified Managed Accounts (UMAs) by introducing new strategies focused on direct indexing and factor-based investments. These additions include fixed income strategies, such as the Systematic U.S. Aggregate Bond Core and the Systematic Municipal Bond Core, as well as equity options like the Systematic U.S. Dividend Yield Core and the U.S. Dividend Yield Multi-Factor SMA. 

These offerings aim to help advisors serve mass-affluent, high-net-worth, and ultra-high-net-worth clients with tailored solutions that offer flexibility and tax optimization.

The move comes as UMAs gain popularity, with assets growing at an annual rate of 34% over the past five years, according to Cerulli. SEI’s expansion aligns with broader industry trends, as other major players like Envestnet and Dimensional.

Finsum: An SMA makes a lot of sense for direct indexing options given the tax implications.