Displaying items by tag: direct indexing

Asset managers are increasingly rolling out tax-managed products, with investments in these vehicles seeing notable growth. Assets in tax-managed separately managed accounts (SMAs) surged to over $500 billion, a 67% increase within 18 months, while tax-managed mutual funds grew by 22% to $73 billion, according to Morningstar. 

Direct indexing dominates tax-managed SMA assets, offering customized tax management by investing in individual stocks within an index, though other strategies like ETF model portfolios and active equity are gaining traction. 

Morgan Stanley’s Parametric leads this area, managing $245 billion, mainly through direct indexing. Morningstar anticipates direct indexing will stay prevalent, but asset managers like JP Morgan’s 55ip and AB are exploring alternatives, focusing on model portfolios and municipal bonds for tax advantages. 

Finsum: We may see more unified managed accounts, which integrate various investment types, creating more comprehensive tax management options.

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

Expanding tax-efficient investing options, firms are now utilizing direct indexing technology to make separately managed accounts (SMAs) more advantageous for tax management. Unlike funds, SMAs allow for individualized tax strategies because the investor owns the underlying assets directly, an option now expanding with high demand. 

Direct indexing remains the most common approach for tax-efficient SMAs, enabling tailored tax-loss harvesting by strategically selling select stocks. Some firms are also adapting this approach to actively managed equities, though balancing loss harvesting with stock selection can be complex. 

Tax management in fixed-income portfolios, though more limited, still offers advantages, especially during interest rate hikes. 

Finsum: Model portfolios are gaining traction, for similar tax efficiency reasons.

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.