According to a report from Cerulli Associates, direct indexing will grow faster than ETFs, mutual funds, and separately managed accounts (SMA) over the next 5 years. Currently, it’s estimated that total assets under management for direct indexing strategies will exceed $800 billion by 2026 from $462 billion at the beginning of last year. 

Another factor that should support direct indexing’s growth is that only 14% of financial advisors are aware of direct indexing and actively recommend it to clients. It’s estimated that 63% of advisors have a client with over $500,000 in investable assets, while 14% of advisors focus on clients with over $5 million in assets. Direct indexing offers the most clear advantages for high net worth clients. For advisors, it’s an opportunity to offer a differentiated service especially as tax management and customization are highly valued by many prospects. 

Direct indexing is growing in popularity as it allows investors to retain the major benefits of index investing while accessing greater personalization and unlocking certain tax advantages. With direct indexing, clients own the actual components of an index as opposed to an ETF or mutual fund. This leads to more potential for tax loss harvesting and customization to suit a clients’ particular needs or construct a portfolio that aligns with their values. 

Finsum: Direct indexing is forecast to grow faster than many ETFs, mutual funds, and SMAs over the next 5 years. Here are some of the key reasons for its growth, and why advisors should pay attention.  

Decisions made by model portfolio managers are showing that investors are starting to get cautious about valuations of megacap tech stocks. These stocks have been the biggest gainers this year in the stock market. Tech stocks with market caps above a trillion dollars are up more than 50% YTD, while the S&P 500 is up 19%. 2 major catalysts for this group have been the perception that rates have peaked and a frenzy for securities connected to artificial intelligence. 

Of course, many market-cap weighted or tech-focused indices will have outsized exposure to this group. According to Brooks Friederich of Envestnet, an intermediary which operates a platform that offers customized products from asset managers, “End-clients are saying ‘I want an investment product that isn’t going to have all this exposure to the big-tech stocks,’ If you look at retirement portfolios, they all have too much exposure to that because of the construction of the market.”

He also adds that balanced portfolios continue to have appeal and are a major reason for the boom in model portfolios given the ease of combining asset classes. More than half of the assets on its platform are linked to 60/40 or 70/30 portfolios despite the poor performance of fixed income as a hedge against equities last year.  

Finsum: Model portfolio end-clients are showing some concerns about the valuations of megacap tech stocks, while remaining committed to balanced portfolios despite recent volatility. 

Oil prices were marginally higher headed into this week’s Organization of the Petroleum Exporting Countries (OPEC) meeting, following a decline upon the news that the meeting had been delayed. 

According to reports, this delay was due to divisions among OPEC members when it came to further production cuts and restrictions on output. It’s an indication of clashing interests and incentives. As a collective, OPEC’s best interest is to reduce output to ensure that oil prices stay as high as possible. As individual countries, each country is incentivized to produce as much oil as possible to maximize revenue.

Another factor weighing on oil prices is expectations that demand will be weaker than expected in 2024 due to a slowing global economy particularly in Europe and Asia. Deutsche Bank recently warned that there is a strong possibility that the US falls into a recession next year. China’s economy remains stagnant more than a year after Covid protocols have been relaxed. 

Iranian oil also continues to flood the market despite sanctions on these countries. Iranian production is reportedly at a 5-year high, although there are some who believe that sanctions may be more aggressively enforced due to the conflict in Hamas. 

Finsum: Crude oil prices have dropped $20 over the last few weeks. One factor has been a lack of unity among OPEC member nations around production cuts.

In a CNBC interview, Blackrock COI Rick Rieder shared some thoughts on Blackrock’s newest active fixed income fund, and why he believes that active fixed income offers several advantages for investors. 

Active fixed income managers have the latitude to seek opportunities that are beyond what’s represented in the indices. As an example, he cites the Blackrock Flexible Income ETF (BINC) which has outperformed its peers since its inception in late May. Over this period, BINC is up 0.3%, while the iShares Core US Aggregate Bond ETF (AGG) is off by 4% and the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) is down 0.2%. 

BINC’s biggest allocation is to bonds outside of the US at 22% with US high yield debt and US investment grade debt accounting for 17% and 14%, respectively. According to Rieder, the stronger US dollar is leading to more attractive opportunities overseas. 

Passive funds are unable to take advantage of these opportunities. Another advantage for active fixed income is that certain pockets of risk can be avoided as well. He cites this combination as why active fixed income has outperformed, since it leads to more yield and reduced volatility.  

Finsum: Blackrock CIO Rick Rieder explained some of the structural advantages of active fixed income to identify opportunities and avoid pockets of weakness. 

In a strange quirk, millennial investors have a greater allocation to fixed income than older generations according to a recent survey from Charles Schwab. Millennials currently have 45% allocated to fixed income, while Generation X and baby boomers have 37% and 31%, respectively. Looking ahead, 51% of millennials plan to buy fixed income ETFs next year while 45% of Generation X and 40% of baby boomers plan to do so. 

Of course, this is contrary to the conventional thinking that younger investors should have greater capacity for risk given that they have a longer timeframe to ride out volatility to earn higher returns. However, this conservative positioning could be a reflection of the extraordinary events that have taken place over the last couple of decades which have likely shaped their attitudes. These include the dot-com bubble, the financial crisis in 2008, and the pandemic. 

Thus, many millennial investors are focusing more on reducing risk with their high levels of exposure to fixed income while eschewing equities. According to David Botset, the head of strategy and product at Schwab Asset Management, stocks are the ‘growth engine’ of a retirement portfolio so underexposure could have negative long-term implications. 

Finsum: Millennial investors have lived through unusually volatile markets which have impacted their thinking and led to an overallocation to fixed income.