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.