Displaying items by tag: direct indexing

In a recent interview with ESG Clarity, Morningstar CEO Kunal Kapoor offered his thoughts on direct indexing and how custom features could lead to more people being interested in investing. Kapoor mentioned that while separate accounts were always touted as providing customization, in reality, most separate accounts did not provide much customization. That’s why he is so excited about direct indexing. He stated that, “the cool thing about building a direct index is that at the start, the adviser’s having this conversation with the client, not only about the risk profile, risk tolerance, time horizon – but suddenly the conversation is about preferences.” He believes that these preferences get clients engaged with their advisors. He said, that it can “allow an adviser to really drill into an individual’s preferences in an educated way – really walkthrough for the individual what the pros and cons are of implementing those preferences in a portfolio.” Kapoor also compared direct indexing to passive investing. He believes that while passive investing can be good for most people, it can take the fun out of investing. Direct indexing, on the other hand, has many of the benefits of passive investing, but it brings back the fun of making choices.

Finsum:Morningstar CEO Kunal Kapoor believes that direct indexing creates more engagement between advisors and their clients since it requires them to discuss preferences.

While investors remain spooked by market volatility, Goldman Sachs believes direct indexing may benefit from the volatility. In its recent Market Know-How report, the firm wrote, “Direct indexing involves purchasing the underlying shares of an index, rather than owning an index fund. This investment strategy prioritizes tax-loss harvesting, which builds tax savings through capital losses while attempting to keep tracking error tight to the benchmark. Tax-loss harvesting works not only in down years but also in up years, historically, as individual constituents can still see intra-year declines.” The firm also listed the benefits of direct indexing beyond the tax-alpha achieved from harvesting losses. For instance, the firm lists benefits such as the ability to liquidate concentrated stock positions, reduce active risk in portfolios, and help offset significant taxable events such as the sale of a business or real estate. These can all be achieved through building a “war chest of capital losses.” In addition, Goldman also wrote that “owning individual securities instead of an index fund allows investors to achieve these potential benefits while expressing preferences, such as sector tilts.”

Finsum:In a recent report, Goldman Sachs stated that direct indexing may benefit from market volatility since the strategy prioritizes tax-loss harvesting, and historically, tax-loss harvesting works in both up and down markets.

While there is a difference in opinions as to how much direct indexing will take market share away from ETFs, there is no doubt that the strategy is growing. In fact, personalized portfolios in general are starting to really take shape. A big reason for this is that volatility is expected to continue next year and many investors want more control over their portfolios. While direct indexing lets investors cherry-pick which stocks to buy in a benchmark index, Edward Jones recently announced that it is providing advisors with a new and more personalized investing model for clients using ETFs and mutual funds. According to documents filed at the SEC, the personalized research models will consider client specifics such as existing assets, potential capital gains and losses, and the characteristics of the overall portfolio. Edward Jones is initially introducing these models on a limited basis. According to Scott Smith, director of advice relationships at Cerulli Associates, the personalized research models exemplify an industry trend toward personalization. He stated, “We’re seeing this across the industry, from direct indexing, where you’re knocking out individual securities, to this, where you’re tilting the portfolio. It’s all about using scalable technology to offer better client solutions.”

Finsum:As part of the trend towards personalized portfolios, Edward Jones recently announced that it will offer personalized research models using mutual funds and ETFs.

Direct indexing has been all the rage this year with many researchers predicting it will be the "next big thing" in investing. For instance, a few weeks ago, a report from Cerulli Associates estimated that direct indexing is poised to reach more than $800 billion in assets by 2026. But not all research firms share this sentiment. According to a recent study by asset management research firm Blackwater Search & Advisory, direct indexing is a “niche service that mostly benefits specific high-net-worth investors.” The firm believes that without a wide range of investors, the growth of direct indexing may not be as large as previously thought. According to the report, “Direct indexing is not necessarily the best option for everyone. Not everyone needs or wants the degree of customization that direct indexing offers, and the variety of funds already existing on the market is more than enough to craft interesting portfolios.” Many pundits talked about direct indexing as an “ETF Killer” due to greater personalization and tax advantages. However, ETFs offer a broad range of funds that appeal to a much wider number of investors. So, while direct indexing may continue to grow its market share, it appears that it isn’t the “ETF Killer” it was once projected to be.

Finsum:Based on the results of a recent study, direct indexing may not see as much growth as previously thought due to the strategy mainly benefiting affluent investors.

Retail and direct indexing, it seems, forge quite the cozy twosome.

Fueled by clients with assets of between $2 million and $3 million, by 2026, direct indexing will represent one third of retail separate accounts, according to the second annual white paper commissioned by Parametric Portfolio Associates, released by Cerulli Associates, according to financeyahoo.com. Financial advisors were the target.

Assets in directing indexing where projected to expand at a five year CAGR of 12.3% to hit $825 million by 2026, according to the report.

There’s a “gigantic swath of the market” serving these clients who could benefit from such a product due to their tax needs,” said Tom O’Shea, research director and one of the report’s authors. He added that. compared to other investment vehicles like separate accounts and ETFs, the projected rate’s “aggressive.” 

While financial advisors and their clients might not be exactly flocking to direct indexing, the financial services industry’s bent on persuading the financial planning industry that almost every investor can receive a boost from direct indexing, according to investmentnews.com.