Displaying items by tag: fees

Direct Indexing is being heralded as the next big wave of investment products, as it gives investors the power to take advantage of tax-loss harvesting and customize it to their interests. However, the dual objectives that they propose could come to compete with each other and undermine investor interests. If investors maximize the tax-alpha they aren’t really aligned with their interests which younger investors are holding as a high priority. Riding a portfolio of all ‘greenwashers’ gives investors few options for tax purposes and deviates too far from the underlying index. The most effective solution might be for financial advisors to develop a better understanding of client interests rather than leaning on a magical new product.

Finsum: Some are calling direct indexing active management in disguise, but investors trying to capitalize on either customization or tax loss might still find it an attractive option.

BlackRock, JPMorgan, Goldman Sachs, Vanguard, Morningstar, and many others are swooping in to purchase direct/custom indexing firms in order to capitalize on this fast-growing market segment. While the most appealing factor is tax advantages ESG-customization is driving faster than ETF growth in the US. The rampant greenwashing problem in ETFs gives custom indexing a leg up by allowing more de-selection of these companies. It also allows a weighting that could be advantageous to different market cycles. Investors could more easily de-select their own companies' stock from an index to reduce exposure.

Finsum: Direct indexing can mirror and even enhance ETFs role while still giving tax advantages!

A small but substantial change may be shaking the bond ETF infrastructure to its core. The New York State Department Financial services is allowing insurers to label bond ETFs as individual bonds rather than as equity risk. Companies have issued lots of new debt setting records as record low interest rates have made it appealing. This regulation could change the way the Fed and other regulators interact with bond markets, and could lead to the sort of efforts that saved the bond market in 2020. These will allow more bond products and increase inflows, but for insurers bond ETFs have more complications than a traditional single fixed income security and could provide difficulties in the future.

Finsum: Small changes to regulator practices like this can lead to massive swings in credit creation, keep an eye on bond ETFs.

Russia’s invasion of Ukraine has triggered tons of sanctions from the west and many of those cut off Russian companies or Russian financers. Direct indexing has been put in one of the best positions of many financial products as they had some of the tiniest exposure to ADRs. With a meager 1% exposure, these portfolios have been left in a fairly healthy position all things considered. Meanwhile, major index companies like MSCI and FTSE Russel have raced to remove any Russian securities. Moreover, Vanguard and BlackRock as well as other major mutual funds were given until May 25 by the Treasury to find an off-shore buyer for Russian stocks. Direct index company dimensional funds have added Russia to a DNP list and have committed to rid of all their Russian stocks.

Finsum: Many funds were able to quickly dump Russian stocks, however, energy prices could be a more difficult problem to navigate.

Model Portfolios got some widespread skepticism thrown their direction when a group of academics wrote a paper criticizing their usage. The points centered around conflicts of interests and the fee structure. However, model portfolios are templates for investing and so their optimization might not be the ‘perfect’ formula for everyone. Additionally, of course funds are going to include their own products in model portfolios (even if they have higher fees), because they believe their products are superior. In fact, funds would be violating their fiduciary duty if they didn’t honestly think their own ETF was a better product at a slightly higher fee structure.

FINSUM: Cherry picking better-performing portfolios after the fact is an unfair advantage; many model portfolios have different risk factors.