Direct indexing is like customizing a Tesla, says investor


You can personalize clothes, jewelry, and cars, so why not have a portfolio?

This is the idea behind direct indexing, which allows investors to buy stocks in an index rather than those in a mutual fund or exchange-traded fund.

Once reserved for the ultra-rich, the strategy is now widespread, with Vanguard, BlackRock, Morgan Stanley and others crafting offers to help people tailor their positions based on risk profile, environmental, social and other considerations. governance, and other factors.

“Think of it as standalone money,” said Patrick O’Shaughnessy, whose company runs a platform called Canvas that allows for personalized investments, Monday at CNBC’s “ETF Edge”.

“You set the conditions (…)” To the advisor and possibly the end investor, it will look like the next generation of any technology, just like using Stitch Fix for custom clothing or… building a Tesla online . “

Investors use direct indexing in a variety of ways, including to take advantage of tax breaks, reduce positions in stocks or sectors related to their professional work, or make adjustments related to ESG factors, O’Shaughnessy said.

While only 20% of Canvas accounts are ESG-conscious, they run the gamut of exclusions, with many reductions in exposure to carbon-emitting names and at least one ruling against positions in companies that produce beverages. sweet, he said.

“There is a demand for people to have their own strategy built just for them according to their circumstances and preferences,” said the CEO, Director and Portfolio Manager of O’Shaughnessy Asset Management.

“When we give people these tools in a custom indexing platform or a direct indexing platform, about 80% of them completely personalize their strategy. So I think that’s where the The world is going. Technology allows that to happen. Better to own the shares directly and unlock the benefits of doing so versus holding them indirectly through an ETF. “

Although customizable, separately managed accounts have been available to high net worth investors since the 1950s, this new accessibility could lead to a major shift in the way the mass market invests, said Dave Nadig, chief investment officer and chief research officer at ETF Trends, in the same interview.

Above all, the fees can’t be much higher, Nadig said. While direct indexing cannot yet compete with ETFs charging 3 basis points for their strategies, providers can “absolutely” charge 20 to 40 basis points for the strategy, which is still a relatively competitive rate, a. -he declares.

“I think it’s kind of inevitable that we come up with this more personalized way of approaching investing,” Nadig said. “Being able to precisely manage your needs is really important in the long run.”


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