Direct indexing allows a deeper level of customization that mutual funds and ETFs can’t provide. ETFs are an all-or-nothing proposal wherein the investor gets all the securities within its basket. Direct or personalized indexing, meanwhile, is a separately managed account that attempts to replicate an index.
Unlike a mutual fund or an ETF, the investor directly owns the individual stocks in a direct index account. This means that investors can create a customized index fund, like the S&P 500, but without stocks that the investor wants to avoid.
A direct indexing strategy lets an investor tailor their holdings to hew closer to their investment goals or values. Investors can screen out what are commonly known as “sin stocks,” or even entire industries.
See more: “When Direct Indexing Is the Right Choice”
For example, for investors who feel they have too much exposure to a stock or sector they view as being too risky, this strategy may be a good strategy to mitigate that risk exposure. The portfolio can be adjusted with the financial advisor’s guidance. The advisor can monitor the portfolio and periodically update and rebalance the investments to the investor’s liking.
This strategy also enables the expression of specific market views or outlooks by tilting portfolios toward stocks with certain characteristics like momentum or value, known as factors.
High-net-worth investors looking to benefit from the features of personalized indexing may want to consider Vanguard Personalized Indexing. VPI can also enable advisors to diversify and customize their clients’ broader portfolios.
Vanguard CEO Tim Buckley said at Exchange 2023 that the company will “be investing heavily” in direct indexing. More information on Vanguard Personalized Indexing can be found online.
For more news, information, and analysis, visit the Direct Indexing Channel.