Direct indexing is a separately managed account that attempts to replicate the performance of an index. But unlike an ETF, they aren’t locked into holding all the securities that the index in question tracks. So, they can customize the holdings to align with their investment goals and values.
Consider Jordan. Jordan is a passionate environmentalist with strong faith-based principles. With a direct indexing account, Jordan’s financial advisor can customize the portfolio to her liking.
This means screening out fossil fuel companies while adding an alternative energy tilt to accommodate Jordan’s environmental objectives. The advisor can also implement screens and tilts for entire sectors. This includes a waste and pollution screen and a low carbon footprint tilt.
See more: “Use Direct Indexing’s Screens and Tilts to Reflect Clients’ Values”
But it also means that an advisor can use screens and tilts to accommodate her faith-based principles. This includes screening out adult entertainment, gambling, alcohol, or predatory lending companies.
Jordan’s financial advisor can also ensure that she’s comfortable with any possible added risk that could result from these customizations.
Adding Screens and Tilts to Reflect Values
A service like Vanguard Personalized Indexing offers screens and tilts to add securities that reflect the investor’s personal values. Advisors can also request custom options on their client’s behalf. Once investors select their options, advisors can generate impact and performance reports on demand. That way, their clients can have a clearer picture of the impact of their customizations.
Additionally, VPI can automatically scan the portfolio for potential tax-loss harvesting opportunities at set frequencies.
Vanguard CEO Tim Buckley said at Exchange 2023 that the company will “be investing heavily” in direct indexing. More information about VPI can be found online.
For more news, information, and analysis, visit the Direct Indexing Channel.