Screen Out and Tilt in Stocks to Your Liking With Direct Indexing

Say an investor wants to track the performance of the Russell 2000 but doesn’t want any gambling or oil companies. Also: they want to include some stocks that aren’t on the index. An ETF or mutual fund won’t be able to help. But a direct indexing account will.

Direct indexing accounts are designed to replicate the performance of an index. But unlike a comingled fund, the investor directly owns the securities in the portfolio. So, advisors can customize the accounts through screens and tilts to exclude or include stocks.

See more: “Build Around Existing Positions Through Direct Indexing

This level of customization not available in ETFs is leading an increasing number of investors to kick direct indexing’s tires.

Requesting Custom Options

Accounts like Vanguard Personalized Indexing offer screens and tilts that let advisors customize their clients’ portfolios. It also enables advisors to request custom options on their client’s behalf.

“You can help clients express environmental, social, and governance (ESG) or socially responsible investing (SRI) preferences,” according to Vanguard. “You can tilt their portfolios toward stocks with certain characteristics like momentum or value, known as factors.”

But it doesn’t just have to be ESG preferences. Clients with strong religious beliefs, for example, can tilt their portfolios to express those values. Or maybe the client wants to show solidarity with the United Auto Workers union while its members are on strike. VPI can screen out automobile companies while the UAW pickets.

At Exchange 2023, Vanguard CEO Tim Buckley said direct indexing was once an option only “reserved for the ultra, ultra-high-net-worth” investor. But he noted that its use cases could be expanding to a broader investor base. Buckley added that Vanguard 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.