Turn To Direct Indexing for Customized Portfolios

Investors are increasingly turning to direct indexing accounts to create customized portfolios. Direct indexing services are separately managed accounts designed to track the performance of an index. But unlike a pooled investment vehicle, the investor directly owns the securities in a direct indexing account.

This means an advisor can set up an account that tracks the Russell 1000 Growth Index while screening out any FAANG stocks. Or the advisor can include stocks that aren’t found in the benchmark index.

Direct indexing 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.

See more: “Take Advantage of Vanguard Personalized Indexing’s Tax-Loss Harvesting Capabilities

“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.”

More Accessible to a Broader Investor Base

Vanguard CEO Tim Buckley said at Exchange 2023 that direct indexing was previously only “reserved for the ultra, ultra-high-net-worth” investor. Investors would have to be able to afford to buy the stocks needed for approximating an index’s performance. Plus, rebalancing the portfolio so it would keep corresponding to the corresponding index was also difficult and time-consuming.

But recent developments have made direct indexing more accessible to a broader investor base. Software innovations have automated processes such as regular scanning for tax-loss harvesting opportunities and rebalancing. Plus, most brokerage firms now offer commission-free trades, which has dramatically reduced transaction costs. In addition, investors can now buy fractional shares of stocks, making it more affordable to fund a direct indexing account.

Buckley said 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.