On this week’s ETF Edge with host Bob Pisana of CNBC, direct indexing is said to be attracting much attention as a new form of investing. When owning an S&P 500 ETF, an investor has indirect ownership of the stocks in that index. Direct investment provides the opposite, which comes with additional aspects such as holding a vote in shareholder meetings and customization abilities.
Is it worth it to hold onto a regular index fund in favor of direct indexing? Pisani spoke with ETF Trends’ CIO and Director of Research, Dave Nadig, and Patrick O’Shaughnessy of O’Shaughnessy Asset Management about this and more.
O’Shaughnessy opens by noting how this can be seen as a technology trend, and five years ahead, investors can own a custom index that’s built entirely for themselves.
He notes, “There are lots of ways that we’re seeing this platform get used, but fundamentally, it is a technology trend. Just like ETFs were, and just like mutual funds were, it works as a better way for people to get access to the stock market.”
This could also work as an ESG account, as Pisani points out, with funds that only apply to ESG investing tailored to the beliefs of the creator. For Nadig, when it comes to direct investing, using ESG as an example, that’s a very personal area. Therefore, despite an interest in helping the world in general, there could be specific areas one would want to focus on. This is hard to do with a big, packaged product, despite all the various ones that have recently launched.
With direct indexing, as Nadig states, “You really can create that socially conscious, or environmentally conscious portfolio that’s right for you but still based on fundamentally sound large cap indexing, for instance. That’s the advantage. You can choose what’s important to you.”
In terms of other issues it can solve, tax benefits are a part of it. As O’Shaughnessy explains, investors love the tax features that come with it. No one wants to pay more taxes, so this index allows for ways to reduce tax bills in various ways. The ESG element is also a big enough factor in investor interest. There’s also the whole customizable element that can really play into investors solving their own issues as far as how to feel their portfolios are best utilized overall.
Watch the whole ETF Episode with Dave Nadig:
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