We must admit, it came as a bit of a surprise to us.

At the 2019 Inside ETFs conference, held in February in Hollywood, Florida, ETF.com managing director Dave Nadig and Inside ETFs chairman Matt Hougan delivered a presentation centered around “direct indexing”—explaining both what direct indexing is and its potential to be the next big disruptive force in investing.

What is direct indexing?

If an ETF packages equities and other assets into a single product accessible to investors at a low cost, direct indexing takes it a step further, replicating an index by owning the individual securities instead of in a bundle, as an ETF does. This has certain advantages, especially when it comes to tax. Unlike an ETF, direct indexing allows investors to harvest losses on individual securities, for example.

So, why did the term sound familiar to us? In some ways it describes what Parametric has been doing since 1992—yes, for 27 years—with Custom Core, our separately managed account (SMA) solution. But we’ve taken the idea several steps further still, offering greater customization, flexibility, and transparency, including continuously monitoring portfolios to harvest tax losses, enabling in-kind transitions, helping clients with charitable gifting and estate planning options, offering factor investing and responsible investing capabilities, and more.

Why are more people talking about direct indexing now?

In an interview published several days after the Inside ETFs event, Hougan observed that approaches like direct indexing and Custom Core have perhaps reached an inflection point—that this moment may be not unlike the early 2000s, when ETFs began to disrupt the traditional wealth management industry. The reasons, we think, are twofold.

For one thing, more and more investors, particularly high-net-worth clients, are pressing their advisors for greater customization. Off-the-shelf products like ETFs and self-declared “direct indexers” increasingly feel like one-size-fits-all solutions—constricting, impersonal, rigid. To be sure, we think ETFs have a major role to play, but investors seeking to express their convictions through their passive portfolios are discovering that an SMA gives them more options.

Second, technology is playing a greater role than it used to, opening solutions like direct indexing and Custom Core to more and more investors. Customization requires robust systems with enormous capacity, and those systems are getting smarter and faster. For our part, Parametric has invested heavily in technology, much of it proprietary, allowing us to scale in a way that meets the increased demand.

But having the right software in place and letting it run isn’t the whole story: Done right, at least half the value of this approach, particularly at the high-net-worth level, lies on the human side of the ledger—listening carefully to client needs, crafting thoughtful portfolios based on those needs, and providing superior client service throughout the portfolio’s life cycle.

The bottom line

It’s great to get recognized for something we’ve worked hard on for close to 30 years. Inside ETFs is one of the largest events in the industry, attracting more than 2,300 financial advisors, institutional investors, hedge funds, academics, and others in the financial services community.

But the truth is that the recognition Parametric already gets from the thousands of advisors we work with each day is the real reward. They’ve long ago come to trust us with their most highly valued clients’ accounts, and they rely on us to partner with them to provide solutions, not just products. To provide thoughtful market exposures, not just index replication.

We and our clients know Custom Core goes beyond direct indexing, but whatever investors choose to call it, we’ll keep innovating on the suddenly hot new idea we actually pioneered all those decades ago.

 For more market trends, visit ETF Trends.