By nature, humans love to customise things. From personalised recommendations on Netflix and Stan to suggested playlists on Spotify or iTunes, everyone craves to have things that serve them by knowing them.
However, in the world of financial services, investors don’t often receive that same bespoke treatment. Until now, that is. Enter direct indexing.
In its simplest form, direct indexing involves directly investing in the actual securities that make up an index.
This approach is dissimilar from investing in exchange traded funds (ETFs) that track an index or mutual funds that follow a benchmark index.
Direct indexing allows investors to own the securities that make up an index and hold them in a separately managed account (SMA).
For example, if replicating the S&P500, the investor would directly own all the stocks in the index.
The concept has gained traction in the US in recent years, with total assets under management in 2020 sitting at around $US350 billion ($482 billion). According to a 2021 report from Oliver Wyman and Morgan Stanley, this could grow to about $US1.5 trillion by 2025, drawing flows that would otherwise be snapped up by ETFs or mutual funds.
To explain direct indexing further, Vanguard senior investment strategist Inna Zorina uses the analogy of going to the gym.
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