Direct Indexing

Direct Indexing:  The Next (R)Evolution

As is the case with any industry, Finance has evolved from technological improvements over the decades.   Indexing as a Service (“IaaS”), or “Direct Indexing” as it’s sometimes called, is the next evolution in the investing landscape.  “Direct Factor Indexing” as it’s also called is simply the ability for investors to create exposures directly– without using an ETF wrapper.

IaaS is a technology that gives investors the ability to invest directly into indices without going through the ETF structure.  The technology enables investors (and advisors) to instantly create, execute in the market and manage any number of indices.  In the same way as an ETF baskets of stocks are bought and sold, but with the added benefits of:

• Avoiding the potential liquidity “chokepoint” of the ETF structure.
• The ability to tax-loss harvest individual positions (because all stocks are owned directly).
• The ability to create and customize any exposure (as opposed to relying on an “off the shelf” ETF).

Consider the following example of direct indexing, which not only highlights the benefits for the investor, but also demonstrates the added value an Advisor can provide it clients:

An advisor has several clients (ranging in account size from $1M to $100M) each of whom is invested in a slightly different Large Cap Value index tailored specifically to suit them. For instance, one client has an ESG filter while another has a cap on Utilities.  Each client’s exposure, in addition to being customized, is also rebalanced according to how it fits within the rest of their portfolio and tax-loss harvested in order to maximize performance based on their specific situation.