Written By: John Drachman The Twitter world erupted in laughter recently when a presidential candidate referred to a “record player” during a debate – a term familiar to hipsters and boomers but few others. Will investors someday regard “mutual funds” and “ETFs” with similar mockery? The answer may be “yes,” if a new retail kid on the block, Direct Index Investing, continues to gain ink and traction with rising numbers of return-focused, expense-minded investors and advisors.
A Look BackMorningstar Research has steadily documented the torrent of outflows from mutual funds, an investment vehicle founded nearly a century-ago. For the present, the popularity of ETFs (Exchange Traded Funds) continues to shine brightly, as they reached almost $4 trillion this past March, according to the Investment Company Institute. After the launch of the original passive, index-based ETFs, a plethora of active/passive hybrids, smart beta solutions, rules-based algorithms and liquid alternative products quickly followed. Now, it may be time for Direct Index Investments to have their close-up. Formerly an exclusive offering to large institutions and HNW investors, Direct Index Investing provides smaller retail investors with access to fractional shares, asset-based pricing, digital innovations and benefits like these:
- Lower Expenses Direct Indexing can lower expenses though benefits like tax‑loss harvesting, which allows a security that has fallen below its purchase value to be resold and replaced with another. In this manner, you can use the tax loss to off-set the tax payable on a potential future capital gain – while still staying invested in the market.
- Added Measure of Personalization ETF investors can’t exclude companies they dislike from their portfolio models. With a Direct Index Investment, you can specify what to leave in – or out. Trading in fractional shares has become increasingly common, too. This is good news if you want exposure to pricier stocks at more affordable levels.