As 2022 draws to a close, a trend is emerging that is expected to gain momentum next year — actively managed investment strategies — and those who like the idea of investing in a basket of companies, but are more focused on what they invest in. A custom strategy for those who want more control. of.
Direct index assets are expected to grow from about $462 billion today to $825 billion by 2026, according to Boston, Massachusetts-based global research and consulting firm Cerulea Associates. This exceeds the growth forecast for exchange-traded funds and mutual funds. and separately managed accounts.
Here’s what’s behind the ongoing shift: Many analysts forecast significantly higher equity volatility in 2023, especially at the beginning of the year, with still-high inflation, Fed rate hikes, and the possibility of a recession. And some people want more control.
“This is part of a broader trend towards personalized portfolios,” Cerulli director Tom O’Shea told Yahoo Money.
Direct indexing becomes mainstream
A direct index allows investors to select stocks to buy in a benchmark index instead of owning a fund that tracks a specific index, such as the S&P 500.
Our hands-on approach allows us to adjust turn-on-the-dime as market conditions change. This is not suitable for investors in passively managed retirement portfolios that mimic the rise and fall of any index. Tracked.
“With a direct index, investors invest in an index rather than owning pre-selected stocks through a fund,” said Margherita Cheng, certified financial planner and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland. You can directly buy individual shares within.” Yahoo Money. “Investors can customize their holdings to suit their risk tolerance and investment preferences.”
“But there are some drawbacks,” added Cheng. “For example, direct indexes can be more expensive than passive investments, distract clients from their long-term financial goals, and may encourage more frequent trading.”
Regular index funds vs DIY
Investing in Steady Eddie index funds — stocks such as the S&P 500 index and fixed-income bond funds that have been on autopilot for months — is a huge investment for many individuals, especially those who are putting money into retirement. It has become standard advice for
The overall idea is that it’s easier and less expensive to buy an entire computer-generated index than to buy and sell individual stocks. And generally speaking, simply keeping course will likely shake off a stock market downturn. Additionally, trying to find the best time to invest is difficult and most of the time you make big mistakes.
But for many retirement savers, that passive strategy has been hard to come by as the market has taken a hit this year. The S&P 500 Index has fallen about 19% so far this year as inflation has yet to subside and the broader stock market remains teetering. It’s hard to resist the urge to step in and fine-tune your account, especially if you’re nearing retirement. .
“Firms like Schwab, Vanguard and Fidelity for DIY investors are rolling out these personalized products and we know there are many investors who prefer to own individual securities for a variety of reasons. is watching.” “Shia said.
“Tax incentives are one of the reasons these are attractive,” he said. “For example, they are not necessarily buying mutual funds that incorporate capital gains. It could be risk, it could be a low volatility portfolio, it could also be ESG, which is becoming increasingly important, especially for young people.”
custom solution
For example, this year Fidelity launched a customized index fund for do-it-yourself brokerage clients. To create a custom index, he picks a group of stocks he wants to invest in based on a chosen theme (e.g. clean energy stocks), determines the percentage weighting of each investment, and puts all those stocks into one basket. to invest
After the free trial, the service costs $4.99 per month. Custom baskets are available for non-retirement securities accounts, including Health Savings Accounts (HSAs), Traditional IRAs, Roth IRAs, and Rollover IRAs. You can invest in up to 50 stocks and create as many baskets as you want.
“We knew investors wanted more than basket trading. We want an easy way to trade securities on the Internet,” Josh Krugman, senior vice president of securities at Fidelity, told Yahoo Money. “This new ability to invest in and customize portfolios built from Fidelity’s thematic models brings his index capabilities directly into the hands of the DIY retail investor.”
However, according to a recent Cerulli survey, only 14% of financial advisors are aware of and recommend direct index solutions to their clients. For now, these hands-on services are just a small part of the overall mutual fund sandbox.
“For tax-deferred or tax-exempt retirement accounts, more control over taxes may not be attractive as rebalancing can be done without tax implications,” Cheng said. I’m here. “For taxable accounts, flexibility and control over tax and security choices could be beneficial, depending on the personal and financial circumstances of the customer.”
Mixed strategy case
But passive investing never fades.
According to the Investment Companies Institute’s 2022 Factbook, passively managed index funds will hold a larger share of the U.S. equity market than actively managed funds for the first time in 2021. Passive funds accounted for 16% of the U.S. equity market at the end of 2021, while active funds accounted for 14%. Ten years ago, active funds were 20% and passive funds 8%.
Daniel Wiener, chairman of Adviser Investments in Newton, Massachusetts, told Yahoo Money: “I haven’t heard or read anyone in substance saying that the end of passive investing is near.”
Importantly, our commissions are low for our pre-configured index baskets of stocks and bonds.
According to a report by the Investment Company Institute, the average expense ratio for actively managed equity mutual funds in 2021 was 0.68%, while the average expense ratio for index equity mutual funds was 0.06%. The average expense ratio for actively managed ETFs is 0.69%.
A set-and-forget passive approach makes perfect sense, especially if you’re a long-term investor and aren’t adamant about being a stock jockey. Batting averages also support passive investing.
S&P Dow Jones Indices (SPIVA) Mid-2022 Survey of Active Mutual Fund Manager Performance Finds More Than 70% of Actively Managed Funds in 38 of 39 Comparative Indexes Over the Past 15 Years was higher than
Additionally, data analysis by Keith Lerner, Chief Market Strategist at Truist, shows that the S&P 500 has averaged a 29% gain over three years, following a decline of more than 20% dating back to 1950.
“It’s not holding water. If returns are expected to be lower in the next few years, both passive and active funds with low expense ratios should be the preferred investment vehicle,” said Weiner. says. “Thus, T. Rowe Price, Vanguard, Fidelity low cost funds and low expense ratio ETFs will continue to be preferred investments.”
Kerry is a senior reporter and columnist for Yahoo Money. follow her on her twitter @Kelly Hannon
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