Personalized Stock Indices, DIY Indices
As seen in the Economist on January 2022
In 2001 andrew lo, a professor at the Massachusetts Institute of Technology, predicted that technological advances would one day allow investors to create their own personal indices designed to meet their financial aims, risk preferences and tax considerations. Such an idea “may well be science fiction today”, Mr Lo wrote, but “it is only a matter of time.” More than 20 years later, that time may have come.
A revolution in passive investing that began in the 1970s led to the introduction of funds that track the performance of an index, such as the s&p 500, affording investors diversification at a low cost. Now a growing number of American fund managers and brokers are offering retail clients more personalised products that combine the benefits of passive investing with greater customisation. Direct-indexed accounts, as such products are known, promise to track the performance of a benchmark index. But unlike off-the-shelf mutual funds or exchange-traded funds (etfs), which are pooled investment vehicles overseen by portfolio managers, investors in direct-indexed accounts own the underlying securities, and can tailor their portfolios to suit their needs.
The idea is not new. “Separately managed accounts”, custom portfolios of securities managed by professional investors, have been around since the 1970s. But such products have historically been available only to institutional investors and “ultra-high-net-worth” clients with millions of dollars to invest. Today direct-indexed accounts are within reach of the “mass affluent”, with liquid assets in the hundreds of thousands. “It’s what institutions have been doing for years,” explains Martin Small, head of the us wealth-advisory business at BlackRock, an asset manager. “But with technology and scale and more automation, we can deliver it in smaller account sizes.”
Analysts point to three forces behind the trend. The first is advances in technology, including sophisticated algorithms and the computing power needed to continuously analyse and execute trades across hundreds of thousands of portfolios simultaneously. The second is the rise of zero-commission trading, which dramatically lowers costs. The third is the emergence of fractional-share trading, which allows investors to buy securities in bite-sized pieces, making it easier to build small diversified portfolios. Companies like Amazon, a single share of which costs more than $3,000, can be included without breaking the bank.
Read the rest of this article in the Economist here.
Some more information on this topic of DIY Index Strategy:
One way to harvest the losses in an index is to own all the stocks in the index. That way you can sell the losing positions. However, buying that many stocks is too unwieldy and expensive for the average investor. There are money managers who will do this for you. Another strategy — a DIY project — involves replicating the index by buying sector exchange traded mutual funds (ETFs).
With a DIY index strategy, I buy sectors like the utility, energy, information technology, health care and others in proportionate amounts to the S&P 500 index. By doing this I come close to mirroring the performance of the S&P 500 index but can now harvest losses if a sector is at a loss.