Direct indexing is a separately managed account where the investor owns individual stocks that represent a chosen benchmark index. But unlike an index fund, investors directly own each stock in a direct indexing account. This provides high-net-worth investors with broad-based index exposure while also letting them customize their holdings.
Advisors can use negative screens, positive tilts, or a combination of both to customize portfolios to align with their investors’ views. Screens can be used to exclude companies, sectors, or industries that violate a client’s principles.
See more: Capitalize On Volatility Through Direct Indexing
Vanguard offers an example of this. Say an investor wants to avoid investing in any companies that produce adult entertainment or nuclear weapons. Direct indexing lets the advisor screen out any company in an index that does business in these industries. Even if a client has strong feelings against investing in a single company, the advisor can screen it out.
Adding Preferential Weight Through Tilts
As opposed to screens, which exclude companies, tilts can help clients support issues that fall within a gradient. Tilts add a preferential weight that improves focus on topics important to the investor. Examples include weighting a portfolio with companies moving toward a lower carbon footprint or increasing the number of women in leadership roles.
“Think of it this way: Tilts let clients express support of companies that engage in ‘good’ behavior on an issue, whereas screens let them express disapproval of ‘bad’ behavior by a company,” Vanguard wrote.
Vanguard Personalized Indexing offers a wide range of screens and tilts for your clients to choose from. You can also request custom options, such as faith-based or vegan. Once your clients have made their selections, you can generate impact and performance reports on demand, so clients can have a clear picture of the impact of their customizations.
Vanguard CEO Tim Buckley said at Exchange 2023 that the company will “be investing heavily” in direct indexing. More information on Vanguard Personalized Indexing can be found online.
For more news, information, and analysis, visit the Direct Indexing Channel.
