We must admit, it came as a bit of a surprise to us.
At the 2019 Inside ETFs conference, held in February in Hollywood, Florida, ETF.com managing director Dave Nadig and Inside ETFs chairman Matt Hougan delivered a presentation centered around “direct indexing”—explaining both what direct indexing is and its potential to be the next big disruptive force in investing.
What is direct indexing?
If an ETF packages equities and other assets into a single product accessible to investors at a low cost, direct indexing takes it a step further, replicating an index by owning the individual securities instead of in a bundle, as an ETF does. This has certain advantages, especially when it comes to tax. Unlike an ETF, direct indexing allows investors to harvest losses on individual securities, for example.
So, why did the term sound familiar to us? In some ways it describes what Parametric has been doing since 1992—yes, for 27 years—with Custom Core, our separately managed account (SMA) solution. But we’ve taken the idea several steps further still, offering greater customization, flexibility, and transparency, including continuously monitoring portfolios to harvest tax losses, enabling in-kind transitions, helping clients with charitable gifting and estate planning options, offering factor investing and responsible investing capabilities, and more.
Why are more people talking about direct indexing now?
In an interview published several days after the Inside ETFs event, Hougan observed that approaches like direct indexing and Custom Core have perhaps reached an inflection point—that this moment may be not unlike the early 2000s, when ETFs began to disrupt the traditional wealth management industry. The reasons, we think, are twofold.
For one thing, more and more investors, particularly high-net-worth clients, are pressing their advisors for greater customization. Off-the-shelf products like ETFs and self-declared “direct indexers” increasingly feel like one-size-fits-all solutions—constricting, impersonal, rigid. To be sure, we think ETFs have a major role to play, but investors seeking to express their convictions through their passive portfolios are discovering that an SMA gives them more options.
Second, technology is playing a greater role than it used to, opening solutions like direct indexing and Custom Core to more and more investors. Customization requires robust systems with enormous capacity, and those systems are getting smarter and faster. For our part, Parametric has invested heavily in technology, much of it proprietary, allowing us to scale in a way that meets the increased demand.
But having the right software in place and letting it run isn’t the whole story: Done right, at least half the value of this approach, particularly at the high-net-worth level, lies on the human side of the ledger—listening carefully to client needs, crafting thoughtful portfolios based on those needs, and providing superior client service throughout the portfolio’s life cycle.
The bottom line
It’s great to get recognized for something we’ve worked hard on for close to 30 years. Inside ETFs is one of the largest events in the industry, attracting more than 2,300 financial advisors, institutional investors, hedge funds, academics, and others in the financial services community.
But the truth is that the recognition Parametric already gets from the thousands of advisors we work with each day is the real reward. They’ve long ago come to trust us with their most highly valued clients’ accounts, and they rely on us to partner with them to provide solutions, not just products. To provide thoughtful market exposures, not just index replication.
We and our clients know Custom Core goes beyond direct indexing, but whatever investors choose to call it, we’ll keep innovating on the suddenly hot new idea we actually pioneered all those decades ago.
To Everything There Is a Season: The Four Stages of a Tax-Managed Custom Core™ Account
Portfolio tax management: It's about a lot more than just tax loss harvesting. In this paper we show that there are other key opportunities to reduce tax exposure at every stage of a portfolio's life cycle.
A Custom Core® SMA allows investors to take charge of their passive mandates. Portfolios are held as separate accounts, giving investors the ability to customize them to their needs. Investors can select from a wide range of benchmarks and then tailor their exposure to incorporate their unique objectives.
Brian Langstraat, CFA, Chief Executive Officer
Brian is responsible for Parametric’s firmwide strategy and organizational development. Since joining Parametric in 1990, Brian has held positions in portfolio management, product development, portfolio administration, marketing, and client service. In 2014 he was elected to the Eaton Vance Corp. board of directors. He earned a BA in economics and sociology from the University of Washington.
The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Parametric and its affiliates disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Parametric are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Parametric strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results. All investments are subject to the risk of loss.