Active management will become more popular next year, as well as custom strategies for those investors who want to have more control over where their money goes, contends an article in Yahoo! Finance. Direct indexing assets, currently at $462 billion, are expected to rise up to $825 billion by 2026, according to Cerulli Associates data that is cited in the article, making its growth forecast the biggest out of ETFs, mutual funds, and separately managed accounts.
What’s causing the shift? Most likely volatility that doesn’t show any sign of going away next year, according to analysts. Stocks will remain relatively flat next year, as inflation remains high, the Fed continues to hike rates, and the threat of a recession still looms. Active management will give investors much more control, something that could seem very appealing in an uncertain market. Being more actively involved in your portfolio allows for quicker adjustments as market conditions change, since “[direct indexing allows investors to buy the individual stocks in an index directly as opposed to owning a predetermined selection of stocks through a fund,” Marguerita Cheng of blue Ocean Global Wealth told Yahoo Money. However, direct indexing can sometimes be pricier than passive investing, and clients have a tendency to lose sight of their long-term goals as they get caught up in trading.
It’s long been the standard to buy an entire index rather than try to buy and sell individual stocks as it’s cheaper and much less complicated. In general, staying the course is usually the wisest path to long-term financial success. But it’s been difficult for investors to sit by in their passive strategies this year as the markets have roiled with volatility. Many investors, particularly those who are nearing retirement, have opted to step in and make changes to their portfolios. In addition, customization could have tax benefits, and appeal to those who are especially focused on ESG.
Many firms are now catering to DIY investors with more personalized products, such as Schwab, Vanguard, and Fidelity, which launched a customized index fund where customers select a group of stocks based on a theme—for example, clean energy stocks—and allocate percentages of each investment into a single basket. The service costs $4.99 a month, allows for up to 50 stocks and unlimited baskets, and can be used across non-retirement brokerage accounts. “This new ability to invest in and customize portfolios built from Fidelity’s thematic models puts direct indexing capabilities into the hands of DIY retail investors,” Fidelity senior VIP Josh Krugman told Yahoo Money. However, a Cerulli survey indicates that a mere 14% of financial advisors actually recommend direct indexing strategies to clients.
And passive investing hasn’t fallen by the wayside, particularly because fees for a pre-determined basket of stocks and bonds are so low. A passive approach is easy for investors who are still many years away from retiring and in it for the long haul. And in the last 15 years, over 70% of actively managed funds underperformed their benchmark, according to a survey this year from the S&P Dow Jones Indices, cited by Yahoo! Finance. That’s led many strategists to recommend a blended strategy of both passive and active investing. Says Keith Lerner of Truist, “if expectations are that returns will be lower in the years ahead then both passive and active funds with low expense ratios should be the preferred investment vehicles.”