Custom Indexing: The Benefits of Unbundling
By OSAM Research TeamJuly 2021
Unlike ETFs and mutual funds that offer one pre-packaged product for investors to purchase, the portfolio construction methodology behind Custom Indexing is personalized to an individual’s unique circumstances, risk tolerance, goals, and preferences. Custom Indexes are implemented through a separately managed account (SMA), where investors can directly own a mix of individual securities rather than indirectly owning positions through shares of funds and ETFs.
Custom Indexing is a technology, and technology often removes barriers. Packaged funds sit in between investors and the stocks they own. While mutual funds and ETFs were wonderful innovations in their own right, recent advances in portfolio management technology coupled with zero-commission trading have enabled investors to access sophisticated strategies consisting of direct share ownership.
THE BENEFITS OF 'UNBUNDLING' & OWNING INDIVIDUAL SECURITIES
The direct share ownership of Custom Indexes allows for more precise execution of high-end financial planning and offers benefits not available to ETFs, particularly in:
1) Tax Loss Harvesting
2) ESG & SRI
3) Reducing Concentrated Stock Risk
4) Allocation Flexibility
IN SUMMARY
ETFs and mutual funds suffer from a couple core problems: lack of customization and an inability to actively take advantage of underlying losses to combat tax drag.
Enabled by advances in technology, commission-free trading, and more, Custom Indexing now allows investors to build portfolios that are personalized to their specific situations and preferences. In the future, investors will no longer buy into someone else’s investing formula: each investor will buy into their own.
Custom Indexing is the start of that future, and the time is now.
*Direct link to piece highlighting tax management process
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The material contained herein is intended as a general market commentary. Opinions expressed herein are solely those of O’Shaughnessy Asset Management, LLC and may differ from those of your broker or investment firm.
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The risk-free rate used in the calculation of Sortino, Sharpe, and Treynor ratios is 5%, consistently applied across time
The universe of All Stocks consists of all securities in the Chicago Research in Security Prices (CRSP) dataset or S&P Compustat Database (or other, as noted) with inflation-adjusted market capitalization greater than $200 million as of most recent year-end. The universe of Large Stocks consists of all securities in the Chicago Research in Security Prices (CRSP) dataset or S&P Compustat Database (or other, as noted) with inflation-adjusted market capitalization greater than the universe average as of most recent year-end. The stocks are equally weighted and generally rebalanced annually
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