Morningstar launches direct indexing as stock investors seek to personalize portfolios

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Morningstar’s Wealth Management Group has launched Direct Indexing to help stock market investors customize their portfolios in a tax-efficient way, offering a type of investment offering the company says has gained popularity with advisors. financial.

The new offering became available after engaging a board of advisers for nearly a year and launching a pilot program in June, according to a Morningstar statement expected to be released on Tuesday. It will help advisors help their clients create custom portfolios linked to a broad index and a subset of its holdings.

“Generally they’re going to own a subset of the stocks in the index,” Daniel Needham, chairman of Morningstar Wealth, said in a phone interview. “You can build a broadly diversified portfolio of a subset of the index companies that will follow closely.”

Direct indexing allows individual investors to invest directly in stocks of companies based on their “specific preferences”, Needham said. That can mean excluding certain stocks and industries, or expressing views related to “ESG,” he said, referring to environmental, social and governance criteria.

“Personalization is just everywhere,” Needham said. “People just want things to be more personalized,” and “financial planning and investment management is no exception.”

Needham said Morningstar will work with financial advisors to provide direct indexing, helping them build portfolios on behalf of their clients. According to the firm, interest in direct indexing has accelerated among advisors.

“The approach makes direct ownership of the underlying securities convenient for more individuals,” Morningstar said in the release, as investors can customize their holdings and select additional services such as “loss harvesting.” tax”.

“You are able to manage the portfolio in a tax-conscious way,” Needham said. “Fiscal management is really a key driver for the adoption of direct indexing.”

Opinion: Is direct indexing really the next big thing?

Morningstar’s announcement comes about a week after Fidelity Investments announced on October 24 that it was expanding its direct indexing capabilities with the launch of the separately managed account offering for Fidelity institutions for select management companies and institutions. of heritage. In June, Fidelity announced it was launching Fidelity Solo Fidfolios to bring “new direct indexing capability to DIY retail investors.”

Morningstar’s direct-indexed portfolios include Morningstar US Target Market Exposure, Morningstar US Small-Mid Cap, Morningstar US Large Cap Broad Growth, Morningstar US Large Cap Broad Value and Morningstar Global Markets ADR, according to an email from a holder. word of society.

On the sustainability front, Morningstar US Sustainability Dividend Yield Focus, Morningstar US Sustainability Moat Focus, and Morningstar Women’s Empowerment will also be available as portfolio options for direct indexing on Tuesday, the spokesperson’s email says.

As for excluding particular securities from the various indexes, some investors may wish to do so based on their values ​​and “political beliefs,” Needham said. This may mean eliminating areas such as alcohol, tobacco, firearms, fossil fuels or animal testing from their portfolios, according to Morningstar.

US stocks remain in a bear market this year, with major benchmarks such as the S&P 500 index mired in losses. For example, shares of the SPDR S&P 500 ETF Trust SPY,
-0.25%
slipped about 0.7% on Monday for a 2022 through October loss of nearly 19%, according to FactSet data.

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