Direct indexing: active management under another name?

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With the ability to create their own portfolios, he says, clients expose themselves to the pitfalls of active management. This includes the likelihood of falling behind their benchmarks in the short and long term, which even the majority of professional fund managers are guilty of regardless of geography, industry or asset class. in which they play.

And while direct indexing tends to come with lower fees than equity mutual funds, Rabener argued that investing on the basis of personal choice is unlikely to lead to better results than can be produced by already underperforming fund managers.

Another benefit touted by proponents of direct indexing is how well it lends itself to tax-loss harvesting strategies. But apart from the tendency of the tax benefits reaped to be lower in practice than in theory – some argue that the liability is not reduced, but only deferred – Rabener argued that managing an investment portfolio around tax optimization comes with significant risks, such as selling at the wrong time.

“In general, the worst performing stocks recover the most during recoveries. So if these have been sold, the investor captures all of the drop, but only part of the rise, ”he said. “In addition, replacing the losers with other positions changes the risk profile and the exposure to the factors of the portfolio.

Tax-loss harvesting strategies, he added, create yet another layer of active management, increasing the already high risk of losing investments. Citing research from Hendrik Bessembinder, he said that just 4% of all stocks accounted for almost all of the excess returns over short-term US Treasury bonds since 1926.


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