Today, Stockchase Insights and Jim Cramer - Mad Money commented about whether CCJ-N, ADBE-Q, IDXX-Q, DEA-N, LPX-N, MS-N, GS-N, BAC-N, C-N, WFC-N, JPM-N, ORCL-N, SRE-N, ABBV-N, AXP-N, VZ-N, GE-N, JNJ-N, PG-N, HAL-N, GEV-N, UAUA-Q, VICI-N, ISRG-Q, X-T are stocks to buy or sell.
Benefits of Direct Indexing:
Direct Indexing can be cheaper
When you own an ETF or fund, you pay an ongoing annual fee to own that fund. With direct indexing, you in theory do not have to pay anything to hold the index allocation. While we think investors can start to split hairs a little when evaluating a 0.05% fee fund to a 0.1% fund, the reality is that ETFs gained their edge because of low costs and now might be a victim of what they used to succeed in the first place.
Direct Indexing can be more tax efficient
When you own a fund and want to rebalance or do tax-loss selling, you can either sell units of the fund or not and those units are sitting at either a gain or a loss. With direct indexing, you would have an ability to not sell the entire index and sell only individual securities that have under or over performed within the index. So, if energy had a bad year, you could sell all energy stocks in the TSX for tax losses and continue to hold all of the other items within the fund so you don’t trigger gains. Put another way, the index itself could be up on the year but you can still harvest a tax-loss within the index. In the ETF or fund format, you would only be able to trigger a tax gain on the entire fund with this scenario.
It can be a tool to generate alpha
The potential strategies behind direct indexing could be countless as the technology develops and improves over the years. One can envision simple factor filters where an investor can exclude any company in the index with debt over ‘X’ or any company with a payout ratio over 100%. Again, the opportunities are endless and it has the potential to give even passive investors a lot of power in tweaking their ‘passive’ allocations in a way that makes them more comfortable with their portfolio and even allowing for differentiated returns from the index, for good or bad. Perhaps the ironic thing here is that things might come full circle and direct indexing strategies will lead to investors becoming active investors again and not even realizing it!
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