Embracing the Future of Portfolio Management: The Power of Savant Custom Indexing
Embracing the Future of Portfolio Management: The Power of Savant Custom Indexing
Technology helps push many industries forward, and investment management is no exception. In recent years, the “great unwrapping” of custom indexing has emerged as a potentially disruptive force in asset management. Much like the invention of the exchange-traded fund (ETF) redirected assets from mutual funds, we believe custom indexing is poised to reshape the competition for assets among ETFs and mutual funds for the foreseeable future.
What Is Custom Indexing?
Custom indexing offers a more direct investment approach compared to traditional mutual funds and ETFs, which act as wrappers between investors and the stocks they own. By holding individual stocks that make up an index or blend of indexes, custom indexing allows investors to manage their portfolios with greater flexibility and precision. This method can help provide enhanced control, customization options, and tax management opportunities by enabling investors to own the underlying stocks directly.
Historically, retail investors found custom indexes, also known as “custom SMAs” (separately managed accounts), inaccessible due to high trading costs and intensive management, so they were used primarily by institutions and affluent investors. However, the landscape has transformed dramatically. The removal of trading commissions by major brokerages and advancements in technology have democratized access to custom indexing, making it feasible for a broader audience. This evolution is fueled by:
Commission-Free Trading:
Initiated by Charles Schwab in October 2019, this move has significantly reduced the cost of trading individual stocks.
Technological Advancements:
Modern software platforms simplify the replication of indexes, making custom indexing more accessible and less labor-intensive.
Investor Demand:
Rising interest in impact investing allows custom indexing to cater to unique preferences, such as ESG (Environmental, Social, and Governance) or faith-based standards.
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Although the use cases and access to custom indexing have increased in recent years, custom indexing is not appropriate for all portfolios. Investors with a large majority of their assets in qualified accounts are unlikely to realize significant tax benefits. Similarly, investors with taxable positions that are highly appreciated may not see enough of a benefit to make it worthwhile to realize those capital gains. Your financial advisor can help you determine whether custom indexing can help add value to your portfolio.
Savant’s Approach to Custom Indexing
Savant harnesses this innovative approach through Savant Custom Indexing, integrating sophisticated technology with strategic portfolio management. This allows investors to access Savant’s evidence-based investing philosophy in a more tax-efficient way than traditional mutual funds and ETFs. By reducing their tax liability, investors can keep more of their returns.
This service can be beneficial for investors with large taxable accounts, allowing them to:
Optimize Tax Management: Investors can perform deep tax-loss harvesting at the individual stock level on a daily basis, helping enhance after-tax returns.
Express Personal Values: Investors can align their portfolios with personal values, such as environmental, social, and governance (ESG) criteria.
Manage Concentrated Stock Positions: Provides flexibility to underweight or avoid specific sectors to reduce risk associated with high exposure to particular industries.
If you have questions about custom indexing and how it can potentially align with your investment goals, please consult with your financial advisor.
Whether you’re thinking about switching financial advisors or are considering hiring one for the first time, download Savant’s Advisor Evaluation Checklist. This resource can help ensure the firm you pick fits your needs.
Jonathan J. Fuller
Senior Analyst, Portfolio Strategy