Create customized portfolios using direct indexing

Index funds and ETFs can offer diversification and broad market exposure at a reasonable price. But many investors would rather not own some of the companies in the index for a variety of reasons.

If the reasons are environmental or social, one solution is to buy a mutual fund or ETF that incorporates sustainable concerns into its investment objective. However, since no two individuals are alike, it can be challenging to find the perfect fit with off-the-shelf products. 

One solution is to use direct indexing – a personalized index in a separately managed account or SMA. An SMA offers the potential to incorporate customization precisely, tailored to provide just the right fit. And like a bespoke suit, it can also be altered over time as needs and opportunities evolve.

At Natixis Investment Managers Solutions, portfolios can be customized for environmental, social, governance, religious, or other personal reasons. We start with an index, often the S&P 500®, and then subtract securities to achieve the desired outcome while still maintaining a diversified portfolio. For example, we can exclude specific securities by name, or selected industries within a market sector, such as insurance or banks. We can also eliminate entire sectors, such as energy, which could help an investor concerned about environmental sustainability. 

Direct indexing can support Environmental, Social, and Governance investing as well -- by actively including certain companies or sustainable industries through positive screening based on ESG ratings. Negative screening can be based on ratings, but can also use business involvement screening or revenue thresholds of controversial companies.  

In addition, active screening can be used to help reduce overlapping risk. For example, an investor may have significant stock holdings in their own company, or their spouse’s company, or from inherited shares, and may want to limit additional exposure to those companies.

One final way to apply customization is by utilizing factor tilting, which favors companies that exhibit characteristics such as momentum, value, or dividend yield. Instead of seeking to track an index, these strategies lean portfolios toward characteristics that the investor believes will outperform the market.

For investors with specific investment requirements, customized indexing provides an efficient way to address personal or practical investment goals without sacrificing the benefits of a well-diversified portfolio.