Private investors have grown to love exchange-traded funds (ETFs), which enable them to easily track a host of global markets and maximise their returns by paying impossibly low annual fees.
This has been a welcome revolution, giving power to small investors and saving them from handing over a small fortune in charges to expensive active fund managers.
Yet ETFs do have one big drawback. While they are pretty much guaranteed to match the performance of their chosen index, minus that small fee, they will never actually beat it.
That’s because they are obliged to buy every stock listed on the index, the good, bad and in some cases downright ugly, and passively follow them up or down.
Now, a twist on ETFs offers investors the chance to filter the bad and ugly out of their portfolio, and only buy the good guys.
It is called direct indexing, or sometimes personalised indexing, and helps investors or their advisers build a customised portfolio that offers greater freedom and flexibility than either ETFs or actively managed mutual funds.
The concept has been taking the US market by storm, where it is expected to grow faster than any other investment vehicle over the next four years.
Cerulli Associates expects direct indexing growth to outpace both ETFs and active funds, with average annual growth of 12.3 per cent a year.
Assets invested in direct indexing will almost double to about $825 billion by 2026, up from $462 billion last year, it says in a report sponsored by direct-indexing provider Parametric Portfolio Associates.
Cerulli research director Tom O’Shea reckons direct indexing is ready to deliver “mass customisation” and provide a “silver bullet” for investors, but what does the concept mean in practice?
First, if you have not heard of direct indexing, do not worry. The concept is fairly new and mostly restricted to the US, but then so were ETFs at first, and see how swiftly they have conquered the world.
The key difference with direct indexing is that you are buying the individual stocks on a market rather than all of them, as you do with an ETF or mutual fund.
As well as the cherry-picking benefits, this allows you to replicate the performance of that index by directly purchasing a few of its constituent members and adjusting them over time, says Vijay Valecha, chief investment officer at Century Financial.
Since you own the individual stocks, you can adjust your holdings to fit your specific circumstances.
“Unlike one-size-fits-all ETFs or mutual funds, you can customise your portfolio to, say, include more tech stocks and fewer utility stocks,” he says.
If an investor already has a large stake in an individual company listed on an index they want to track, direct indexing allows them to exclude that company from their portfolio.
For example, somebody who made a large bet on electric carmaker Tesla might be reluctant to double down by buying it in a tech tracker, too.
The same might apply if an investor already owns a heap of shares in their employer and don’t want further exposure when buying the index it is listed on.
Direct indexing also allows investors to exclude a stock or sector on environmental, social and governance (ESG) grounds, say, if they don’t want to buy into a tobacco manufacturer or a fossil fuel exporter.
This seems to offer the best of both worlds, at least in theory. Passive investing, with active engagement.
Unlike one-size-fits-all ETFs or mutual funds, you can customise your portfolio to, say, include more tech stocks and fewer utility stocks
Vijay Valecha,
chief investment officer, Century Financial
Mr Valecha says it has a further benefit as it can offer tax advantages that traditional ETFs do not, known as tax-loss harvesting.
“This involves selling individual securities in your portfolio at a loss, even when the index has climbed as a whole,” he adds.
By doing this, you can generate losses to offset against your capital gains from other positions in the same tax year, potentially lowering your overall bill.
“Over time, these incremental tax savings can add up significantly,” he says.
Vanguard Personalised Indexing automatically scans investors’ portfolios each day for tax-loss harvesting and rebalancing opportunities, helping them optimise holding periods and offset capital gains and losses.
This strategy is not an option when investing in standard ETFs because you own only interests in the fund, rather the individual securities, Mr Valecha adds.
One drawback is that it takes time and effort to identify and purchase the securities.
“Some of the stocks may not be easily available for purchase, making it difficult for smaller investors to obtain them at a reasonable price,” Mr Valecha says.
Until recently, only large, institutional clients or high-net-worth investors could tap into direct indexing, but now platforms such as Fidelity, Schwab, BlackRock, Vanguard and Morgan Stanley are opening the concept to a much wider market by offering cheaper, automated services.
How much you need to access the service varies. For example, Fidelity offers it from $5,000 while Schwab's minimum investment is $100,000.
Jason Hollands, managing director of fund platform Bestinvest by Evelyn Partners in the UK, says the supposed tax advantages of direct investing will depend on the country.
“In the UK, for example, investment fund structures are highly tax-efficient as trades within funds do not incur capital gains tax liabilities. You only crystallise a gain when you sell shares in the fund itself, so there is no real benefit here.”
Giles Coghlan, chief market analyst, consulting, for brokerage HYCM, suggests the ability to exclude individual stocks may be overrated.
“Even if one stock drops deeply, if it is part of a larger index like the S&P 500, it isn’t particularly damaging to your portfolio.”
David Morrison, senior market analyst at Trade Nation, says this remains a niche area and for most investors, ETFs remain the simplest and cheapest option.
“Direct indexing demands time and effort, either from you or your financial adviser. That means there will be management fees and commissions, if actively buying and selling individual stocks within the index.”
These may be offset through tax savings, but the process will work best on larger portfolios, which offer economies of scale.
“By contrast, it’s relatively cheap to buy and hold an ETF, although you have no control over what’s in it,” Mr Morrison says.
For most investors, ETFs will be enough. Having more control is great, unless it comes at the cost of even greater complexity.
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The National's picks
4.35pm: Tilal Al Khalediah
5.10pm: Continous
5.45pm: Raging Torrent
6.20pm: West Acre
7pm: Flood Zone
7.40pm: Straight No Chaser
8.15pm: Romantic Warrior
8.50pm: Calandogan
9.30pm: Forever Young
Company profile
Date started: Founded in May 2017 and operational since April 2018
Founders: co-founder and chief executive, Doaa Aref; Dr Rasha Rady, co-founder and chief operating officer.
Based: Cairo, Egypt
Sector: Health-tech
Size: 22 employees
Funding: Seed funding
Investors: Flat6labs, 500 Falcons, three angel investors
Founders: Ines Mena, Claudia Ribas, Simona Agolini, Nourhan Hassan and Therese Hundt
Date started: January 2017, app launched November 2017
Based: Dubai, UAE
Sector: Private/Retail/Leisure
Number of Employees: 18 employees, including full-time and flexible workers
Funding stage and size: Seed round completed Q4 2019 - $1m raised
Funders: Oman Technology Fund, 500 Startups, Vision Ventures, Seedstars, Mindshift Capital, Delta Partners Ventures, with support from the OQAL Angel Investor Network and UAE Business Angels
Suggested picnic spots
Abu Dhabi
Umm Al Emarat Park
Yas Gateway Park
Delma Park
Al Bateen beach
Saadiyaat beach
The Corniche
Zayed Sports City
Dubai
Kite Beach
Zabeel Park
Al Nahda Pond Park
Mushrif Park
Safa Park
Al Mamzar Beach Park
Al Qudrah Lakes
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Company Profile
Name: Thndr
Started: 2019
Co-founders: Ahmad Hammouda and Seif Amr
Sector: FinTech
Headquarters: Egypt
UAE base: Hub71, Abu Dhabi
Current number of staff: More than 150
Funds raised: $22 million
Afghanistan Premier League - at a glance
Venue: Sharjah Cricket Stadium
Fixtures:
Tue, Oct 16, 8pm: Kandahar Knights v Kabul Zwanan; Wed, Oct 17, 4pm: Balkh Legends v Nangarhar Leopards; 8pm: Kandahar Knights v Paktia Panthers; Thu, Oct 18, 4pm: Balkh Legends v Kandahar Knights; 8pm: Kabul Zwanan v Paktia Panthers; Fri, Oct 19, 8pm: First semi-final; Sat, Oct 20, 8pm: Second semi-final; Sun, Oct 21, 8pm: final
Table:
1. Balkh Legends 6 5 1 10
2. Paktia Panthers 6 4 2 8
3. Kabul Zwanan 6 3 3 6
4. Nagarhar Leopards 7 2 5 4
5. Kandahar Knights 5 1 4 2
10 tips for entry-level job seekers
- Have an up-to-date, professional LinkedIn profile. If you don’t have a LinkedIn account, set one up today. Avoid poor-quality profile pictures with distracting backgrounds. Include a professional summary and begin to grow your network.
- Keep track of the job trends in your sector through the news. Apply for job alerts at your dream organisations and the types of jobs you want – LinkedIn uses AI to share similar relevant jobs based on your selections.
- Double check that you’ve highlighted relevant skills on your resume and LinkedIn profile.
- For most entry-level jobs, your resume will first be filtered by an applicant tracking system for keywords. Look closely at the description of the job you are applying for and mirror the language as much as possible (while being honest and accurate about your skills and experience).
- Keep your CV professional and in a simple format – make sure you tailor your cover letter and application to the company and role.
- Go online and look for details on job specifications for your target position. Make a list of skills required and set yourself some learning goals to tick off all the necessary skills one by one.
- Don’t be afraid to reach outside your immediate friends and family to other acquaintances and let them know you are looking for new opportunities.
- Make sure you’ve set your LinkedIn profile to signal that you are “open to opportunities”. Also be sure to use LinkedIn to search for people who are still actively hiring by searching for those that have the headline “I’m hiring” or “We’re hiring” in their profile.
- Prepare for online interviews using mock interview tools. Even before landing interviews, it can be useful to start practising.
- Be professional and patient. Always be professional with whoever you are interacting with throughout your search process, this will be remembered. You need to be patient, dedicated and not give up on your search. Candidates need to make sure they are following up appropriately for roles they have applied.
Arda Atalay, head of Mena private sector at LinkedIn Talent Solutions, Rudy Bier, managing partner of Kinetic Business Solutions and Ben Kinerman Daltrey, co-founder of KinFitz
Our family matters legal consultant
Name: Hassan Mohsen Elhais
Position: legal consultant with Al Rowaad Advocates and Legal Consultants.
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UAE currency: the story behind the money in your pockets
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Number of Chinese people in International City: Almost 50,000
Daily visitors to Dragon Mart in 2018/19: 120,000
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Percentage increase in visitors in eight years: 500 per cent
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The biog
Favourite films: Casablanca and Lawrence of Arabia
Favourite books: Start with Why by Simon Sinek and Good to be Great by Jim Collins
Favourite dish: Grilled fish
Inspiration: Sheikh Zayed's visionary leadership taught me to embrace new challenges.
Recent winners
2002 Giselle Khoury (Colombia)
2004 Nathalie Nasralla (France)
2005 Catherine Abboud (Oceania)
2007 Grace Bijjani (Mexico)
2008 Carina El-Keddissi (Brazil)
2009 Sara Mansour (Brazil)
2010 Daniella Rahme (Australia)
2011 Maria Farah (Canada)
2012 Cynthia Moukarzel (Kuwait)
2013 Layla Yarak (Australia)
2014 Lia Saad (UAE)
2015 Cynthia Farah (Australia)
2016 Yosmely Massaad (Venezuela)
2017 Dima Safi (Ivory Coast)
2018 Rachel Younan (Australia)
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Our family matters legal consultant
Name: Hassan Mohsen Elhais
Position: legal consultant with Al Rowaad Advocates and Legal Consultants.
The specs
Engine: 2.0-litre 4cyl turbo
Power: 261hp at 5,500rpm
Torque: 405Nm at 1,750-3,500rpm
Transmission: 9-speed auto
Fuel consumption: 6.9L/100km
On sale: Now
Price: From Dh117,059
The specs
- Engine: 3.9-litre twin-turbo V8
- Power: 640hp
- Torque: 760nm
- On sale: 2026
- Price: Not announced yet
How much do leading UAE’s UK curriculum schools charge for Year 6?
- Nord Anglia International School (Dubai) – Dh85,032
- Kings School Al Barsha (Dubai) – Dh71,905
- Brighton College Abu Dhabi - Dh68,560
- Jumeirah English Speaking School (Dubai) – Dh59,728
- Gems Wellington International School – Dubai Branch – Dh58,488
- The British School Al Khubairat (Abu Dhabi) - Dh54,170
- Dubai English Speaking School – Dh51,269
*Annual tuition fees covering the 2024/2025 academic year
EA Sports FC 26
Publisher: EA Sports
Consoles: PC, PlayStation 4/5, Xbox Series X/S
Rating: 3/5
Results
6.30pm: Baniyas (PA) Group 2 Dh195,000 1,400m | Winner: ES Ajeeb, Sam Hitchcock (jockey), Ibrahim Aseel (trainer)
7.05pm: Maiden (TB) Dh165,000 1,400m | Winner: Al Shamkhah, Royston Ffrench, Sandeep Jadhav
7.40pm: Handicap (TB) Dh190,000 1,200m | Winner: Lavaspin, Richard Mullen, Satish Seemar
8.15pm: Maiden (TB) Dh165,000 1,200m | Winner: Kawasir, Dane O’Neill, Musabah Al Muhairi
8.50pm: Rated Conditions (TB) Dh240,000 1,600m | Winner: Cosmo Charlie, Pat Dobbs, Doug Watson
9.20pm: Handicap (TB) Dh165,000 1,400m | Winner: Bochart, Richard Mullen, Satish Seemar
10pm: Handicap (TB) Dh175,000 2,000m | Winner: Quartier Francais, Fernando Jara, Ali Rashid Al Raihe
NBA Finals results
Game 1: Warriors 124, Cavaliers 114
Game 2: Warriors 122, Cavaliers 103
Game 3: Cavaliers 102, Warriors 110
Game 4: In Cleveland, Sunday (Monday morning UAE)
