FTSE Russell Insights

Three takeaways from our 2022 Direct Indexing survey

Susan Quintin

Global Head of Equity Product Management

As recently as five years ago, hardly anyone in the financial services industry—outside of a small group of specialized, mostly tax-focused firms—had heard of direct indexing (DI). Fast forward to 2022, and DI has risen to prominence in the index investing conversation, with its surging popularity fueling significant asset growth.

From March to June 2022, Aite-Novarica Group conducted an online DI survey, and its 21 respondents spanned the wealth industry—including wealth management firms, asset management firms, investment platform providers, and digital/robo advice providers. Three clear themes emerged from the data, which given the survey sample size is a directional representation of wealth industry DI sentiment.

#1: The wealth industry hears opportunity knocking

DI is expected to be a key growth driver in the industry, especially for wealth firms. Survey results indicated that 81% of firms have a high interest in offering DI solutions to advisors—and 76% ranked DI as a top priority over the next 12-24 months. When it comes to what wealth firms view as the best opportunities for DI adoption and distribution, 90% of survey respondents named registered investment advisors (RIAs) as the top target market.

Ranking the Direct Indexing Opportunity
81%
of firms have a high interest in offering DI solutions to advisors
76%
of firms ranked DI as a top priority over the next 12-24 months
90%
of firms ranked RIAs as the top opportunity for DI adoption/distribution

 #2 Customization is king

DI seeks to replicate the performance of an index through purchasing the underlying shares, allowing for bespoke index solutions. This feature is of growing importance to investors, as more are prioritizing objectives such as tax efficiency and ESG considerations. For investors concerned about tax bills eroding their portfolios returns, holding individual securities directly facilitates tax loss harvesting on an index constituent level. And the rise of ESG has more investors valuing the ability to customize index allocations to meet their individual ESG requirements. 

Survey findings support the growing investor demand for customization. As shown, the majority of firms surveyed cited both tax loss harvesting and ESG screens/overlays as important capabilities for managing and delivering DI solutions.

How important is it to have the following capabilities for managing and delivering direct indexing solutions? (n=21)

Chart shows most firms surveyed cited both tax loss harvesting and ESG screens/overlays as important capabilities for managing and delivering DI solutions.

Source: Aite-Novarica Group - June 2022

#3: Direct indexing growth is on the brink of a surge

With rising investor demand for customization, it’s no surprise that the industry is in broad agreement that DI is undergoing significant growth—and that this growth is expected to accelerate over the next three to five years. Survey responses were consistent with this outlook, with 76% of firms reporting a high likelihood for adding DI solutions for US equity large-/mid-cap within the next five years. The survey also revealed that wealth firms are starting to look beyond large US equities for their DI offerings, targeting smaller cap equities, non-US equities, and fixed income.

To read the full report, visit FTSE Russell Research page.

What is the outlook for adding direct indexing solutions for the following asset classes/investment vehicles in he next five years? (n=21)

Chart 3 shows that 76% of firms reporting a high likelihood for adding DI solutions for US equity large-/mid-cap within the next five years. The survey also revealed that wealth firms are starting to look beyond large US equities for their DI offerings, targeting smaller cap equities, non-US equities, and fixed income.

Source: Aite-Novarica Group - June 2022

 A rosy outlook for direct indexing

If wealth industry sentiment is any indication, direct indexing has claimed an enduring place alongside ETFs and mutual funds in the index investing conversation. By one estimate, global DI assets are projected to more than quadruple over the next five years[1] —supporting survey respondents’ view that the direct indexing opportunity could be a key growth driver for the industry over the next several years.

For more details on our direct indexing survey, read the full paper Survey Report: The Direct Indexing Opportunity 2022.

[1] Source: Oliver Wyman/Morgan Stanley 2021

Read More About

Stay updated

Subscribe to an email recap from:

Disclaimer

© 2023 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) FTSE Fixed Income Europe Limited (“FTSE FI Europe”), (5) FTSE Fixed Income LLC (“FTSE FI”), (6) The Yield Book Inc (“YB”) and (7) Beyond Ratings S.A.S. (“BR”). All rights reserved.

FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, YB and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “FTSE4Good®”, “ICB®”, “The Yield Book®”, “Beyond Ratings®” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, YB or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.

All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of FTSE Russell products, including but not limited to indexes, data and analytics, or the fitness or suitability of the FTSE Russell products for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell products is provided for information purposes only and is not a reliable indicator of future performance.

No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.

No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this document should be taken as constituting financial or investment advice. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset or whether such investment creates any legal or compliance risks for the investor. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset nor confirmation that any particular investor may lawfully buy, sell or hold the asset or an index containing the asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back-tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.

This document may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.

No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, YB, BR and/or their respective licensors.