“This concept isn’t mainstream in the investment advisor
community yet, but it could be in the future. And there is a
potential for a large impact for both active and passive mutual
funds and ETFs,” Price added.
Bob Seawright believes this trend likely will disrupt ETFs.
The chief investment and information officer for Madison
Avenue Securities sees direct indexing as “potentially the
most disruptive in how it relates to how advisors are going to
construct their portfolios generally, but more specifically on
how they’re going to go about it and what pieces they’re going
to use to do it. When I speak with folks in the ETF industry,
they’re convinced that they’ve won … [and that] mutual funds
will always exist but ETFs will rule the day.”
But think about it, Seawright says. “If you’re an advisor in
[Silicon Valley], you have a real need for the ability to sort out
your client’s firm from their holdings. [You may] prefer to own
the S&P 500 index, but your client works for Apple and has a
ton of Apple stock. It’s great to be able to pull Apple from the
S&P and still provide the index — and create your own index
if you choose.”
He also points to the benefits of direct indexing, especially
as it relates to socially responsible investing, i.e., when clients
want to eliminate certain products or negative screens.
“With direct indexing you have the ability to sort to whatever extent you want to create an individualized portfolio for
your clients. And in a way that you can support with academic
research as being viable — you’re not just throwing something
against the wall and seeing what will stick — but actually coming up with a well-diversified, well-constructed conceptualized portfolio. That’s pretty powerful,” Seawright explained.
Sustainable investing as an investment category has about
$30 trillion dollars in assets globally but is not yet widely
embraced by the advisor community. Many experts say SI
and all that it covers — environment, social and governance,
impact and social investing — is a significant trend in portfolio
management, especially as earnings and the investing power
of millennials expand. The United States alone has more than
$12 trillion in assets, with flows quadrupling year-over-year,
according to Morningstar.
“The move towards socially conscious/ESG investing is
only going to increase in coming years,” said Price. “Offering
advisors and clients ESG resources and portfolio solutions is
no longer going to be a ‘nice to have’ but rather a requirement
in the future.”
He sees more targeted ESG mutual funds and ETFs on
the horizon, and believes “building a portfolio that is exclu-
sively comprised of ESG funds will become much easier in the
future.” Plus, “investors will be able to focus their portfolios
on environmental and social issues that are most important to
them,” Price explained.
SRI or ESG has been a factor in the industry, and there’s
no shortage of products that advisors can utilize for portfolios today. BlackRock and State Street Global Investors, for
instance, have taken major steps in developing products and
making other moves in this direction. They’ve also become
vehement in their support of this investment choice.
“We will be increasingly disposed to vote against management and board directors when companies are not making
sufficient progress on sustainability-related disclosures and
the business practices and plans underlying them,” wrote
BlackRock CEO Larry Fink in his January letter to CEOs of the
firm’s portfolio companies and to its investor clients.
Cyrus Taraporevala, president and CEO of State Street
Global Advisors, was even more strident in his January letter
to corporate board members: “Beginning this proxy season,
we will take appropriate voting action against board members
at companies in the S&P 500, FTSE 350, ASX 100, TOPIX 100,
DAX 30 and CAC 40 indices that are laggards based on their
Here are a handful of new portfolio products tied to important trends in wealth management.
New ESG ETFs
Blackrock’s iShares plans to introduce three ETFs that exclude
fossil fuels as part of its Advanced-branded product line for
index-based ETFs that also screens out for-profit prisons,
controversial weapons manufacturers, palm oil producers and
companies with high controversy scores.
It rebranded its Sustainable Core ETFs as Aware funds,
which include only companies with favorable environmental,
social and governance characteristics but offer a similar risk
and return profile to broad market indexes.
The Aware product line was originally introduced in March
2018 with several equity and fixed income ESG ETFs based on
indexes from MSCI, which is also the index provider for the
Advanced product line. In a few weeks, those indexes for the
Aware-branded ETFs will add screens that exclude companies
collecting revenues from thermal coal and oil sands.
State Street, which has several index ESG ETFs, has filed an
application with the Securities and Exchange Commission to
trade its first actively managed ESG ETF.
The SPDR SSGA Responsible Reserves ESG ETF will invest
in short-term fixed income securities including Treasuries,
mortgage pass-throughs and corporate bonds and screen
out most issuers that are involved in or derive revenue from
extreme event controversies, controversial weapons, civilian