Direct Indexing May Offer ETF Alternative

Morningstar Inc. has stepped into the fast-growing direct indexing market, following Fidelity Investments and other money managers that offer investors the option to buy stocks that make up an index. 

The new product allows financial advisors and investors to build portfolios by buying individual stocks that make up indices, Chicago-based Morningstar said in a statement. 

The option may permit investors to sidestep equity exchange-traded funds, which track indices such as the S&P 500, and grant investors a share of their overall portfolio.  

Direct indexing is projected to grow more than 12.4% in the next five years, outpacing ETFs, which are expected to grow 11.3% during the same period, according to a 2021 study done by Cerulli Associates. A recent report by Broadridge also stated that 61% of financial advisors either have used or are considering using the product.  

In the past five years, ETFs have pulled in over $6 trillion in assets, according to ETF.com data. Direct indexing’s growth comes as investors hunt for returns amid slim stock market pickings. With markets like the Nasdaq down more than 30% this year, investors may be seeking alternatives.  

“Advisors are looking for ways to meet client interest in new investment options, particularly those that allow customization and personalization,” said Daniel Needham, president of Morningstar Wealth, in the statement. 

Morningstar’s product comes just weeks after Fidelity Investments announced a similar offering for retail investors Morgan Stanley, The Vanguard Group Inc. and BlackRock Inc. each offer direct investing, according to Investopedia. 

Just weeks ago, Fidelity said it would expand its direct indexing offerings to financial advisors and wealth management firms.  

Morningstar’s product launch is one of the first from its new division, Morningstar Wealth, which combines the portfolios from its investment management, data aggregator and retail investor arms.  

Contact Shubham Saharan at [email protected]