Schwab Takes Aim at Surging Demand for ETF Direct Indexing

Firm's Personalized Indexing adds dashboard that boosts fund picking and tracking.

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Reviewed by: Michelle Lodge
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Edited by: Michelle Lodge

Charles Schwab Corp. is riding the wave of direct indexing, and ETF popularity, by adding to its Schwab Personalized Indexing a digital dashboard at the account level that gives the client a real-time snapshot of their account's value. 

Each day, Schwab's proprietary tax-loss harvesting algorithms show after-tax performance, which includes total realized gains and losses generated in the account, and the daily estimated account after-tax return, Divya Krishnan, director of Schwab product management, told etf.com. The dashboard also offers personalization capabilities that give users the ability to exclude more individual stocks as well as entire industries and sub-industries, the company said.

"Schwab has been very focused on bringing together technology and investment management to a wider audience,” Krishnan said.

Schwab’s offerings are in line with the growing popularity of direct indexing among well-off and wealthy investors, an area once only open to the ultra-wealthy.  

Assets in direct indexing are expected to grow at a five-year CAGR of 12.3% to reach $825 billion by 2026, according to Cerulli Associates, quoting from a white paper commissioned by Parametric Portfolio Associates. The report, which is geared to financial advisors, estimates direct indexing will account for one-third of retail accounts in three years, led by clients with $2 million to $3 million in assets. 

Krishnan added that Schwab’s internal research has shown that “clients want the ability to customize their direct indexing products, which allows them to exclude as many stocks as they would like at the industry or sub-industry level.”  

Schwab’s new personalization capabilities allow clients to pinpoint favored stocks when crafting their portfolios. As an example, she said a client may choose to omit all stocks in the oil and gas sector, or include the sector, but exclude only the companies engaged in drilling. 

The four indices under this direct indexing program are a U.S. large cap based on the Schwab 1000 Index, a U.S. small cap based on the S&P SmallCap 600 Index, an environmental, social and governance based on the MSCI KLD 400 Social Index, and the MSCI EAFE International. Each strategy seeks indexlike returns with enhanced after-tax benefits.

Krishnan said Schwab offers some of the lowest account-opening minimums and charge some of the lowest fees in the industry. Clients can open a direct indexing account with as little as $100,000, whereas some financial services houses require a $250,000 minimum. Clients pay $400 annually if using a Schwab portfolio manager, and $250 per year using an outside financial profession.  

(This story has been updated to add information on Schwab's digital dashboard product.) 

Follow Michelle Lodge on Twitter @lodgemich. 

Michelle Lodge is a journalist who is a contributor to many sites: Fortune, Money, Time, Barron’s, Investopedia, CNBC.com and Bloomberg.com.