Investors are increasingly aware of the benefits of indexing. Mounting academic evidence shows that’s it’s difficult to beat the markets or identify managers with the skill to do so. At the same time, investors want their portfolios to reflect their values more than ever. They may want to exclude certain types of companies from their portfolios if they are involved in gambling, alcohol, unfair labor practices and so on.
Smartleaf’s direct indexing solution lets investors have the best of both indexing and socially responsible investing (SRI). Our Core Portfolio can be customized to screen out certain companies and even entire industries that don’t align with investors’ beliefs.
SRI exchange-traded funds (ETFs) exist, but there is limited choice. For instance, some investors may want to exclude fossil fuels but have no strong feelings about alcohol or stem cell research. SRI ETFs also generally have high expense ratios.
Direct indexing allows for security-level customization. Investors can put their own imprint on a portfolio by deciding which SRI issues are most important to them. At Smartleaf, we use MSCI’s research to screen out individual companies involved in industries our investors don’t wish to own. In addition, we are able to apply religious-based screens.
While we exclude some stocks, we are mindful of maintaining an index’s risk and return profile. To minimize the impact of an exclusion, we compensate by intelligently redistributing assets among the remaining stocks. Other separately managed account managers typically replace excluded stocks with cash or by proportionally increasing the position size of the remaining stocks, neither of which maintain the characteristics of the index they track.
Learn more about Smartleaf Core Portfolios here.