Direct indexing: What is this latest investing fad?

It's the hottest new stock investment concept that's labelled 'ETF version 2'. How does it work and who's offering it in Australia?

| More on:
A group of young people lined up on a wall are happy looking at their laptops and devices as they invest in the latest trendy stock.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

An Australian firm has brought the latest investing fad dubbed ETFs 2.0 from overseas to the local market.

Nucleus Wealth recently launched directindexing.com.au to allow Australians to invest through "direct indexing".

Direct indexing builds on the concept of a passive index fund, but allows customisations of individual stock holdings according to each investor's tastes.

"Direct indexing involves the investor owning the individual shares that make up an index in a separately managed account," said Nucleus Wealth chief investment officer Damien Klassen.

"Because the investor directly owns each of the shares in their own account, Nucleus Wealth is able to customise their superannuation or investments."

How direct indexing works

For example, if an investor wants their money to track the S&P/ASX 200 Index (ASX: XJO) but wants to avoid the big banks, they could simply sell their shares in Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group Ltd (ASX: ANZ).

The same goes for those who want to eliminate fossil fuel producers or gambling from their portfolios.

"Where an index mutual fund, an index ETF or traditional superannuation fund merely tracks the index, direct investing allows investors to control their investment decisions," said Klassen.

"Investors can modify their portfolios by creating 'tilts', which is the ability to remove or add certain holdings or sectors according to personal preferences."

The direct indexing product from Nucleus Wealth is charging from 0.11% upwards on a sliding scale based on the amount invested.

Form your own opinions about ethical investing

Nucleus Wealth chief operating officer Shelley George said ETFs are now like Henry Ford's famous quote, "Any customer can have a car painted any colour that he wants, so long as it is black".

"Before direct investing, if you want a red car, you had to go to a stock broker and build the entire car from the base parts," she said.

"Nucleus looks at direct investing as providing a third option: take an already built car and add your own custom tilts."

The direct indexing concept hands the power to individuals to invest ethically, according to their own beliefs and criteria.

"When it comes to ethical investing, the questions become more nuanced and the answers often depend on the individual," said Klassen.

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Westpac Banking Corporation. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on How to invest

Happy couple enjoying ice cream in retirement.
How to invest

I'd buy Woodside shares today to generate $1,000 of monthly passive income

At the current share price, I think Woodside can continue to deliver market-beating, long-term passive income.

Read more »

A couple lying down and laughing, symbolising passive income.
How to invest

No savings? I'd use the Warren Buffett method to earn lifelong passive income with ASX shares

Learn how to invest from Warren Buffett.

Read more »

Confident male executive dressed in a dark blue suit leans against a doorway with his arms crossed in the corporate office
How to invest

Investing in ASX shares? Why CEO pay DOES matter when misaligned

Wonder who topped the highest-paid CEO table?

Read more »

A young well-dressed couple at a luxury resort celebrate successful life choices.
How to invest

Could investing $10,000 in ASX shares make you a millionaire?

Is this the key to becoming wealthy? Let's find out more.

Read more »

A man in his late 60s, retirement age, emerges from the Australian surf carrying a surfboard under his arm and wearing a wetsuit.
How to invest

Looking to boost your retirement with extra passive income? Try this!

Securing a passive income stream could offer a big lift to your retirement lifestyle. Here’s how I’d go about it.

Read more »

A young woman holding her phone smiles broadly and looks excited, after receiving good news.
How to invest

These ASX 200 stocks turned $20,000 into $100,000+ in 10 years

Big returns were made by investors buying these shares back in 2014.

Read more »

Emotional euphoric young woman giving high five to male partner, celebrating family achievement, getting bank loan approval, or financial or investing success.
How to invest

7 tips for successful ASX shares investing: expert

AMP chief economist Shane Oliver shares what he has learned over 40 years in the game.

Read more »

Woman and man calculating a dividend yield.
How to invest

This Warren Buffett metric is at a never-before-seen high! What does it mean?

Warren Buffett's valuation indicator could be sending a warning.

Read more »