WALL STREET JOURNAL.
The Personalized Index Fund’s Time May Be Near
Many people may not
be up to the task, but some experts expect more individuals will
be doing this
Start with an investment theme,
throw in some rules, add a touch of your favorite research firm,
and voilà—your own personal index fund. ILLUSTRATION: SERGE
BLOCH FOR THE WALL STREET JOURNAL
By Chuck Jaffe
June 19, 2018 10:22 p.m ET
Someday soon, your
favorite index could be, literally, “the index of my favorite stocks.”
While you might not feel qualified, technology already exists to
help you build an index just as good as what the experts do, and lower your
investment costs in the process.
“Personalized indexing” may not be here yet, but it isn’t far
Index investing and passive management—buying and holding a
basket of stocks that replicates a benchmark—has been taking over the investment
scene for years. Index funds attract the vast majority of investment flows,
compared with active funds. Their low cost, transparency and tax efficiency are
the pillars of the multitrillion-dollar exchange-traded-funds business.
Yet what investors have seen is just the beginning.
Whatever the financial-services industry can dream up, and
believes the public will buy, it can turn into an index ETF. That is why there
already seems to be an index ETF for every occasion and specialty, from
artificial intelligence (AIEQ) to gaming (GAMR) to obesity (SLIM) to whatever
stuff millennials are into (MILN).
It isn’t a big step from that to building an index portfolio that
follows your personal rules.
As indexing has evolved, so has the thinking about what index
funds are and what they are supposed to do.
Jack Bogle, founder of Vanguard Group and the first index fund,
advocated classic indexing, where investors buy into old-school indexes like the
S&P 500 and hold them forever. This is truly “passive investing,” where both the
buyer of the fund and the manager of the fund do virtually nothing.
But many investors these days are “tactical,” meaning they trade
passive index funds to tilt a portfolio toward whatever sector or region is most
promising at any point. As investors, they could be described as “actively
The next extension of this phenomenon becomes the personalized
index, one where you make the rules.
While it could be as simple as “buy all large-cap stocks with a
positive earnings trend and no debt on the balance sheet,” it is more likely to
reflect research you trust, with your confidence then leveraged into a
Here’s how it might work: You go to
your brokerage website, logging into the research tools there from your favorite
analytical firms, like
Morningstar Inc. You screen
investments—mixing and matching what you want to see. You cross-reference
different research firms, maybe combining 5-star options from Morningstar with
highly rated securities from other research firms and add in personal criteria,
like a preference for increasing dividend payouts.
It’s a rules-based approach where you make the rules.
Ben Johnson, director of global ETF research at Morningstar,
compared the financial concept to what hungry eaters find at
Chipotle Mexican Grill : “All of the
ingredients are out there, and you order whatever looks good to you, and each
person gets their food the way they want it, at a cost they can see and
understand. You get exactly what you want.”
With the screening done and the rules in place—including how
often to rebalance holdings and how to weight the portfolio—you click a button
to buy the portfolio and—boom!—personal index fund.
There will be trading costs to buy the securities—currently
excluded from the expense ratios of traditional funds and outside of the cost
structure of ETFs—but no management fees. And brokerage firms are developing
ways to nearly eliminate trading costs, such as flat annual fees for managing a
“The technology is here to do it now, but the industry is
resisting it because the establishment gets paid to put together baskets of
stocks,” says David Trainer, president of New Constructs, a Nashville-based
research firm. “As cheap as index funds are, the truth is that investment firms
have been overcharging people for simply putting stocks into groups. You don’t
need that middleman anymore, so you will either buy the lowest-cost index funds
out there or you will make them and execute them yourself.”
Mind you, personalized funds aren’t a new concept.
At the height of the internet-stock bubble, various firms started
trying to sell investors custom baskets of stocks. The idea was to build
low-cost, diversified portfolios where the investor knew, and controlled, all
holdings. While the concept was supposed to democratize investing, the leading
players moved where the money took them, away from the personalized funds angle
and more toward menus of thematic, prepared portfolios.
It’s worth remembering, however, that both indexing and the ETF
industry didn’t become popular concepts overnight. The first ETF opened in
January 1993; it took more than 15 years for the industry to reach 1,000
offerings, then took less than 10 years to double from that size.
Thus, the personalized index fund is greeted with skepticism,
even as industry watchers can’t help but acknowledge its potential.
At a press briefing at the recent Morningstar Investment
Conference in Chicago, Morningstar Chief Executive Kunal Kapoor said he believes
that “the do-it-yourself crowd will go in that direction [of personalized
funds], but the average investor probably won’t take it that far.”
But a moment later, he was asked what the next generation of
investors is demanding from the financial-services industry, and his answer
showed the potential of the personalized portfolio.
“Personalization is very big to the new generation,” Mr. Kapoor
said. “They want something tailored to them instead of being put into a black
box. They want to know how their money is working for them. They want
transparency and low costs. And those are all things they’re going to insist on
and won’t be satisfied without.”
Mr. Jaffe is a writer in Boston. He can be reached at
Appeared in the June 20, 2018, print edition