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 off.

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.

The next steps

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 passive.”

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 portfolio.


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.

Trading costs

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 personalized portfolio.

“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