An index strategy that's all about customization is expected to grow faster than other investment vehicles over the next four years as investors' desire for personalization intensifies.
Cerulli Associates expects assets in so-called
Direct indexing essentially allows investors to cherry-pick which stocks to buy in a benchmark index instead of owning a fund that tracks a specific gauge like the S&P 500. In recent years, the strategy has
"Competition continues to intensify in the wealth management industry as investors exercise more control over their portfolios and providers are challenged to differentiate," the paper said. "This has continued to amplify industry interest in direct indexing and, more broadly, mass customization of client portfolios."
Wall Street has been pouring billions of dollars into direct indexing. Franklin Resources, better known as Franklin Templeton,
To be sure, total assets in direct indexing are still dwarfed by ETFs and other products. Though Cerulli sees mutual funds' five-year compound annual growth rate shrinking 2%, they would still command nearly $19 trillion in 2026. Meanwhile, money in ETFs is projected to climb 9.5% to $11.3 trillion in that span, while separate accounts are seen rising 7.2% to $2.5 trillion.
"Direct indexing, once hailed as an 'ETF killer' that would revolutionize investing, has yet to make much of a dent," Bloomberg Intelligence senior ETF analyst Eric Balchunas wrote in an October report. "Direct indexing could find some niche uses, but we don't think it will surpass 2%-3% market share given it's more complex, active and expensive than ETFs."
To that point, Cerulli sees "mass-affluent and high-net-worth clients" as the largest addressable market for custom indexing, despite shops such as Fidelity and Altruist offering services for accounts with balances less than $10,000.
Franklin Templeton's custom-indexing platform Canvas, for instance, isn't offered to retail investors, according to O'Shaughnessy Asset Management client portfolio specialist Jamie Catherwood. But Canvas has crossed $3.5 billion in assets and 2,000 accounts since launching at the end of 2019, he said.
"Just from our experience, it's growing very rapidly, and it'll only continue to grow as technology and software evolves and price points become lower and fees fall," Catherwood said on Bloomberg Television's ETF IQ on Monday.