Build-Your-Own-Index Boom Could Hit $825 Billion in Four Years

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 to climb to $825 billion by 2026 from roughly $462 billion now, according to the research shop’s new paper sponsored by direct-indexing provider Parametric Portfolio Associates. That’s a five-year compound annual growth rate of 12.3%, exceeding growth forecasts for exchange-traded funds, mutual funds and separately managed accounts.

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 boomed in popularity. It gives specialization-minded advisers the ability to tailor portfolios at lower costs, which has become more important as asset management firms vie for clients’ dollars.

“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.”