Last year, assets in passive mutual funds and ETFs overtook assets in active mutual funds and ETFs. This is remarkable considering that passive funds accounted for 31% of total assets in 2015. The trend has been gaining steam since 2008 due to the strong performance of market-cap, weighted indices, and a greater preference for lower fees. 

In 2023, only 47% of active managers outperformed their passive benchmarks. Over the last decade, only 12% of active managers have survived and outperformed their benchmarks. Due to this, it’s not surprising to see that passive strategies are being adopted in separately managed and unified accounts. Currently, it accounts for 32% of assets in these accounts and is forecast to grow at a 12% rate over the next 4 years, faster than growth in ETFs and mutual funds. 

Direct indexing is a customizable, passive investing strategy. It’s designed to track a benchmark but allows for customization for tax purposes or to align investments with a client’s values. According to research, direct indexing can add between 85 and 110 basis points to a portfolio’s after-tax returns. 

Direct indexing also allows advisors to offer clients more personalization while retaining the benefits of passive investing. Already, asset managers and custodians are responding by offering direct indexing solutions at scale to advisors. 

Finsum: Passive strategies have overtaken actively managed strategies in terms of their share of assets. Direct indexing is one factor, as it is a way for advisors to retain the benefits of investing in an index with greater customization and tax efficiency

• tax loss harvesting
• direct indexing
• tax efficiency
• active management
• custom indexing

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