What’s fueling the growing interest in direct indexing? S&P DJI’s Robby Ross and Brandon Hass sit down with Erkko Etula from Brooklyn Investment Group to explore how direct indexing solutions can enable investment managers to customize leading indices like the S&P 500 to meet specific objectives.
[TRANSCRIPT]
Robert Ross:
Hi and welcome. I'm Robby Ross, Chief Commercial Officer for S&P Dow Jones Indices. We're excited to announce the launch of MyIndex, a customizable version of our indices in partnership with Brooklyn Investment Group. Joining us today is Erkko Etula, CEO and Co-Founder of Brooklyn Investment Group, and Brandon Hass, Head of Direct Indexing and Model Portfolios at S&P Dow Jones Indices. Welcome both of you.
Erkko Etula:
Thank you.
Brandon Hass:
Thank you.
Robert Ross:
Let's get started. Brandon, to start, can you explain what is MyIndex and how does it work?
Brandon Hass:
Yeah, absolutely would love to. Thanks again for having us here. So what MyIndex is, I think you kind of hit the nail on the head. It's a custom solution based on our index files that provide for a universe to create personalized, customized index investment solutions at scale. How it works is we have an agreement with Brooklyn Investment Group in a collaboration where we actually plug in hundreds of thousands of index files every single day that they can then use to customize investment solutions based on unique, discrete needs of particular clients, right on a financial advisor's workstation. So we really feel like this is the next evolution in delivering our index files for creation of custom portfolio solutions at mass scale.
Robert Ross:
That's great. And Erkko, over to you. Can you talk to us a bit about Brooklyn Investment Group and what makes it unique?
Erkko Etula:
So Brooklyn Investment Group is a multi-asset direct indexing platform for financial advisors. So let's unpack that a little bit. So direct indexing, as you all know, is a way to invest in the underlying securities like stocks and bonds directly while incorporating personalization and tax management. So you don't need to invest in an ETF to invest in the underlying stock. That's an example. Now, multi-asset means that we cover both equities as well as fixed income. Now, so the advisor can really tailor for each client a portfolio that spans both stocks and bonds, so really thinking about a whole portfolio solution.
Robert Ross:
Great. Thank you. And Brandon back to you. How does this collaboration enhance access to S&P Dow Jones Indices, and what benefit does it provide to the next generation of investors?
Brandon Hass:
So from an access point perspective, as I mentioned before, we're providing kind of a more linear access to our index files via Brooklyn Investment Group's back end. The advisor now has the ability to come in and implement the client-specific information and then overlay that on to our index files, and through Brooklyn's really industry-leading technology services, can create a custom investment solution that ultimately is tied back to the index file, and the index file continues to inform all portfolio decisions on a go-forward basis based on things like rebalance, reconstitution, corporate actions, et cetera. And as we see direct indexing continue to evolve, it's not a new thing, but it is evolving rapidly based on technology solutions and kind of a convergence of other factors. We feel that this facilitates an experience that brings scale and customization to the market, ultimately tied back to our intellectual property.
Robert Ross:
That's great. Thank you. And Erkko, how does Brooklyn's platform compare to perhaps options that people are more familiar with such as ETFs and mutual funds in terms of customization?
Erkko Etula:
So, broadly speaking, what we provide to the advisor and the end client are three things. There's customization, there's the tax alpha and also what we call operational alpha. So the ability for the advisor to customize each portfolio while still continuing to scale their growth. And how that compares to prior investment options, let's think about your mutual funds, your ETFs. So mutual funds really gained popularity in the middle of the century. ETFs started taking market share from mutual funds in the 1990s, but both of those commingled vehicles put investors among each other in the same standardized set of exposures. Now, direct indexing enables for each investor to fully customize their own portfolio. So, take the family of S&P DJI indices, mix them together and then add their own investor restrictions or preferences. And, in addition, enables tax-loss harvesting. Now, what are tax losses used for? Well, tax losses are used to offset gains elsewhere in the portfolio to help minimize the taxable income of each investor. So that is really the reason why we think that the technology-powered managed account and direct indexing is really becoming the vehicle of choice for investors going forward. So three things, your personalization, your tax alpha, and then also the operational alpha for the advisor to continue to scale their business while providing personalization to their clients.
Robert Ross:
It's amazing how technology is able to provide that. And back to Brandon for a minute. What insights have S&P Dow Jones Indices gained from observing trends in direct indexing, and how has demand for portfolio customization evolved?
Brandon Hass:
It's a great question. There's a lot to unpack there. So as I mentioned before, direct indexing, it's been around for really decades inside of an SMA format, and that continues to exist. And what we tend to find within the marketplace today is that direct indexing is often reflected in things like large-cap core exposure or really predominantly U.S. equity exposure with a kind of a tilt and a preference towards large-cap core and these liquid instruments that exist, things that are tied to indices like the S&P 500. And within the United States, that's often a client's largest allocation or allocation sleeve when we're thinking about goals-based wealth management or multi-asset risk-based modeling. And so that trend is continuing. We tend to see that the large-cap core and the reflection of the S&P 500 as a pivotal position within the direct indexing ecosystem. Now, as direct indexing continues to kind of permeate and percolate through the industry, there's a lot of choices out there. And as I mentioned before, we as an index provider also have a philosophy of providing choice. So we're not just the S&P 500, we have again thousands, really hundreds of thousands, of indices in various iterations. We continue to innovate these iterations via these liquid ecosystems and relationships that we have with the exchanges to price accordingly and have what we call scrutinized data sets that are really packaged into independently governed and independently governed calculated indices. And so as we see this choice continue to evolve, so too is the way that the indices to which they're tied are being delivered. So we're kind of seeing this trend expand outside of the large-cap core into other sizes of the market segment as well as factor allocations, international or global equity allocations, and then things like what Brooklyn Investment Group is doing with the fixed income component of clients' sleeve. And what this does is it allows, again, investors to continue to invest and make decisions with confidence. Because at the end of the day, the data sets and the information is backed by S&P Dow Jones Indices. We are product and wrapper agnostic, and delivering those data sets to empower decision-making with confidence is ultimately the philosophy that we continue to stand by.
Robert Ross:
That's great. Thank you. And Erkko, I think last question for you. What features of Brooklyn's platform make it great for using MyIndex? Talked earlier about some of the benefits, but how do these features improve client results?
Erkko Etula:
So there are really two main benefits for the clients. And we talked about tax management. So the tax-loss harvesting and the ability to bring the after-tax return above the pre-tax return, which is huge. So we're talking about potentially percentage points of additional return say on your S&P 500 index return. And then personalization. So there's basically a continuum of personalization options for each client. So basically each client account lives in its own capsule. There's some household relationships that tie the capsules together. But within each capsule, the advisor can personalize the portfolio. So let's take a mix of S&P DJI indices to begin. You can combine those equities as well as say municipal bonds in the same account. Then the advisor goes and incorporates the client's investment preferences or restrictions. So, for example, exclusions of certain stocks. Maybe the client comes in with a concentrated position and wants to sell it down in a tax-neutral way. Maybe the client has a preference toward higher-dividend stocks. So they can actually tilt the portfolio say starting with the S&P 500 exposure and tilt it toward higher-dividend stocks. And then obviously ESG, industry, sector exclusions as well as tilts. So basically there is a continuum of preferences that can be incorporated in each client portfolio. And what is more, we also report on the performance impact of those tilts on both pre-tax and after-tax bases. So at the end, the advisor can go to the client and say, look, this is how we personalize the portfolio for you. We listened to everything that you wanted to incorporate. We accounted for your concentrated company stock that we're selling down in a tax-neutral way over time. And by the way, here is the performance impact, both on a pre-tax as well as after-tax basis versus the original benchmark and the benchmark that incorporated your preferences. So very fine performance attribution and a nice story for the advisor to tell in every client meeting.
Robert Ross:
It's an amazing technology. Brandon, last question to you. How does S&P Dow Jones Indices keep its index methodologies transparent and in-line with market needs, particularly in a collaboration like this.
Brandon Hass:
Great question. So let me talk about transparency and then I'll talk about aligning with client needs. From a transparency perspective, transparency is at our core. We provide independently calculated and governed indices, and we publish that methodology publicly in a public domain. So if you were to go online and google S&P Dow Jones, fill in the blank index, that methodology deck is right there for every person to view. So public transparency of index methodology is really at the core of our philosophy. Let's talk a little bit more about addressing client needs, also at the core of our philosophy. The concept of providing choice to the market across a multitude of market segments via our index methodology is really at the center of what we do as well. We have hundreds of thousands of indices that we calculate every single day across various market segments, regions, sizes, styles and currencies. And as the market continues to evolve, we'll bring new index solutions to market. And the way that we pump those index files and intellectual property into these various channels, which have mostly historically been ETF, structured products, and SMAs to a certain extent, now can actually facilitate an experience where they're powering the back end of a technology service that sits on an advisor's workstation or a combination thereof. We want to continue to provide that choice to the market via our intellectual property and allowing investors to make investment decisions with confidence.
Robert Ross:
Thank you very much. Thank you, Erkko, thank you, Brandon, for discussing the future of direct indexing and MyIndex. It's exciting to see how the collaboration between S&P Dow Jones Indices and Brooklyn Investment Group is creating personalized investment options. Thank you for watching. We'll keep you updated on S&P Dow Jones Indices' latest innovations. Thank you.
Brandon Hass:
Thank you.
Erkko Etula:
Thank you very much.
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