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What is Direct Indexing?

• What is direct indexing?

  Direct indexing allows an investor to directly own securities that are part of an index. Instead of using ETFs or mutual funds to build a portfolio, an investor may use individual stocks. Doing so eliminates fees associated with ETFs and mutual funds.

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• What are the advantages of direct indexing?

  There are three main advantages to direct indexing. Firstly, transparency – investors are able to know exactly which stocks they own in their portfolios at any time. As a point of comparison, when investing in mutual funds, an investor may access the full list of holdings on a quarterly basis and top ten holdings on a monthly basis.

  Secondly, costs will be lowered further as direct indexing eliminates any fees such as expense ratios associated with ETFs or mutual funds. For mutual funds, the average annual expense ratio is 1-2%. Over the long term, these fees paid to the external fund managers will lower net investment returns significantly.

  Lastly, direct indexing addresses overlaps in holdings between fund vehicles. The same stock (for example, Apple or Microsoft) may appear in several ETFs or mutual funds that charge different fees. Through direct indexing, overlaps between holdings are eliminated.

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• What is Syfe USDirect?

  USDirect is Syfe’s innovative direct indexing process that replaces the US equity index ETFs with individual US stocks in our Core portfolios.

  There are four Core portfolios - Defensive, Balanced, Growth and Equity100. The USDirect component (allocation to individual US stocks) will be sized proportionately in each of the core portfolios. For example: Equity100, an all equity portfolio, has an approximately 75% allocation to US equity. With USDirect, investors are able to directly hold the underlying US stocks that best represent this US equity allocation. Similarly, since the Core Growth portfolio has a 50% allocation to US equities, the USDirect component of individual stocks held are sized down proportionately.

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• How does Syfe implement USDirect in core portfolios?

  USDirect intends to give clients the best representation of stocks that tracks the US equity market. It follows a four steps process:

  First, stocks in the S&P 500 index are used to define broad US market exposure.

  Second, factor exposures across value, growth and minimum volatility are incorporated to enhance long term returns, reduce volatility, and improve diversification.

  Third, the stock weightages are optimised to minimise tracking error to the broad US market and preserve factor exposures. This results in top 100 stocks that best represent the Core portfolio US exposure.

  Lastly, allocations are optimised twice a year to address price and factor drifts over time.

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• What are the cost savings through USDirect as compared to ETFs and Mutual Funds?

  Building a portfolio of equity mutual funds will set an investor back by 1-2% on average on an annual basis, without accounting for any platform fee charges. Using ETFs to do the same reduces that to 0.25-0.30%. Through USDirect, Syfe is able to bring it down further to 0.12%.

  

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• What about trading costs?

  Trading costs are borne by Syfe. As these 100 stocks in USDirect are highly liquid, trading costs would be minimal.

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