On Aug. 21, Optimal Asset Management announced a direct indexing service through its Factor Allocator platform that allows institutions and investment advisors to directly invest in the holdings of four S&P Dow Jones indexes along with some of OAM’s factor indexes.
Instead of owning an index through a pooled intermediary such as a mutual fund or ETF, in direct indexing the investor directly holds the exact proportion of underlying securities that make up the index, using fractional shares as needed.
The vehicle for this direct investing is a separately managed account, which means the client benefits from the tax advantages of holding individual securities, which can include fractional shares.
The use of fractional shares is made possible, according to OAM founder and CEO Vijay Vaidyanathan, because broker-dealers are now “willing to expose their [trading] operations to a modern API,” allowing a firm like OAM to bundle together individual client trades as if they were from one account.
The genesis of the Optimal approach, said Vaidyanathan, came from his frustration that “the way the best investors invest is largely unavailable to people like you and me.” Yes, we can invest in ETFs, which are “fantastic and have transformed investing,” he said, but it’s hard to achieve diversification through approaches like factor investing or smart beta through ETFs.
“These mass-market products only work if there’s a mass market for them, while I’m much more interested in how to customize” the ETF approach while making that approach available to a broader range of investors, said Vaidyanathan, who holds a Ph.D. in finance from EDHEC Business School in France, has three master’s degrees and previously was president of EDHEC-Risk Indices and Benchmarks, North America.