Custom Indexing is THE Investing Mega Trend of 2021.

By 2025, most financial advisors will use web-based software to create and manage Custom Indexes for their clients. Standard indexes have a single methodology; one ruleset dictating what they own and how they rebalance. Standard indexes are “one size fits all.” Like standard indexes, Custom Indexes also invest and rebalance according to a defined methodology. But with Custom Indexes, the methodology is personalized based on an investor’s circumstances and preferences and can be easily adjusted as an investor’s circumstances change. This flexibility is possible because Custom Indexes are implemented through separate accounts, where investors can directly own a custom mix of individual stocks and bonds rather than indirectly owning positions through a collection of funds and ETFs.

Source: O’Shaughnessy Asset Management

Nobody’s even ready for this, how powerful it’s going to be, how aggressively disruptive it’s going to be. If I had a business or a conference or a website with the word “ETF” in it, I would start thinking about a new name right about now.

Because while ETFs have spent the last two decades being thought of as cutting edge, they won’t occupy that spot past next year. I’m a huge fan and prolific user of ETFs – I don’t think custom indexing dilutes their use case as much as it steals their thunder. The future will have plenty of room for both, but financial advisors are about to fall head over heels in love with the ability to create custom index solutions for every high net worth family they serve.

Patrick O’Shaughnessy first unveiled his firm’s custom indexing platform for the advisory industry last fall at my conference, Wealth/Stack. His booth was jammed with young, forward-thinking advisors for the remainder of the event.

Ritholtz Wealth Management signed on as one of the first five firms to use the technology with live dollars in client accounts. In the first 11 months of this year we’ve moved or allocated almost a quarter of a billion dollars to strategies we’ve built on Canvas. 58% of that was new assets that had come in from brand new clients during the course of 2020 and 42% came from clients in our existing asset allocation models whom we’ve converted for various reasons. This rate of adoption by our advisors and clients, as well as OSAM’s ability to process it all blew away all of my own expectations.

There are so many scenarios it makes sense for – from managing embedded tax liabilities to mitigating concentration risk – that I can’t imagine us ever going backwards. We will now have both ETF / mutual fund models of our core strategies as well as custom index versions, with each client’s specific circumstances being used to determine the best approach.

Patrick mentions that 70% of the advised households now on the Canvas platform have portfolio allocations that are absolutely unique to those households – and as advisors grow even more comfortable with the tech and tools, he sees that number going up. Why wouldn’t it?

Our feedback as we allocated, used the tools and created portfolios with the Canvas team definitely had an impact on some of the features and capabilities they’ve subsequently created. I’m proud of our role in advancing this technology and could not be more excited for everything it’s going to allow us to do for our clients in the future.

I asked Michael Batnick, our Director of Research, what he thinks our biggest use cases have been so far. He says that by far, it’s been tax loss harvesting to unwind large positions. This is me speaking, but from my experience saving a client $1 on unnecessary taxes is like earning them $10 – people really appreciate when their accountants, lawyers, financial advisors, etc help them out with this stuff. Here’s Michael:

“Our biggest use case has been marrying tax loss harvesting with a concentrated position. Being able to set tax budgets and coming up with a plan to wind down a position, helping to make sure our clients aren’t over exposed to tomorrow’s General Electric. Another cool one is if somebody works at an energy company. Not only is their livelihood tied to energy, but their retirement might also be if they get company stock. Building a portfolio that is able to exclude their company and their competitors is huge.

A lot of the benefits here can be quantified, others cannot. The psychological satisfaction that they get from having their own portfolio cannot be measured.”

My Director of Institutional Asset Management, Ben Carlson, notes that as Gen’s Y and Z replace the Boomers as the majority owners of our nation’s wealth, custom indexing for ESG purposes and other belief-based, value-based investment strategies is going to be equally explosive. I won’t even touch that topic because Ben’s going to blog on that soon and it will be better than mine 🙂

To commemorate the first anniversary of Canvas’s launch, Patrick wrote up some of the stuff he’s learned and where he believes the industry is headed. I agree with him wholeheartedly. It’s the next evolution and it’s not likely things will be the same ever again. OSAM may have created it, but they won’t have it to themselves forever. We’ve seen the burgeoning tech coming from some of the largest asset management firms on earth (and signed several NDAs, so, no comment) but what I can tell you is that this is unequivocally where the puck is going. You’re going to be hearing about it a lot next year.

So! Here’s what I want you to do…

First, Patrick O’Shaughnessy will be appearing on my podcast later this month. Subscribe here so you’ll get the notification when it drops. We’ll be discussing how the custom indexing trend will upend many existing beliefs within the investment industry along with some specific case studies from our own internal experience with this technology. I hope you get a lot out of it for your own portfolios or practice. This weekend, more than 40,000 people tuned in to hear me and Anthony Scaramucci discuss hedge funds, Janet Yellen, Long Island and getting punched in the face. You should be subscribed anyway, it’s dope.

Second, read Patrick’s manifesto (my word, not his, lol) below so you’re ready for the convo. Talk soon!


Custom Indexing_The Next Evolution of Index Investing



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