Introducing Custom Indexing
Custom Indexing allows RIAs to create custom portfolios for their clients that directly hold the underlying securities of an index rather than purchasing a traditional index fund. This approach provides several benefits, including the ability to customize portfolios to align with specific investment objectives, as well as include or exclude specific stocks based on ESG preferences and other factors. Unlike traditional ETF investing, Custom Indexing does not have an expense ratio and comes with low minimums, allowing RIAs to customize and personalize investing to suit their clients' needs.
RIAs using Custom Indexing through Interactive Brokers have access to a wide range of index options, including popular indices and ETFs such as the S&P 500 and the NASDAQ 100. They can fine-tune portfolios by adjusting the weightings of individual securities within the index.
How It Works
As an illustrative example, the SPY ETF, which tracks the SPDR S&P 500, is comprised of 102 stocks, each with its own weighting. Using Custom Indexing, advisors can download the list of SPY's individual holdings along with each weighting, save it as a Custom Index and apply it as a model, which is adjustable for individual clients as needed.
IBKR Custom Indexes offer several advantages over ETFs:
- No expense ratio
- Low to no commissions
- Low minimums
- Ability to customize and personalize to suit client needs
- Flexibility when harvesting tax losses
Advisors can:
- Set cash targets
- Exclude any selected stocks
- Apply ESG-related exclusion lists (e.g., 'Fossil fuels')
- Set custom rules (e.g., exclude small cap stocks; overweight stocks where PE is within a certain range and stock is in a particular sector; and so on)
- Swap stocks in the model for stocks you want with a single click
IBKR's Custom Index tool is accessible from TWS Latest and TWS Beta. Additional information is available in our FAQs and on our website.
Any discussion or mention of an ETF is not to be construed as a recommendation, promotion or solicitation. All investors should review and consider associated investment risks, charges and expenses of the investment company or fund prior to investing. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.