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Fidelity Readies the First Retail Direct Indexing Product

By Bernice Napach

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What You Need to Know

  • The minimum investment for Fidelity Managed FidFolios is $5,000; the fee is 0.40%.
  • Managed FidFolios will initially offer three strategies: large-cap index, international index and environmental focus.
  • The product is in pilot but is expected to launch in the coming months.

Direct indexing is going mainstream, with Fidelity Investments leading the way.

The financial giant, which oversees over $11 trillion in assets, has filed with the Securities and Exchange Commission to offer a direct indexing product with a $5,000 minimum investment.

The product, called Fidelity Managed FidFolios, is in pilot but is expected to be available to all investors “in the coming months,” according to a spokesman.

The product will initially offer three different strategies — U.S. Large Cap Index, International Index and Environmental Focus — that investors can customize, with some limitations, by removing individual stocks or industries from these indexes. The fee is 40 basis points.

“The Program is designed for clients who seek a personalized and professionally managed stock portfolio facilitated by a digital experience,” according to the SEC filing.

Direct indexing involves buying the individual stocks that make up an index, adjusting their weights or eliminating some to align with investors’ preferences. The strategy also makes it easier for investors to harvest tax losses that can offset capital gains.

The Fidelity Managed FidFolios combines direct indexing with fractional share trading, which allows clients to allocate assets among multiple positions based on dollar amount rather than share size, according to the SEC filing.

”This is the most mainstream form of direct indexing from a most mainline asset management and provider of investor services seen to date,” said Ben Johnson, director of global exchange-traded fund research for Morningstar, adding that the $5,000 minimum is the “lowest entry point” he’s heard of for a direct indexing product.

The 0.40% fee, though competitive, is a “pretty high hurdle” for investors who can already build low-cost portfolios of mutual funds or ETFs for a fraction of the cost, Johnson said. (Fidelity itself offers several zero-fee index mutual funds.)

“In theory you’d have to add back 30-35 basis points of value through a combination of superior tax efficiency, better portfolios and general good feelings,” he explained.

Schwab is also piloting a direct index product, which is expected to launch this year, but its minimum investment is expected to be $100,000.

Direct indexing is the “next wave for more retail investment solutions,” said Dennis Gallant, strategic advisor at Aite-Novarica Group.

He sees the Fidelity offering, with its low minimum, targeting younger investors who are comfortable with digital investing and want direct ownership of stocks like they have with Robinhood and other online brokerages and are looking for customization.

They are “obviously more ESG and socially conscious minded,” he added.

Like Morningstar’s Johnson, he is interested to see what happens with direct indexing fees given the price differential between such products and and traditional low-cost index ETF solutions.

“Fee pressure is coming down the path. Fidelity has scale to address that,” Gallant said.

So does Vanguard, which in October completed its acquisition of Just Invest, a provider of tax-managed, personalized wealth management technology that has the Kaleidoscope direct indexing platform.

“As direct indexing “starts to move down market there will be more pressure on lowering fees and costs,” Gallant said.

Bernice Napach

@Think_Napach

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