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Rekenthaler Report

What to Know: Indexing With a Twist

Is the best index-fund flavor plain vanilla?

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The Idea
Bloomberg's Matt Levine--who has resumed his daily column after four months of parental leave--professes fondness for an investment idea that he has dubbed "direct indexing." Explains Levine, "In direct indexing, you buy 1) all the stocks in the index, 2) except the ones that you don't want, and 3) plus any other ones that you do want." Think of it as indexing with a twist.

Levine continues, "In traditional active investing, you buy stocks where you have an investment thesis, the stocks that you understand and like and can make a case for. The implicit default is not buying; you have to overcome some burden of proof to decide to buy a stock. In direct indexing … the default is buying everything; there is a burden of proof to delete a stock."

John Rekenthaler does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.