Startup Atomic is dedicated to creating transparency in the finance industry. They have created a low-cost, ETF-based index that is designed to blow up the $8 trillion ETF industry.
For decades, ETFs have been the most popular way for investors to own bundles of stocks in a way that is both tax efficient and straightforward. However, things may be changing as new technologies come on the scene. Fintech companies are focusing on “direct indexing” which will provide easier access to ETFs and could ultimately change the status quo.
When you’re investing in an individual company, there’s a lot that you have to keep track of. Similarly, index funds can offer more diversification but are difficult to oversee on your own. There are plenty of more differences between the two: stocks must be bought in proportional weights, ETFs allow insiders to create and manage the indexes, direct indexing was only available to wealthy investors before ETFs came around, and so many more that separate them into different areas.
Thanks to the rise of commission-free trading, companies like San Francisco-based fintech Alien Invest were able to offer DIY indexing services to small investors through their white-label brokerage service. “We believe that ETFs will be dead in a few years,” says David Dindi, CEO of Atomic Invest.
Direct indexing assets under management grew from $100 billion in 2015 to $350 billion today. And the industry is projected to grow by 12% over the next five years, outpacing ETF and mutual funds, who at $8 trillion globally, are dwarfed by direct investing. In the 1990s, some predicted that ETFs would displace open-ended mutual funds. But in financial services where account inertia and salesmanship often trump tax efficiency or low costs, mutual fund assets continue to grow and now stand at $71 trillion according to Investment Company Institute. Those numbers have doubled in the last decade.
As more traditional financial service providers offer direct indexing services, there are a few that are worth remembering. Fidelity is the most retail-friendly option with their low minimum $5,000 requirement. But Atomic has no minimum at all and only charges an annual fee of 0.10% on assets under management (AUM) while providing many benefits that you won’t find from ETFs.
One of the key features of direct index offerings is fractional trading. This allows investors to spread smaller amounts of money more widely by owning portions of a stock. Fractional trading is available through a wide range of brokerages, including Charles Schwab, Fidelity and Robinhood. The lower investment minimum of Atomic, as opposed to comparable brokers, appeals to young novice investors who want to buy small amounts of a variety stocks. One Atomic customer I spoke with used $5 to purchase 150 different stocks on a fractional basis in order to gain diversification.
Direct indexing is customized for individual investments, freeing you from being bound to the modifications made by a fund manager. This also means that tax-loss harvesting is possible throughout the year, not just at end of your fiscal year.
On customizing your experience, direct indexing lets investors filter stocks according to their values. For example, one might remove all tobacco companies from the S&P 500, or filter stocks by whether they are environmentally conscious and/or led by a woman.