Tuesday, May 31, 2022. Photographer: Michael Nagle/BloombergFor decades, exchange traded funds or ETFs have trumped mutual funds as the most popular vehicle for investors looking to own baskets of stocks in a tax efficient manner. Today, fintechs are looking to bite into ETF’s stronghold by bringing direct indexing mainstream.
Direct indexing involves purchasing stocks that make up an index in proportional weights. ETFs provide the same diversified index exposure, but an individual’s brokerage stands between them and owning the shares directly. ETFs have risen to prominence by allowing individuals to diversify with a single trade while avoiding the costs of professionally managed mutual funds.
The rise of commission-free trading has largely removed the fee barrier to direct indexing, causing firms like San Francisco fintech Atomic Invest to chase the opportunity to bring the strategy to small investors. The company offers white label brokerage services to banks, fintechs, credit unions and other consumer-facing finance platforms. “We believe that ETFs will be dead in the next five years,” says an enthusiastic David Dindi, CEO of Atomic Invest.