Let’s Make Our Own Index Fund!

The Problem

Bonds are a big part of many investors’ portfolios. But yields today are close to nonexistent.

Since 2009, rates have been at or below the rate of inflation. Two bond funds I own pay 1.88% and 1.45% respectively.

Inflation is currently running at about 4.8%. This means I’m paying about 2.9-3.4% per year after inflation for the privilege of owning these funds.

Not fun, right?

An Unlikely Solution

So I’ve been exploring building a portfolio of high dividend stocks to replace the bonds and provide income. The stocks I’m interested in have paid high dividends for decades straight.

They represent the highest payors amongst the Dividend Aristocrats. Call them the Dividend Royals.

What if I had my own index fund of these companies? Each stock could be automatically weighted in the portfolio based on its market cap.

So, since Exxon Mobil has a much larger market cap than Federal Realty Investment Trust, for example, it would be a proportionately larger piece of the index fund.

A sophisticated solution could even automatically rebalance the fund on a regular schedule. This would keep the stocks in correct proportion to each other.

But who can provide such a service?

The Hunt

Not many companies, it turns out. Here are the biggest providers of “direct indexing”, or DIY index funds, per Bloomberg:

Vanguard also has such an offering via its recent acquisition of Just Invest.

I’ve requested demos from Vanguard, Parametric (part of Morgan Stanley), and Aperio (part of BlackRock). If I see anything good, I’ll report back!

There’s also an interesting offering from Interactive Brokers called BasketTrader. While I didn’t have the time to dig deep into it today, it looks like it may provide a solid tool for direct indexing.

Do you know a good direct indexing provider? Please leave a comment at the bottom.

There will be no blog on Monday or Tuesday. An old friend is coming to visit!

See you on Wednesday. Have a great weekend everyone!

More on markets:

How Did High Dividend Stocks Perform In the Last Crash?

Should Anyone Own Bonds?

Starting a Financial Plan from 0

Photo: “Thunderbird Supercomputer” by SandiaLabs is licensed under CC BY-NC-ND 2.0

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