The custom Indexing tool helps advisors create portfolios modeled after Index ETFs to customize them according to client’s goals. In this case, the ETFs are the base to create a portfolio, but weights and sectors can be adjusted in accordance with client needs because the client owns fractional shares. Investors who adopt a customize index have the following advantages over traditional ETFs:
- No expense ratios
- Low minimums, and
- The ability to customize and personalize according to client’s needs.
How to enable fractional shares?
Enabling fractional shares is crucial for using IBKR’s Custom Indexing tool, as index investing often requires purchasing fractional shares of many individual stocks. Advisors can enable fractional shares through the Advisor Portal by navigating to Settings, Client Settings, and selecting the option to trade in fractions, followed by signing the Fractional Share Trading Disclosure.
The Custom Indexing feature within TWS is accessed via the Advisor Setup button and allows users to create and manage custom indices. Advisors can select ETFs to replicate, adjust cash allocations, and customize portfolio parameters using the provided tools. Custom indexing poses higher risks due to subjective criteria and reliance on investment managers, including concentration, liquidity, model, manager risks, and tracking errors. Hence, investors should carefully consider these risks before investing.
How to adjust and customize the index holdings?
The process of adjusting and customizing index holdings involves several methods that advisors can use to tailor an index to their specific needs. Advisors can modify the cash target, excluding specific symbols or socially responsible groups, and use custom criteria to filter or rescale securities based on financial variables. Adjustments are made through a user interface with options for manual weight adjustments and automated rebalancing to maintain a 100% target. Advisors can apply these changes by clicking “Save and Apply Custom Rules” and save or restore targets as needed. This customization process ensures that the index aligns with the advisor’s or client’s investment strategy, with further details on client investment covered in a subsequent lesson.