What is Custom Indexing?

On this week’s episode of the Wiser Roundtable podcast, the team discusses a new trend in investing today: custom indexing. The history of indexing, how custom indexing works and predictions on how this will impact the future of investing are explored.

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The team starts the discussion by explaining the history of index funds. According to Investopedia, John Bogle was the founder of the Vanguard Group and a major proponent of index investing. Commonly referred to as “Jack,” Bogle revolutionized the mutual fund world by creating index investing, which allows investors to buy mutual funds that track the broader market. He did this with the overall intent to make investing easier and at a low cost for the average investor.

Then in the early 1990s, along came Exchange Traded Funds. From one fund in 1993, the ETF market grew to 102 funds by 2002 and nearly 1,000 by the end of 2009. According to the research firm ETFGI, there were more than 7,100 ETFs trading globally in May 2020. If you include exchange-traded notes or ETNs (a much smaller category), there were an additional nearly 1,000 globally. Learn more on a recent podcast we hosted on ETFs.

Standard indexes are “one size fits all.” Like standard indexes, custom indexes also invest and rebalance according to a defined methodology. But the methodology is personalized based on an investor’s circumstances and preferences and can be easily adjusted as an investor’s circumstances change. The evolution of FinTech or financial technology has made custom indexing possible.

Custom indexing is a very new way to invest and is in its infancy stage. This type of investing is best served by those with high net worth and those with specific investing needs. As with any innovation, the diffusion of custom indexing will probably be slow. It requires software and an understanding of the technology. It will require financial advisors to learn a new way of investing and this will naturally take time to diffuse in the market.


0:00 Introduction

2:34 History and Evolution of Index Funds

6:15 What is a Custom Index?

10:30 How is Custom Indexing Possible?

17:30 What Type of Investor is Best Served by Custom Indexing?

21:07 How do Proxies Work in Custom Indexing?

21:50 What is the Future of Custom Indexing?


Learn more about Casey Smith and connect with him on Twitter.

Learn more about Brad Lyons.

Learn more about Matthews Barnett.

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Learn more about the Wiser Wealth Management Roundtable podcast and access previous episodes.


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