The protests roiling college campuses are filled with all sorts of demands, but one thing they all have in common is money.
Many of the pro-Palestinian protesters want the school’s endowment to take money away from investments in companies with financial ties to Israel. Most institutions refused to do so.
This form of financial protest is not new. We all want to live our values and we want our universities, employers and communities to do the same. Similar protests were seen in South Africa in the 1970s and 1980s amid the ongoing debate over climate change. Students in particular can learn a lot about investing, governance, and complexity by trying to influence their schools.
However, many individual investors can also press the eject button on stocks they don’t like. This week, after years of being fed up with the way a small number of companies treated American customers, employees, and public trust in a big way, we finally did it ourselves. Since this is a personal matter, I will not mention the company name here. But let me be clear: it had nothing to do with Israel or Gaza and everything to do with how investing in unscrupulous companies made me feel.
I’m not saying you should either. But if you put your mind to it, it gets easier as the years go by.
At first glance, this process may seem simple. If you don’t want certain stocks in your portfolio, you don’t have to buy them. You can also sell it if you already own it. If so, send an enthusiastic note to the company’s management.
But many people invest in index funds, a large basket of stocks that make up the entire U.S. stock market. Until recently, it was almost impossible to call a fund company and request that a particular stock be removed or doubled just for you.
But that is changing. Through a strategy called direct indexing, you can perform your own subtraction within a collection of index-like investments. This is primarily available in brokerage accounts and not retirement accounts, but that may change as this strategy becomes more popular.
A direct indexing financial services firm purchases shares in a particular index on your behalf, and you own those shares directly, rather than through a mutual fund or exchange-traded fund. One of the big benefits of direct indexing is that you can save on capital gains taxes by buying and selling stocks at the right time to offset winners and losers. Another advantage is that it allows companies to exclude certain stocks from their portfolios, but still own all the other stocks that are part of the index they want to emulate.
Direct indexes have been around for years, but the minimum amount companies are required to invest continues to drop. Fidelity lets some people do it with a minimum investment of $5,000. He needs $20,000 for a startup called Frec. At Wealthfront, this service is for his accounts over $100,000.
There are also fees and there may be limits on the number of companies you can exclude.
Financial services companies that offer direct indexing are companies that bring their own agendas. For now, the social impact of this form of stock deselection is limited, due to the lack of institutional protection and the fact that many investors are not yet able to index directly through their retirement portfolios, where they hold the majority of their stocks. It will be a target.
Still, we all have to live with ourselves. If eliminating a few bad actors just makes you feel better about your investments, it may be worth indexing directly for that reason alone.
An interesting and complex additional feature of some products is the ability to screen industries or parts of them. This is not just a standard feature for eliminating oil stocks.
Aperio, a direct indexing service acquired by investment giant BlackRock for more than $1 billion, provides a screen for people who want to avoid investing with predatory lenders. How are those lenders defined? This question falls to a company called MSCI, which assembles various types of data and indexes.
MSCI is on the lookout for all questionable (but usually legal) lending practices, and among the companies on its prohibited list are major banks, credit card companies, credit bureaus, student loan issuers, mortgage lenders, Provider not included. The six companies on the current list include companies in the rental and pawnshop categories.
“While applying the investment exclusion may sound simple in theory, it requires nuance in practice,” MSCI spokeswoman Melanie Blanco said in an email. “Values-based exclusion requires an understanding of the different ways in which companies can engage in business activities.” In fact, a significant number of companies make profits in different locations through direct and indirect activities. Because of this, it can be difficult to know where to draw the red line.
Unsurprisingly, some of the direct indexers I spoke to this week deduct companies like Gaza, which some protesters want removed from university endowments. No one listened to customers asking for screens in the district. But that doesn’t mean people aren’t moving individual companies out of their stock baskets, even if the reasons aren’t always clear.
Mo Al Adham, Frec’s founder and chief executive officer, said whether customers who have pulled out of Boeing in recent months are because of questions about the company’s aircraft and their safety, or because of questions about the company’s aircraft and their safety. He said he was unsure if it was because of his doubts about the issue. Work in Israel. They may also be avoiding Boeing because they worked there. Getting a salary from a company means you have enough financial exposure even if you don’t choose to own shares in that company. Or it could be something else entirely.
But contrary to the biggest controversies of last year and next, just because direct indexers aren’t creating screens about the Gaza war doesn’t mean they can’t. My screen happened to be about customer abuse. Your story may be even more unique.
We need investors of all kinds to create a market. The fact that it’s becoming easier to make a mark is good news for those who want to take on a challenge.
