The protests roiling college campuses are filled with all kinds of demands, but many of them have one thing in common: money.
Many pro-Palestine protesters want their school donations to take money away from investments in companies that have 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 for our colleges, employers and communities to do so too. We saw similar protests in the 1970s and 1980s with South Africa and the ongoing debate over climate change. Students, especially, can learn a lot about investment, governance, and complexity by trying to influence their schools.
But many individual investors also have the ability to press the eject button on unfavorable stocks on their own. This week – after years of disgust at the way a small number of companies have treated their American customers, employees and the public trust writ large – I finally did it myself. This is personal, so I won’t name the companies here. But to be clear, it had nothing to do with Israel and Gaza, and everything to do with how I felt about investing in bad corporate actors.
I’m not saying you should do this either. But if you want, it gets easier with each passing year.
At first glance, the process may seem simple. If you don’t want certain stocks in your portfolio, you don’t have to buy them, or you can sell them if you already have them—and send an impassioned note to the company’s executive team for good measure.
But many people invest in index funds—large baskets of stocks that make up, say, the entire U.S. stock market. Until recently, in most cases, it was not possible to call a fund company and demand that it remove or double certain shares just for you.
This, however, is changing. You can do your own subtraction within an index-like collection of investments through a strategy called direct indexing. It is primarily available in brokerage accounts rather than retirement accounts, although this may change as the strategy becomes more popular.
A financial services company that does direct indexing buys shares of a specific index on your behalf, and you own the shares directly, not through a mutual fund or exchange-traded fund. A big advantage of direct indexing is that you can save money on capital gains taxes by buying and selling stocks at the right time to offset winners and losers. Another advantage is that companies will allow you to keep certain stocks out of your portfolio, but you will still be able to own all the other stocks that are part of the index you want to imitate.
Direct indexing has been around for years, but the minimum amount of money a company requires you to invest continues to shrink. Fidelity will allow some people to do this with a minimum investment of $5,000. A start-up called Frec requires $20,000. At Wealthfront, the service is for 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 “bring your own agenda” entities. This lack of institutional defense – and the fact that most people still cannot do direct indexing through a retirement portfolio, where many people who invest keep the majority of their shares – will limit for now the social impact of this form of investment. deselection of shares.
Still, we all have to live with ourselves. If feeling better about your investments is just a matter of removing a few bad actors, then direct indexing might be worth it for that reason alone.
An additional feature of some offerings that is both curious and complicating is the ability to exclude sectors or parts of them. This isn’t just the standard get-me-out-of-oil-stocks feature.
Aperio, a direct indexing offering that investor colossus BlackRock bought for more than $1 billion, offers a screen for people who want to avoid investing with predatory lenders. How does this define these creditors? He hands the matter over to a company called MSCI, which is an assembler of data and indices of various types.
MSCI looks for any suspicious (but typically legal) lending practices, but none of the companies on its banned list are big banks, card companies, credit bureaus, student loan issuers, or mortgage providers. The six on its current list include companies in the rent-to-own and pawnshop categories.
“Applying investment exclusions may seem simple in theory, but in practice it requires nuance,” MSCI spokeswoman Melanie Blanco said in an email. “Values-based exclusions require an understanding of the various ways in which a company can be involved in a business activity.” In fact, so many companies make money in so many places with direct and indirect actions that it can be difficult to know where to draw a red line.
For what it’s worth, none of the direct indexers I spoke to this week heard clients clamor for a Gaza screen that would subtract companies like those that some protesters hoped to excise from university endowments. That doesn’t mean, however, that people aren’t removing individual companies from their stock baskets, even if the reasons aren’t always clear.
Mo Al Adham, founder and chief executive of Frec, said he was not sure whether customers who have stripped Boeing of their holdings in recent months have done so because of doubts about the company’s planes and their safety or doubts about their safety. work in Israel. They could also be avoiding Boeing because they worked there; receiving your salary from the company is a huge financial exposure without also choosing to own its shares. Or it could be something else entirely.
But just because direct indexers haven’t created coverage around the war in Gaza – unlike the biggest controversy of last year or next year – doesn’t mean they can’t do so. Turns out my screen was about customer mistreatment. Yours might be about something even more idiosyncratic.
It takes all types of investors to create a market. The fact that it is increasingly easier to leave your mark is good news for anyone who wants to try.