Original Article by Korean Newspaper ‘Korea Economic Daily’, 23th Aug. 2022 https://www.hankyung.com/finance/article/2022082324081
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"There are limitations to the existing ETFs, as they require a lot of time in the distribution process and do not reflect individual investor preferences. With 'direct indexing', we can create ETFs that precisely meet customer demand on the spot."
Chun Yung Nok, the CEO of Doomoolmori (on the picture), said in an interview with the Korea Economic Daily on the 23rd. Direct indexing refers to designing portfolios that reflect individual investor tendencies, life cycles, values, etc. using artificial intelligence (AI) and other tools.
Direct indexing is similar to ETFs in that it follows a basic index. However, it differs in that it is not listed on the exchange and follows a customized index for each investor. If ETFs are like "ready-made clothes," then direct indexing is like "custom-made clothes". Additionally, while ETFs take about 6 months from product design to listing, direct indexing can receive a portfolio in just a few seconds by simply setting selection criteria for the securities.
South Korean firm Doomoolmori has taken a pioneering step in the direct indexing business. On the 23rd, CEO Chun Yung Nok said in an interview with the Korea Economic Daily that direct indexing enables the creation of ETFs that meet the exact demand of customers on the spot, which is a limitation of the traditional ETFs that take a long time in distribution and do not reflect individual preferences. Direct indexing designs portfolios that reflect the investment tendencies, life cycles, values, and more of individual investors using artificial intelligence (AI) and other technologies.
Like ETFs, direct indexing follows a basic index, but it does not list on exchanges and follows a personalized index for individual investors. While it takes about six months to design and list an ETF, direct indexing can provide a portfolio within a few seconds after setting the selection criteria. Doomoolmori has launched a new stock-type robo-advisor service called 'Tailor' based on direct indexing. This is the first time that direct indexing services have been released in South Korea. The advantage of direct indexing is that investors can create an index that suits their investment tendencies and invest directly. Mr. Chun said, "For example, you can create an S&P 500 index without Tesla or a banking index without Kakao Bank. Traditional factors such as price-earnings ratio (PER), return on equity (ROE), and operating profit margin can also be used."
Investors can also create a portfolio that incorporates the investment styles of world-renowned investors like Benjamin Graham or Peter Lynch. The portfolio constructed based on Peter Lynch's investment style for South Korean small and medium-sized businesses includes companies like Neowiz, Innox advanced materials, Sun-Kwang, DN Automotive, and Park Systems. When connected with a securities firm (such as Korea Investment Securities), real-time trading and periodic rebalancing (adjusting the portfolio weight) are also possible.
Through backtesting (simulation), you can also check the past performance of the index. The Peter Lynch portfolio recorded a return of 231.61% from January 2011 to the end of last year, outperforming the KOSPI index (45.36%) by a large margin.