Public tests a “build your own ETF” feature with Direct Indexing

Commission-Free US stock broker, Public is to start a trial of a new service, that could dramatically alter the worlds of asset allocation, wealth management and retail investing.

Build your own indices with Public

Generated Assets, as the new product is known, is a form of Direct Indexing that allows individual investors to create and back test curated indices and baskets of stocks and ETFs, to assess their performance.

Going forward, Public’s clients should also be able to invest in those indices. And then share and compare the performance of their portfolios with their peers. Bringing another interactive and social dimension to retail investing.

Direct indexing has been around for some time, with private banks, high-end wealth managers and family offices creating bespoke portfolios tailored to an individual client’s requirements or interests.

For the most part, until now, this service has been the preserve of ultra and high networth individuals who have also benefited from the tax mitigation that can result from Direct Indexing strategies.

For example, US investment bank Morgan Stanley advertises the product on its website, but points out that a minimum investment of $250,000 or more is required.

However, Public would like to democratise Direct Indexing, and bring it to a much wider audience and to do that through the use of AI or Artificial Intelligence.

What role will AI play in Direct Indexing?

AI,  or Artificial Intelligence, would help to construct and track the performance of what would effectively become bespoke ETFs, that in theory could contain any combination of assets, in the proportions requested by the end clients.

The growth in ETFs and in particular those that track a sector, asset classes, and investment factor or styles, over the last two decades, means that there are now very few areas in markets or strategies, if any, that are off limits to retail traders anymore.

In theory, using AI, it should be possible to create ETFs that mirror high-end, hedge fund-type strategies for individual investors in a few moments.

What’s more, AI can be used to backtest and fine-tune the allocation and exposures of these portfolios.

Of course, historic results are no guarantee of future returns, but they can provide an informed starting point for investors, traders and their portfolios.

Could AI be combined with other recent innovations to create and manage portfolios?

AI could also be used to help rebalance a portfolio in running, and with commission-free trading and fractional share ownership available, there are few economic barriers left to prevent that happening at scale.

Perhaps you like a particular sector or industry and want to invest in that group.  However, you don’t like the presence of a couple of outliers in the sector.

With Direct Indexing, you can simply exclude those outliers from the portfolio completely or replace them with stocks from another sector that have similar characteristics to the initial group.

Or,  maybe you want to invest in a portfolio that contains stocks with a high free cash flow and low volatility.

Factors which, in the US, had returned +19.60% and +16.70% respectively, over the prior twelve months (to the end of April 025), according to S&P Dow Jones Indices.

Well, with Direct Indexing, you should be able to do exactly that.

Whether you take the top performers from each index, or create a more personalised ETF that contains a curated list, of your favourites, from within these factor indices.

You won’t have to worry about the calculations around weightings, position sizes, etc., either, as AI will ultimately do that for you.

And, the AI will even compare and contrast the benefits of having a cap-weighted or equal-weight version of the portfolio, through back testing their performance, before you make up your mind.

When will Generated Assets go live at Public?

At the moment, Public is just sounding out the demand for this type of product among its client base, with the back-testing functionality, due to go live on its website later in the year.

And it’s not clear what the charging structure would be for any Generated Asset products that ultimately go live.

Presumably, there would be some kind of fee for the computing cost of the AI, as well as the compliance monitoring and administration of the service.

Of course, the use of AI in any mass market portfolio construction tool would be likely to attract the attention of regulators as well.

Despite all that, I think that is a genuine glimpse into the future of investing and portfolio construction, and that the barriers between institutions and individual investors are going to continue to come down.