Custom Indexing: The Next Evolution Of Index Investing

O’Shaughnessy Asset Management

Patrick O’Shaughnessy

Research

9 Pages

O’Shaughnessy Asset Management explores how custom indexing could reshape portfolio construction by replacing one-size-fits-all funds with personalized, software-driven portfolios. The paper argues this shift is not optional but inevitable, driven by zero commissions and technology, and suggests many advisors risk falling behind if they do not adapt.

Key Takeaways

Adoption Curve Accelerating: By 2025, a majority of advisors are expected to use custom indexing platforms, signaling a rapid shift from early adopters to mainstream usage.
Tax Alpha Potential: Automated tax-loss harvesting may add roughly 0.5%–1.0% in annual after-tax excess returns through daily loss realization and reinvestment.
Cost Barriers Eliminated: Trading commissions have effectively dropped to 0%, removing a key constraint that previously limited direct ownership and large-scale customization.
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