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What are the benefits of your “do-it-yourself” stock index?

Index design benefits

The typical indices (S&P500, FTSE100, DAX, SMI, etc.) on the market are not customized to individual requirements and needs. Obermatt enables investors to design custom, do-it-yourself indices based on your own investment criteria. You can select and combine the investment criteria important to you and add or eliminate single shares or entire industries to create your own index.

Use your own investment criteria – even Pay-for-Performance

In standard indices, investors cannot change the investment criteria. This can only be achieved with a custom index where investors are free to select and combine their preferred investment criteria. For example, some investors may like to over-weight fast growing shares or shares with attractive valuations. Additionally, Obermatt allows you to add corporate governance criteria such as Pay-for-Performance which is typically disregarded in standard indices.

Add or delete single shares

In standard indices, investors cannot change individual stocks. A custom, do-it-yourself index allows investors to freely add or delete individual stocks that they hold. This could make sense, if some shares are already in the portfolio (e.g. employee shares) or if certain industries should be avoided (e.g. banks, defence or tobacco).

Cost advantages

Typical index investments carry annual administration fees of 0.3% to 0.8%. A 30-year old investor may have an investment horizon for her or his retirement of 40 to 60 years. Annual administration fees of 0.5% could eat away 25% of total investment within an investment horizon of 50 years. Furthermore, additional costs could be hidden in the “tracking error” (e.g. when the performance of the index investment doesn’t match the actual index). These costs could be saved in a do-it-yourself index.

The cost advantages could be even greater if a custom index is compared to active asset management fees which are typically 2.0% of the assets per year. With an investment horizon of 50 years, that implies that 100% of the invested assets are paid to asset administration. In this example, the entire investment goes to administration costs and what is left to the investor is the potential returns on the assets. By creating and holding the stocks in a custom index, the assets and the realized returns should remain with the investor.

Safety advantages

Index funds can carry the risk of losing part or the entire investment due to bankruptcies. This could be the case if the index is synthetically replicated or “securities lending” is used to reduce cost. If the counterparty becomes illiquid, the assets may become irrecoverable. In custom indices, investors simply hold the actual shares in their own portfolio. Even if the own bank or broker goes bankrupt, the shares typically remain the property of the investors.