Customizing your direct index

You’re able to make several customizations to your direct index portfolio. You can make these customizations when you initially select the index to start investing and after you’ve already started investing in an index. You can add, exclude, or adjust the weights of up to 10 stocks within your direct index portfolios. You’re also able to adjust the weights of up to two financial sectors for all indices except the MVIS US Semiconductor and S&P 500 Information Technology indices, since those indices are only made up of a single financial sector. Click here to learn more about the different financial sectors.

We’ll discuss below how each of the different customizations will impact your portfolio.

What happens when you add a stock to your index during setup?

When you add a position to your index during setup, we’ll distribute your assets in proportion to its market weight in comparison with the other stocks in your index, while reducing the weights of your other positions in proportion to their market weights. For example, if you have an index with 5 stocks and all of them have the same market capitalization, then their weights will be 20% each. If you add a stock that is also the same market capitulation, then we’ll assign the new stock with 16.67% weight and reduce the other 5 stocks to 16.67%. 

You can add a stock during setup of your direct index within the “Customize your index” section of setup by searching for it in the search input. If the symbol does not populate in the search, it most likely is not available to trade within the direct index. If you think there may be a mistake or would like to see if a position can be added, reach out to help@frec.com.

What happens when you exclude a stock from your index during setup? 

When you exclude a stock from your index during setup, we’ll remove the stock’s percentage weight from the index and redistribute it to the rest of the index stocks in proportion to their market cap weights. For example, if you have an index with 5 stocks each making up 20% of the index, then remove one of those stocks, the remaining 4 stocks will each make up 25% of the index. 

You can exclude a stock during the setup of your direct index within the “Customize your index” section by clicking on the customize icon to exclude the stocks you wish to exclude.

Keep in mind that excluding a stock is different from trade restricting a stock. While excluding a stock gives it a 0% weight in the index, trade restricting a stock prevents it from being traded. Learn more about trade restrictions here.

What happens when you add a stock to your index after you’re already invested?

If you add a stock to your index, it will be given a target weight percentage according to its market cap weight and the other positions' target weights in the index will be reduced proportionately. For example, if you have 4 positions in your index all having the same market cap weight then each stock will have a 25% target weight. If you then add 1 position that has the same exact market cap weight, the 5 stocks will each have a target weight of 20%. 

You can add a stock at any time by clicking into your direct index portfolio and clicking “Edit” next to “Your direct index.” From there, you’ll select “Edit” next to “Your customizations” and enter the name or symbol you want to add to your index. If the symbol does not populate in the search, it most likely is not available to trade within the direct index. If you think there may be a mistake or would like to see if a position can be added, reach out to help@frec.com.

What happens when you exclude a stock from your index after you’re already invested?

When you exclude a stock after setup, the algorithm will automatically set the stock’s target weight to 0% and strategically sell out of the position. It will also redistribute the weight percentage to the rest of the index in proportion to the other stock’s market cap weights. Once you’ve selected which stocks you want to exclude, we’ll show you the potential tax impact this action could have on your account. The estimated tax impact provides you an estimated amount you may owe in taxes if you exclude the stock and it’s sold out. You can read more about estimated tax calculations here. 

You can exclude a stock at any time by clicking into your direct index portfolio and clicking “Edit” next to “Your direct index.” From there, you’ll select “Edit” next to “Your customizations”. Then skip to the “Customize stocks” step after the “Customize sectors” step and click on the customize icon to exclude the stocks you wish to exclude.

What happens when you adjust the weight of a stock or sector in your index?

You can adjust the weights of certain positions and sectors within your direct index during setup or after you’re invested by increasing or decreasing the weight within the “Customize sectors” section and clicking on the customize icon to the right of the listed target weight number. From there you can make adjustments to the weight by clicking on a multiplier. 

Read more about how you can adjust the weight and the impact of doing so below: 

1. Increasing the weight of a stock in your index

You can increase the weight of stocks in your index by multiples of 2, 3, and 5. The weight will be multiplied based on the stock’s original target weight. 

For example, let’s assume an equal weight of 5 stocks in an index for a $100 portfolio. Each stock will hold 20% or $20 notional value. If you increase one of those stocks by 2 then the algorithm will multiply the notional value by that multiplier, making it $40 value. We then add up all the notional values of the 5 stocks, which brings the total to $120 instead of the original $100. We then determine the new weight of the position by dividing the notional values of $40/$120, which equals 33.33% instead of the original 20% value. The remaining 66.67% will be distributed equally to the rest of the stocks, which would bring the rest of the 4 stock weights to 16.67% each.

Additionally, if you want to increase the weights of more than one stock, the weight adjustment will be based on the original target weight of the position in an uncustomized index.

2. Decreasing the weight of a stock in your index

You can decrease the weight of a stock by a multiplier of 0.75, 0.5, or 0.25. The weight will be multiplied based on the stock’s original target weight. 

For example, let’s assume an equal weight of 5 stocks in an index for a $100 portfolio. Each stock will hold 20% or $20 notional value. If you decrease one of those stocks by 0.5 then the algorithm will multiply the notional value by that multiplier, making it a $10 value. We then add up all the new notional values of the 5 stocks, which brings the total to $90 instead of the original $100. We then determine the new weight of the position by dividing the notional values of $10/$90, which equals 11.11% instead of the original 20% value. The remaining 88.89% will be distributed equally to the rest of the stocks, which would bring the rest of the 4 stock weights to 22.22% each. 

3. Increasing the weight of a sector in your index

You can increase the weight of a sector in your index, except for the MVIS US Semiconductor and S&P 500 Information Technology indices since they only have one sector. You’re able to increase the sector weight by a multiplier of 2, 3, or 5. The multiplier will be applied to each stock within that sector and then the remaining percentage will be distributed proportionally to the rest of the index. 

For example, if you have an index with 4 sectors all with 10 stocks equally weighted, each sector would make up 25% of your index and each position would make up 2.5% of your index. Then let’s increase the weight of one of the four sectors by 2, we will then multiply each of the 10 positions within that sector by 2. You originally would have held 40 stocks each originally weighted at 2.5% or a notional value of $2.50 for a $100 portfolio, but after the adjustment you would increase 10 of those stocks by 2 making their notional value $5 and a total portfolio value of $125. The new target weight for each of the 10 positions in the index would be 4% for each position with the new sector equating to 40% of your index. The other sectors would then equate to 20% each and each position would be 2% each.

4. Decreasing the weight of a sector in your index

You can decrease the weight of a sector in your index, except for the MVIS US Semiconductor and S&P 500 Information Technology indices since they only have one sector. You’re able to decrease the weight by a multiplier of 0.75, 0.5, or 0.25. The multiplier will be applied to each stock within that sector and then the remaining percentage will be distributed proportionally to the rest of the index. 

For example, if you have an index with 4 sectors all with 10 stocks equally weighted, each sector would make up 25% of your index and each position would make up 2.5% of your index. Then let’s decrease the weight of one of the four sectors by 0.5, we will then multiply each of the 10 positions within that sector by 0.5. You originally would have held 40 stocks each originally weighted at 2.5% or a notional value of $2.50 for a $100 portfolio, but after the adjustment you would decrease 10 of those stocks by 0.5 making their notional value $1.25 and a total portfolio value of $87.50. The new target weight for each of the 10 positions in the index would be about 1.43% for each position with the new sector equating to about 14.29% of your index. The other sectors would then equate to about 28.57% each and each position would be about 2.86% each.

What happens when you adjust the weight of a stock or sector in your index after you’re already invested?

You’re able to adjust the weights of your sectors (except for MVIS US Semiconductor and S&P 500 Information Technology indices since they only have a single sector) and weights of your stocks after you’re already invested in the index. You can make the adjustments and see the impact outlined above. The adjustments can be made by going into the direct index portfolio you want to edit and clicking “Edit” next to “Your direct index” then select “Edit” again next to “Your customizations.” From there, you’re able to adjust the weights by clicking on the customization icon shown next to the listed weight.

Keep in mind that adjusting these weights after you’re already invested may trigger trades that create a tax impact. We will provide you an estimated tax impact that adjusted weight changes may have on your portfolio once you’ve completed the edits. You can read more about estimated tax calculations here.