TOGETHER WITH  | Good day. US inflation rose 9.1% in June, a 1.3% gain from last month, setting another four-decade high. Seeing that prices continue to increase on US goods and services, the Feds may take an even more aggressive position. Can you guess which of the following prices actually declined in June versus the prior month? a. food, b. airfare, c. rent. Follow the wave 🌊 below for the answer. Zooming in on the money topics for today: 🔎 - Move over ETF, here comes direct indexing
- Why is the US dollar going up?
- Cars that might actually appreciate
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INVESTING Move Over ETF, Here Comes Direct Indexing |  | | Tenor—Move Over Cat | | | ETFs have quickly become one of the most prominent investment vehicles globally in recent years. Their ability to combine the diversification aspect of a mutual fund, the tradability of a stock and at the same time be low cost is unparalleled and a major appeal to self-directed investors and financial advisors alike. And with global ETF assets doubling since 2017 to just over $10 trillion today, ETFs are sure to remain in power for decades to come. However, there’s now a new competitor and trend on the horizon, and its craftiness might surprise you. It’s called direct indexing. Some basics - Simply put, direct indexing is like ETF investing, but instead of buying all the stocks in an index, you get to choose which stocks within the index you want to invest in or not.
- Values-based investing: The idea is that direct-indexing investors want to invest in holdings that align with their values. For example, instead of buying $SPY, you might hold the same stocks in the S&P 500 Index excluding say, Altria, because you don’t want to invest in the tobacco stock.
- And the fees? That means, direct indexing is considered active investing. And as such, the costs to direct-index are usually higher than investing in a passive fund. According to Morningstar, passive fund fees average 0.12% annually versus 0.62% for active funds. Direct indexing fees lie somewhere in between.
- The market outlook: And despite the fact that direct indexing is in its infancy, the market, which was around $350 billion in 2020, is expected to reach $1.5 trillion in AUM by 2025. Today, you can direct index via traditional asset managers (i.e., Schwab, Fidelity, Vanguard, BlackRock, etc.) and newcomers (i.e., Pebble, GAMMA, etc.).
The benefits of direct indexing - Taxes: Tax-loss harvesting is the practice of using losses to your advantage, allowing them to offset your capital gains and therefore reduce your tax bill. Direct indexing allows you to reap the benefits of tax loss harvesting in a way that holding an ETF does not. With ETFs, you hold whatever the fund does, but if you own the individual stocks themselves, you can elect to sell some of your losers in a timely manner to pay less come tax time.
- Personalization: Chances are that if you take the time to look at the holdings of any given fund, you’ll find something you’d change based on your values. Venturing to index on your own terms allows you the freedom to do just that. The idea is that direct indexing allows you to craft a “fund” that truly reflects your personal preferences.
Take this related lesson on this topic and earn Dibs 🟡 while you're at it:
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CURRENCY OUTLOOK Why Is The US Dollar Going Up? | | | | Conventional wisdom would lead us to believe that during times of high inflation, the US dollar would be devalued by rising prices, decreasing its purchasing power. While that tends to be true, nowadays the power of the dollar continues to grow stronger relative to its counterparts. How is this possible? Well, even though other nations might be experiencing some similar, although different, ramifications to their economies in the wake of the pandemic, the US is addressing them differently on the monetary policy front, and this is mainly where our answers lie. Different strokes for different folks - Inflation is pretty bad: The US has experienced some of the worst inflation rates in the world in the aftermath of the pandemic and a slew of extra stimulus money going into the economy. While we logged 9.1% in June, Norway saw 6.3%, France 5.8%, and Japan just 2.5%. Because of this, the Fed’s response to raising rates has been more aggressive than most central banks.
- The money printer: As the Fed rates rise at a fast clip, US Treasury yields follow, attracting investors looking for higher yields, subsequently boosting the dollar’s value. With tighter conditions the Fed is imposing, US debt securities are retaining and attracting noteworthy demand from across the pond, further adding to global demand for US greenbacks.
- Domestic fears don’t supersede international ones: The Euro has been more valuable than the dollar since 2002 for various reasons that we won’t go into here. And just this week, the USD hit parity with the Euro for the first time in 20 years. Why? Although there are worries about a recession in the US, similar fears abound in Europe. Add recession worries on top of the ongoing situation with Russia and rising energy prices. Since the eurozone remains dependent on Russian energy, the USD’s appeal is as a “safe haven” for many investors.
The implications of all this - A slight relief: Theoretically, greater purchasing power on imports because of a strong dollar should alleviate a bit of inflation’s sting, and it does, a little bit. Research shows that the dollar’s 10% rise against its trading partners’ currencies over the last year results in an effective reduction in inflation by just about 0.4%, or not much relative to its 8.6% spike over the last year.
- Dampened profit margins: A stronger dollar also results in lower profit margins for multinational corporations, as it reduces the value of their foreign revenue once it’s converted back to USD, with companies like Microsoft already issuing downward Q2 guidance for this specific reason.
- Trade deficits: Dollar strength makes foreign products cheaper for Americans, but American products more expensive for foreign consumers and businesses. This results in reduced exports and increased imports, further adding to our negative trade deficit and dragging down overall GDP, of which another down quarter for April-June would signal a recession.
So will the USD keep rising? Only time will tell given the many moving parts in the world’s economy. However, with persisting inflation looking to keep US interest rates rising and geopolitical risks abound, the USD will probably stay high for the time being. Take this related lesson on this topic and earn Dibs 🟡 while you're at it:
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TOGETHER WITH FINMASTERS An Illustrative Guide to How Inflation Works | | | | Inflation is our new reality. Prices are climbing beyond control and diminishing your purchase power, but do you really know how inflation works? That’s where this illustrative guide from Finmasters comes in really handy. Here you’ll learn about what causes inflation, how it’s measured and even how to benefit from it. You can use their calculator to find out how much a car, a movie ticket or a cup of coffee cost 20 or 50 years ago. Check out the How Inflation Works guide by Finmasters. It’s fun, educational, and totally free. | | | |
MONEY TIPS Cars That Might Actually Appreciate | | | | Aside from the anomaly that has been these last couple years, vehicles are typically something you can bank on to depreciate reliably, and even as soon as you drive it off the lot in some cases. When and if the car market returns to normal, this will likely be the case again, and we’ll all be a little disappointed that our cars are no longer investments. But, what if they could be? Although most vehicles do usually depreciate over time, there are some hidden gems and corners of the car market out there where, yes, the vehicle might just appreciate over time. Well, like what? - Classic Americana: If you purchase a brand new muscle car, chances are you’ll lose a lot of value in the first few years of ownership. However, if you go for something older that’s bottomed out in value long ago and has since become a classic within the American collectors community, you could set yourself up for some appreciation. Some examples that fit these criteria are 1960s Mustangs, older Corvettes, or even more unique pony cars like Pontiac Trans-Ams, Oldsmobiles, and yes, even a few unique Buicks.
- German engineering: If you don’t mind paying $200 for an oil change occasionally, German cars like BMW, Audi, Mercedes, and even VW are some of the most sought-after collector brands in the world with loyal fan bases everywhere. While buying a 2012 BMW 328i isn’t going to get you much in the way of appreciation, picking up something a little unique like an e46 M3, V10 Audi S4, or even the right GTI VW Golf will fit the bill.
- Vintage Japanese makes: The Japanese car scene is second to none in terms of purist loyalty, and the right cars in this description will hold their value over the long run without issue. A Camry might not quite do it, but if you can get your hands on something like an elusive Honda S2000, Acura NSX, Toyota MR2, Nissan Skyline, or anything akin to this lineage, you’re holding a rare asset.
Take this related lesson on this topic and earn Dibs 🟡 while you're at it:
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🔥 TODAY'S MOVERS & SHAKERS | - American Airlines (-1.1%) shares are down ahead of their quarterly earnings next week; the company released preliminary revenue figures indicative of growth.
- JP Morgan (-4.7%) as the investment bank and financial services company missed on profits, raised reserves, suspended buybacks and said that waning consumer confidence, inflation and other factors will weigh on the global economy.
- Novavax (-26%) as the EU adds severe allergies as side effects of the company's COVID vaccine.
- Bitcoin (+0.5%) to $20,274.60 (1D)
- Ethereum (+2.3%) to $1,140.21(1D)
This commentary is as of 7:00 am PDT. | | | |
🌊 BY THE WAY | - ✈️ Answer: Airline fares. Airfare was one of the few areas seeing a decline, falling 1.8% in June though still up 34.1% from a year ago. Gas prices rose 11.2% and food costs increased 10.4% (CNBC)
- 🎨 ICYMI. The art of selling at a loss & why selling at a loss works (Finny)
- ⏰ Inflation alarm bells are actually getting softer (Bloomberg)
- 🏗️ Mexico pledges $1.5 billion investment in border infrastructure (The Hill)
- Finny lesson of the day:
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| Finny is a financial education platform on a mission to make your money work for you. We offer a customized financial learning platform through bite-size, jargon-free lessons, money trends & insights. The Gist is Finny's twice-a-week (Tues & Thurs) newsletter covering personal finance & investing insights and money trends. Finny does not offer investment and stock advice or endorsements. The Gist content team: Austin Payne, Chihee Kim. We're thankful for the support of today's sponsors and partners—Finmasters—as they make rewards on our platform possible. If you're interested in sponsoring The Gist, please reach out to us. And if you have any feedback for us, please contact us. | | | | | | | |
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