Can You Make Your Investment Portfolio Reflect Your Values?

The protests roiling college campuses are filled with all sorts of demands, but many of them have one thing in common: money.

Many pro-Palestinian protesters want their school’s endowments to pull money from investments in companies that have financial ties to Israel. Most institutions have declined to do so.

This form of financial protest is not new. We all want to live our values and have our colleges, employers and communities do so, too. We saw similar protests in the 1970s and ’80s with South Africa and in the continuing debate over climate change. Students, especially, can learn a lot about investing, governance and complexity through trying to influence their schools.

But many individual investors also have the ability to press the eject button on stocks that they disfavor, all on their own. This week — after years of being disgusted by the way that a small number of companies have treated their American customers, employees and the public trust writ large — I finally did it myself. This is personal, so I will not name the companies here. But, to be clear, it had nothing to do with Israel and Gaza, and everything to do with how investing in bad corporate actors made me feel.

I’m not saying you should do this, too. But if you want to, it is becoming easier with each passing year.

At first glance, the process may seem simple. If you don’t want certain stocks in your portfolio, you don’t have to buy them or you can sell them if you already have them — and send an impassioned note to the company’s executive team for good measure.

But many people invest in index funds — big baskets of the stocks that make up, say, the entire U.S. stock market. Until recently, it hasn’t been possible in most instances to call up a fund company and demand that it remove or double down on certain stocks just for you.

That, however, is changing. You can do your own subtraction inside an index-like collection of investments through a strategy called direct indexing. It’s available mostly in brokerage accounts and not retirement ones, though that may change as the strategy becomes more popular.

A financial services company that does direct indexing buys stocks in a particular index on your behalf, and you own the shares directly, not through a mutual fund or an exchange-traded fund. One big advantage of direct indexing is that you can save money on capital gains taxes by buying and selling stocks at the right time to offset winners with losers. Another advantage is that the companies will let you keep certain stocks out of your portfolio, but you can still own all the other stocks that are part of the index you want to mimic.

Direct indexing has been around for years, but the minimum amount of money that a company requires you to invest keeps decreasing. Fidelity will let some people do it with a minimum investment of $5,000. A start-up called Frec requires $20,000. At Wealthfront, the service is for accounts over $100,000.

There are fees, too, and there may be limits on the number of companies you can exclude.

The financial services companies that offer direct indexing are bring-your-own-agenda entities. That lack of institutional advocacy — and the fact that most people can’t yet do direct indexing through a retirement portfolio, where many people who invest keep the bulk of their stocks — will limit the social impact of this form of stock deselection for now.

Still, we all have to live with ourselves. If feeling better about your investments is just a question of removing a few bad actors, then direct indexing may be worthwhile for that reason alone.

An additional feature of some offerings that is both curious and complicating is the ability to screen out industries, or parts of them. This isn’t just your standard get-me-out-of-oil stocks feature.

Aperio, a direct indexing offering that the investing colossus BlackRock bought for over $1 billion, offers a screen for people who want to avoid investing in predatory lenders. How does it define those lenders? It hands the question off to a company called MSCI, which is an assembler of data and indexes of various sorts.

MSCI looks out for any suspect (but typically legal) lending practices, but none of the companies on its no-go list are major banks, card companies, credit bureaus, student loan issuers or mortgage providers. The six on its current list include companies in the rent-to-own and pawnshop categories.

“Applying investment exclusions may sound simple in theory, but in practice these require nuance,” Melanie Blanco, an MSCI spokeswoman, said in an email. “Values-based exclusions require an understanding of the various ways a company can be involved in a business activity.” Indeed, so many companies make money in so many places from actions both direct and indirect that it can be hard to know where to draw a red line.

For what it’s worth, none of the direct indexers I spoke to this week were hearing from customers clamoring for a Gaza screen that would subtract companies like the ones that some protesters hoped to excise from university endowments. That does not, however, mean that people aren’t moving individual companies out of their baskets of stocks, even if the reasons aren’t always clear.

Mo Al Adham, the founder and chief executive of Frec, said he couldn’t be sure whether the customers who had moved Boeing out of their holdings in recent months were doing so because of questions about the company’s planes and their safety or questions about its work in Israel. They could also be avoiding Boeing because they worked there; getting your salary from the company is financial exposure aplenty without also choosing to own its stock. Or it could be something else entirely.

But just because direct indexers haven’t created a screen around the war in Gaza — as opposed to last year’s biggest controversy or next year’s — doesn’t mean you can’t. My screen happened to be about the mistreatment of customers. Yours may be about something even more idiosyncratic.

It takes all kinds of investors to make a market. The fact that it’s becoming easier to make your mark is good news for those who care to try.