ETF Exchange Traded Funds (ETFs) 2018

I'm not surprised by anything people find a good idea anymore.
I get why people do certain things, they have reasonable rationale and you can make a argument even if it has some flaws.
Lots of people still go bananas for things despite no evidence or apparent logic.

I've given up on understanding.

 

In response to the proposition that ETFs are increasing cap concentration amongst the largest cap stocks -

Pareto

 

You can take the lowest X companies to make up the total of the biggest 5 in any market in the world, so there's nothing interesting about that.
The more interesting thing is that for the ASX you don't need to manipulate the data like that. The entire rest of the ASX outside mining + finance, or outside just the top dozen companies really do make up around half the entire market.

 

Apologies, I’m travelling and on a phone, so the brevity of my post led to it being less clear than it could have been.

What I found most interesting in the linked article was the fourth graph, which shows that since 1964, the top 5 stocks by cap weight in the S&P 500 have fallen from more than 25% to around 15% of total cap weight. This has occurred in the same period in which cap weighted index funds have become a leviathan in the US market.

One of the criticisms levelled at cap weighted index funds is that they lead to a misallocation of capital, with money blindly pouring in to a handful of the biggest companies, the result being that those companies become (relative to the market as a whole) bigger and bigger.

These data show precisely the opposite has occurred in the last 50 or so years.

 

Exactly. Some of the arguments seem to be almost desperate.

I don’t even know all the ins and outs of indexing but now I’ve read enough to know that’s a nonsense argument.

A bigger proponent of indexing than me would likely say it’s people trying to justify their career or those not wanting to accept the realisation that so much time and money is wasted chasing extra returns which just doesn’t seem to work.

 

Yep, saw something yesterday viz Us market.

Approx 15% owned by is in index funds / ETFs...(this includes all Cap weight and smart
Beta)15% is in mutual funds..and 70% is in insto direct investment....

 

For any newbies reading, I thought this was a good work sheet from State Street to consider when choosing an ETF

 

Charlie Bilello on Twitter





Although a few times below 200 SMA for the ASX-listed ETF (IVV), I guess because of exchange rate variations.

 

I was watching a new video by Paul Merriman which helped me understand your point.

He recommends the higher volatility stuff for young people who have a lot of time on their hands accumulating, because when the value is down for longer, they can buy more when it is undervalued, and when it runs hot for a number of years, they can do well by the out performance.

However, and this is what hit me, if you are not accumulating, and worse, if you are drawing down, the volatility provides a much lower performance.

Of course, you would still want diversification as a way to moderate volatility, but you would want the higher risk classes in smaller amounts more akin to the market caps of say small caps and emerging markets, so keeping these would be very useful, but overweighting them can really hit you if you are not able to continue adding in times of volatility.

This might have seemed obvious from your comments but I didn't quite get the full understanding until I saw that video, from the perspective of someone who is closer to retirement.

 

Below you will find the newly released version of the ETFS Australian Landscape for Q3 which provides a high level overview of all ETFs on the ASX.

 

Thanks, @John Ferguson

 

Fidelity one-ups Vanguard, iShares as first fund company to offer a no-fee index fund

Next we will be getting paid to invest. * I haven't read the fine print

 

Mmmm this will please Paul Merriman

 

Expensive, trendy and bandwagon ETPs more likely to fail

Expensive, trendy and bandwagon ETPs more likely to fail

More here also:
ASIC flags concerns about ETF spreads

 

Keeping things up to date ; Have made some minor changes to the SAA, the vehicle (company) has now been funded and have bought a couple of tranches.

40.0% VAS ASX300 Index.
32.5% VGS MSCI World dev Large-Mid index. Unhedged.
7.5% VGS Emerging Markets. Unhedged.
7.5% DJRE Dow Jones Select Global Real Estate index. Unhedged.
7.5% IFRA FTSE Global Infrastructure.Hedged.
5.0% VAF Australian Bonds.

Heavy equities bias remains with 2 additions - small allocation to Emerging Markets, this is a "what if I'm wrong?" insurance, and addition of IFRA, reducing DJRE allocation. Reason for this is that I really wanted at least partial hedging of the International bond alternative ; Property, but that wasn't available. IFRA is fully hedged (note the 50/50 designation in the index name refers to 50% utilities / 50% other, not hedging level), costs the same as DJRE and I believe largely serves a a similar purpose. Time will tell.

From a currency exposure standpoint portfolio is at 52.5% AUD/Hedged and 47.5% Unhedged. MER runs about 24bps with Tax burn approx 62bps...total 86bps vs. 51bps VAS only (72% franked). I am very happy with the minor tax impost given the significant diversification achieved, in any case they add to the franking account for future use. I intend to increase fixed income component in the future, but no need for that currently.

 

@The Falcon
Thanks for posting.
If you were not interested in hedging, would you just go 15% DJRE and no IFRA, or would you still prefer to split it for diversification?

 

Excellent. I’m not following the asset allocation model but looking into it recently this is along the lines of Sixpark’s model which I think is one of the best I’ve seen so far for an Australian investor.

I like the addition of infrastructure which adds correlation benefit should REITs go off the rails.

The EM allocation especially for an accumulator would also concern me from the “what if I’m wrong” scenario as well. It goes against the gut but like all “insurance” it pays to have it just in case,

Also excellent overall from a correlation perspective. But of course you know all that far more than I ever will.

Thanks for the update.

 

Always an important consideration and can be difficult to see these factors.

How flexible are you with the choice of ETFs, if Vanguard or someone came up with a more suitable product (especially the REIT or Infrastructure) would you sell and change, allocate new capital to the new product or stick to your guns?

Enjoyed reading your thoughts as they developed. I've been thinking recently about the ways you can think differently about building a portfolio when you have only ongoing contributions vs a lum sum.

 

Good question. First question would always be what is the tax effect of selling? If material I’d be inclined to allocate new capital to the new product but not sell. But the bar would be pretty high, no plan to add A200 for example.

 

Not an easy one to answer...IFRA is not a slam dunk, I would suggest that survivability is more questionable than DJRE, and a large part of my decision was around the hedging piece. I’d suggest I’d probably skip IFRA if no interest in hedging.