ETF Index ETFs: cap weighted vs equal weighted

Discussion in 'Shares & Funds' started by Zenith Chaos, 31st Jan, 2017.

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  1. Zenith Chaos

    Zenith Chaos Well-Known Member

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  2. Nodrog

    Nodrog Well-Known Member

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  3. Zenith Chaos

    Zenith Chaos Well-Known Member

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    Looks like a good satellite / complement to my existing strategy with a good dividend of almost 8% gross yield. The fees are 0.3% which is higher than I'd prefer but not extravagant.

    My issue now is how many different ways can I buy CBA? I think my priority is to diversify further into small/mid caps (QVE / MIR), increase international allocation (VGS / VEU / VTS) but potentially use QOZ instead of VAS when it appears cheaper over the long-term weighted average (FTSE RAFI has underperformed recently but not in the long term - it might be better value now than VAS).
     
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  4. Nodrog

    Nodrog Well-Known Member

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    @Il Falco,

    When you've finished enjoying the best of what Tassie has to offer care to share your thoughts on RAFI further to our private discussions:)?
     
  5. Nodrog

    Nodrog Well-Known Member

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    Total expenses for QOZ are actually closer to 0.50%. Also expect a higher proportion of capital gains due to higher turnover. Index rebalanced annually.

    I'm still looking into QOZ and RAFI. A very interesting area.

    My tendency is to keep things simple.

    Accept that the ASX is dominated by the top 20. So either STW / VAS / IOZ is mostly Top 20 by weight. The majority of active fund Mgrs will struggle to outperform in the large cap space. See SPIVA report below showing 69% of active Mgrs failed to beat the index over 5 years.

    But where active Mgrs can add real value is in the mid / small cap space as the stats have proven time and time again:

    IMG_0033.JPG

    Over a 5 year period nearly two thirds of active mid-small cap funds outperformed the index. Often by a significant amount.

    Therefore a simple combination to achieve notable outperformance could be:
    1. STW - 70%
    2. QVE (ex20) / CIE (ex30) / MIR (ex50) / WAX (flexible) - 30%

    This is likely to give far greater outperformance than messing around with equal weighted index ETFs.

    There is an Ex20 ETF (code EX20) but it will be full of the rubbish (eg spec miners) the active Mgrs avoid:
    http://www.betashares.com.au/files/factsheets/EX20-Factsheet.pdf

    Not advice.
     
    Last edited: 31st Jan, 2017
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  6. Nodrog

    Nodrog Well-Known Member

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    Meant to add that for those interested in small caps (ex100) and feel they must own an ETF there is also MVS:

    https://www.vaneck.com.au/library/vaneck-vectors-etfs/MVS-fact-sheet.pdf

    https://www.vaneck.com.au/white-paper-mvs/

    The dividend rule eliminates some of the more speculative stuff.

    Also DYOR on LICs mentioned in previous post especially CIE which I haven't really looked into a great deal. I wasn't too keen on their dividend policy (6.5% of NTA) which sounds good in theory but not so good if using capital to prop up the dividend at times:

    http://www.asx.com.au/asxpdf/20161110/pdf/43csrwtzw25sc4.pdf
     
    Last edited: 1st Feb, 2017
  7. Hodor

    Hodor Well-Known Member

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    Great discussion, Very interesting. When I first got interested in ETFs I got some MVW, on further reflection and thinking more about the pros and cons I'm not convinced by the equal weighting methodology with some of the challenges it faces.

    About to board a flight and hide in the wilderness for a few weeks, look forward to reading up on RAFI when I get back as I never got that far down that path
     
  8. Nodrog

    Nodrog Well-Known Member

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    Last edited: 1st Feb, 2017
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  9. The Falcon

    The Falcon Well-Known Member

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    Greetings from Cygnet (Overrated, too many hippies. I saw a "kill capitalism" sticker on a light pole and almost vomited).

    Yes as you know I like RAFI fundamental indexing. Of all the "smart beta" or factor products I think it's the most interesting. In a no fee / no tax world it's a no brainer and works well under lab conditions. I am really yet to look at it in any detail in a real world, say company ownership @ 30% tax / no cgt discount environment. The quality of distributions are quite good with typically 50-70% franking. The ETF structure is an efficient way to house a strategy such as this which by design will have a degree of turnover, being more tax effective than an unlisted fund running same mandate.

    It's a very different product than buy-hold LICs or cap weighted etfs, it is essentially an automated "small v" value portfolio that buys and sells according to its fundamental index rules. This means it will absolutely underperform significantly at times..sometimes for years.....so you need to be "all in" with this or you will sell at exactly the moment you should be buying.
     
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  10. Nodrog

    Nodrog Well-Known Member

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    The wife and I were in stitches laughing at your comment knowing what you're like:D.
     
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  11. BingoMaster

    BingoMaster Well-Known Member

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    QOZ is 11% BHP at the moment. Hmm.....
     
  12. The Falcon

    The Falcon Well-Known Member

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    It's been a great stock to hold for the last 12 months. Will be interesting to see next rebalance. I think to invest in QOZ one needs to leave opinions on individual stocks, held as a buy-hold investor at the door. This is not a buy-hold portfolio. By nature it has a contrarian tilt - fundamental measures only, not opinion. When the fundamentals change, stocks are sold/added.

    It's like when you look at say Allan Grays portfolio, it's full of total crap (stuff I'd never hold) but outperforms - that's value investing. They aren't buy-hold.
     
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  13. Nodrog

    Nodrog Well-Known Member

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    Just rang Betashares about when the annual rebalance for QOZ and QUS takes place. Third Friday in March was the answer.

    Not just BHP exposure but resources in total exposure is 23%. However as the Tassie Devil explained these ETFs are based on contrarian value investing rules. Opinions on stocks are removed. So when March rebalance occurs there could be a whopping capital gains if they dispose of some of the Resource stuff which has gained considerably since the rebalance back in Mar 2016.

    These ETFs remove personal bias and buy out of favour stocks based on very sound Fundamental rules. Human emotion is also removed from the process.

    Talking to Betashares they're quite optimistic that the 2% out-performance over the cap weighted indexes might be a reality going forward in line with the backtested results and index performance which existed prior to Betashares listing these funds.

    Most smart Beta ETFs are rubbish based on weak rules. RAFI is a very robust set of rules that is based on a great deal of sound Fundamental research and testing.

    I personally don't own these ETFs at this time. I'm quite interested in seeing how the US RAFI ETF QUS performs in the future. Much less concentrated than QOZ. Like @ErYan said how many ways does one want to own CBA, BHP etc if you already own cap weighted indexes, LICs (passive and / or active), mid / small cap LICs etc.

    However if one only has one or two ASX 200 focused funds then it could make a great compliment (satellite) or core holding.

    All this said it's early days yet for me in coming to a conclusion. I need to do a lot more research and reading on RAFI.
     
    Last edited: 2nd Feb, 2017
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  14. The Falcon

    The Falcon Well-Known Member

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    Agreed, there will be significant CG at time of rebalance - the ETF structure should allow a lot of the CG to be held rather than distributed - this years distributions will be a test and will watch with interest.
     
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  15. Zenith Chaos

    Zenith Chaos Well-Known Member

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    Thanks for the information @austing and @Il Falco. Quite interesting, but just as Jerry Maguire had his girl at "Hello", you lost me at "it's not buy/hold".

    I'm a lazy investor who doesn't want to have to monitor prices and movements. I know as soon as I do then I will start to get technical and engrossed, which isn't what I want. I'm already spending more time than than I want, but I find the conversations interesting. Just searching for the "perfect easy strategy" that I never need to think about.
     
  16. Nodrog

    Nodrog Well-Known Member

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    Fair enough Jerry:).

    For the "investor" the above ETFs can certainly be buy and hold (set and forget) but the underlying portfolio "is not buy and hold" and will change based on the RAFI rules. Remember even the portfolios of cap weighted indexes like VAS and VGS change based on their rebalance rules. Just lower turnover compared to QOZ / QUS.

    With cap weighted ETFs like VAS / STW are you just going to buy regardless of whether the market is in a huge boom or bust or adjust your buying accordingly? Really no different with QOZ / QUS. Also DCA should work equally as well with these.

    I find all this stuff very interesting but given what I already hold I doubt there's a place for these in our portfolios. There's so much new product coming to market in the Listed fund arena (LICs, LITs, ETFs - passive / active) that if an investor is not careful they could end up with a rediculous number of funds. In fact I've seen some ETF investors with more funds in their portfolio than direct share investors have stocks in theirs:eek:.

    I must admit the desire for simplicity is the overriding factor also will my investing approach. I like the idea of only allowing oneself to hold a set number of funds. That forces you to think very hard and long about adding a new fund as it may mean you have to dispose of an existing fund.
     
    Last edited: 2nd Feb, 2017
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  17. Zenith Chaos

    Zenith Chaos Well-Known Member

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    Limit the number of funds? That sounds like a good idea. How does 100 sound? :D

    I am struggling at the moment to find any value in anything at the moment, having saved at least $18 on coffee alone this week, but hate the idea of 2% in a bank account. The reason I started exploring alternatives.

    My strategy says I should buy VAS, VTS, VEU, VGS as the LICs appear expensive, but as per recent conversations about CAPE, so is the market. I am waiting for the big fall to spend that hard earned $18 on my newly derived portfolio of 100 funds. Therefore my research into alternatives or even heaven forbid single shares. Do you still have any direct shares? Are they a valid complement to LICs / ETFs? They would have to be buy and hold forever.
     
  18. Nodrog

    Nodrog Well-Known Member

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    A dozen for me, no more.
    Yes. When market tanks the damn safer LICs will likely be trading at a significant premium.

    Not so for individual shares. I'll never say no to the likes of CBA and WES for example in these situations. Still pretty much set and forget. I don't think I've really even thought about our CBA Shares since the GFC except for when they offered a juicy capital raising. These are very much buy and hold forever or until they dissappear.

    Great compliment to LICs as they help dilute the Resource holdings in the LICs ala Thornhill.

    If keen on direct shares here's an idea. Focus on select top 20 (ex Resources) when beaten down savagely for buy and hold then use a ex20 mid / small cap LIC to look after the more difficult (research wise) part of the market.

    More to tell but the boss is calling:eek:.
     
    Last edited: 2nd Feb, 2017
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  19. The Falcon

    The Falcon Well-Known Member

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    As Austing has covered, you misunderstand. The ETF is suitable for buy-hold, but it itself is not buy-hold if you catch my drift. For mine, a RAFI ETF is as suitable as a LIC for buy-hold investor.
     
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  20. Zenith Chaos

    Zenith Chaos Well-Known Member

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    Understood. I can buy and hold a RAFI ETF, but the fund itself will be buying and selling the underlying shares.
     
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