ETF The problem with Index Tracker ETFs

Discussion in 'Shares & Funds' started by William@PFI, 16th Aug, 2021.

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  1. Nodrog

    Nodrog Well-Known Member

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    Pity @dunno is busy with his homework. Been ordering in heaps of popcorn hoping for some extraordinary viewing. The suspense is killing me.

    elderly-man-watching-movie-cinema_23-2148202063.jpg
     
  2. SatayKing

    SatayKing Well-Known Member

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    I'm just confused as to why one's homework includes analysing the sales history and underlying profits of the companies in an ETF. But if that is what floats your boat go for it.
     
  3. dunno

    dunno Well-Known Member

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    The problem with Index Tracker ETF's is..............................................People.

    With properly sorted understanding and implementation there is no problem with Index Tracking.

    If you want to harvest equity risk premium over the long term the only real question that needs answering is how you rejuvenate the portfolio as the economy progresses. Market Cap weighting is the lowest cost most efficient way.

    If you can't handle market draw downs that is your issue not the product.

    The magic pudding of timing or stock picking to have your equity premium cake without risk of draw down is a lie fed to the vulnerable by people who take a guaranteed fixed fee and leave you with all the damage when they are wrong.

    If somebody is willing to be upfront about the extra risk you take to chase some extra return, then maybe lend them a skeptical ear - otherwise tell them they are dreaming and move on.

    OP is dreaming, its easy for me to see, others that find his sales pitch more alluring should be the ones that use this thread to thrash out the truth.
     
  4. Ross36

    Ross36 Well-Known Member

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    I'll bite, but only for the noobs who might read this thread and be chasing the golden goose of returns and no risk. The real question for me is does the OP actually believe this scientifically debunked nonsense? One of my posts last year was about an elderly neighbor and her "financial advisor" who also believed you could pick active managers and outperform. This adviser had a bachelor and masters in financial planning, but had so little understanding of the evidence it was scary. I actually think she did believe it, which almost made me sorry for her. Instead I felt sorry for her clients.

    Ted Seides was supposedly a fund of funds guru with all the inside intel and made his active management bet at the PERFECT time the hedge funds talk about (ie. Just prior to a massive drawdown) against Wazza, and still got trounced. READ THE DETAILS OF THAT BET. How are you as an investor or the Aussie financial advisor you pick from their flashy (and expensive - who pays for it?) advertisements going to do better than him?
     
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  5. The Falcon

    The Falcon Well-Known Member

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    I have some active listed equities exposure. It is a small part of total assets (6-7%), AU Microcap. This is a part of the market where there is no optimal systematic exposure imho.

    I used to use multiple managers for this exposure but have concentrated it in one manager, a horse that I am prepared to back come what may.

    For me, active management requires faith in the manager but just as importantly also that the part of the market they operate in is conducive to outperformance (microcaps). So you are looking for manager alignment through investment in the fund, a strategy that has academic support (value) and a commitment to limit funds under management to what is a very modest number. Even then you still will wear plenty of risk of index underperformance / key man / business risk / tax inefficiency etc
     
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  6. Zenith Chaos

    Zenith Chaos Well-Known Member

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    returns and no risk - isn't that bitcoin? Or is it ethereum? I always mix them up. That's why I use a diversification strategy 50/50 to ensure all my eggs aren't in the same basket.
     
  7. Ross36

    Ross36 Well-Known Member

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    It's actually cryptopunks:)
     
  8. Zenith Chaos

    Zenith Chaos Well-Known Member

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    No arbitrage assumes all information is known. This is not a perfect world and small caps is where a researcher is more likely to find an advantage in available information. Part of this is because the big players won't bother with small fish. Their FUM is way too big. That being said, I do not believe returns can be made in small caps without some sort of insider knowledge, it just goes against the no arbitrage principle.

    Playing in the big end of town with the big active players, fighting the influx of algorithmic trading, with the belief that you are likely to outperform the market over an extended period requires significant misinformation. I consider it mathematically equivalent to believing that the earth is flat, as there is enough information available to disprove.

    TL;DR
    1. Small caps is a better opportunity space for active trading as less big players and more insider type information available
    2. Trading in the remaining space is equivalent to rolling dice at the casino.
     
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  9. The Falcon

    The Falcon Well-Known Member

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    Small + Value are recognized sources of additional equity risk premium……more risk basically. “small cap” stocks are not small…Microcap at 50m-300m or so particularly at the smaller end sub $100m have very low capacity / liquidity and that does present an opportunity if you have a long holding period and are playing with small amounts. The key is you can’t have a fund with daily redemptions and you can’t manage a lot of money.
     
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  10. dunno

    dunno Well-Known Member

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    Mind divulging the fund? plus any others you have come across that may be worthy of some more investigation.

    One thing I would like to find in a Microcap manager is one good at networking to access primary capital raisings. I'm happy to play in the secondary market myself but I'm lacking on access to primary.

    TIA
     
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  11. The Falcon

    The Falcon Well-Known Member

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    I like Steven McCarthy at DMX Asset Management. An unassuming CPA ex insolvency practice that follows a value strategy among the smallest listed companies on the ASX. You wont find a lot of press on DMX, but they do provide very good investor comms published on website. They run two strategies under the DMX name - a nano-microcap strategy in unlisted public company structure, and a microcap strategy in unit trust structure which was launched recently. These are not cheap exposures, but I think the work is being done and they provide a very different type of exposure. I believe they also run white label strategies for other managers. I am in the nano-microcap which is soft closed but contact me if you are interested as you never know....I can't say that I have any real conviction about other microcap managers, OC Funds seems to have done very well over a long period and worth a look perhaps.

    With regards to the second part of your question, maybe take a look at Wunala Capital. They play in the pre-IPO space, via preferred equity.
     
    Last edited: 25th Aug, 2021
  12. dunno

    dunno Well-Known Member

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    Thanks for the names. I have had a look at DMX so far and it is what I had in mind for a Micro manager.


    In relation to the second part of my question, I’m not really interested in exclusively Pre-IPO manager or venture capital. But I noticed in a DMXCP presentation they listed as an edge exactly what I think I miss as a DIY stock picker.
    upload_2021-8-27_11-6-47.png



    I also liked this
    [​IMG]




    It’s the charted representation of mathematical expectancy and is exactly what you are looking for if you are trading asymmetrical risk in microcaps.

    The only concern I have is its easy to produce this when the market is a tailwind, to reproduce it when the market is a headwind requires a lot more trading.

    A more focused higher conviction approach can give you an even better expectancy, but it comes with an uglier chart and a higher draw down potential. Personally, I prefer high conviction and long holds (win big or loose big) for Micro allocation. I don’t think as a fund though they could take the risks of stupid high conviction and will ultimately continue to focus on replicating the above. Not a bad thing, you could legitimately argue they are choosing probability over stupidity and it’s something I need to think carefully about. On the other hand if you are going to research and make a bet, be active…..maybe you need to put a lot of risk on the line to make it worthwhile?????


    Where I have landed is:

    My passive holdings look like this for size.
    Large 74.88%
    Mid 19.07%
    Small 5.99%

    A 4% increase in small is in order and If I break it down even further most of what is missing is Micro. There is no sensible way to fill this with passive AUS domiciled ETF’s so an active Micro makes sense especially one that chases quality and growth with low valuation risk in that size class.

    But when I factor in my direct holdings my overall portfolio position is
    Large 41.6%
    Mid 22.4%
    Small 35.97%

    So, I am way overweight small with heaps of overlap between what I do and what a micro fund does.

    Question is, do I think about passive as a separate bucket and fill it out with a Microfund?
    Or Do I think about my position overall?

    I’ve battled this question and have swung positions a few times. Currently I’m leaning to managing for overall position So I’m going to sit on my hands with the status the quo for now and just keep a watch out on DMX and any other suitable funds I may stumble across. Thanks for the offer of an introduction.
     
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  13. The Falcon

    The Falcon Well-Known Member

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    @dunno interesting. If the medium term view is to slowly move to a higher passive weighting, then fixing an SAA that has Microcap exposure and applying funds in line with that SAA as individual positions are closed / reduced seems to make sense.

    However, if you intend to manage the individual small positions for the long term I would be inclined not to further overweight the small exposure via a Microcap fund, and only address that exposure when moving to a higher passive weighting.
     
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  14. Wilko

    Wilko Well-Known Member

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    Can you let us know next time someone is going to fly a plane into a building.

    Cheers
     
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