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Equal weight equivalent of VWRL (or similar)

Index tracking funds and ETFs
1nvest
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Re: Equal weight equivalent of VWRL (or similar)

#329228

Postby 1nvest » July 28th, 2020, 5:12 pm

dspp wrote:This is the FTSE-100 ordered by mkt cap https://lsemarketcap.com/ (or at least is should be ordered by mkt cap, if not select mkt cap by the arrow)

An equal weighted portfolio would put the same amount into ULVR (#1, £188bn) as NMC Health (#100, £10 mln*) or MCRO (#99, £951 mln)

Surely an equal-weighted strategy is dialling up the risk in some huge and unquantified way. At least by doing it by market cap one is able to access the wisdom of crowds for guidance. And if one accepts that mkt cap is a good weighting method then why not go the whole hog and use VWRL or a similar big tracker with similarly low fees. That tends towards being a 'letting-winners-run' strategy rather than a "rewarding failure" strategy.

regards, dspp

*surely that is an error for NMC at £10 mln. Surely the FTSE100 is not quite trawling the bottom that badly ?

£10.4Bn by the looks of it.
if one accepts that mkt cap is a good weighting method

So if
ULVR 188 Bn
NMC 10Bn
And a 10K investment, I'd see that as £5K to each in anticipation that both had equal chance of being the better performing stock for me over the next 12 months. Whilst a cap weighter would be more content with £9500 into ULVR versus £500 into NMC in reflection of their market cap size. More often they'd be wrong, especially with a broader number of stocks involved as investing more into one means less invested into each/all of the others. And that tends to show in longer term outcomes. Consider for instance US non dividend stocks, yearly equal weighted. The cap weighted since 1928 annualised 8.7%, whilst the equal weighted annualised 12.5%. In equal weighting you hold more smaller so there's a distinct smaller cap tilt with that, and that shows in the standard deviations of 33 versus 45 for cap versus equal weighted respectively. However looking at the min (worst year) and the figures were -50 versus -54, whilst for the max (best year) the figures were 90 vs 185. Marginal additional downside, far greater upside, will yield higher volatility (standard deviation), but upside volatility is a good thing!

Convert to Pounds and either 67/33 or 50/50 with gold (silver pre 1972 when the $ was still pegged to gold), and not a penny of income, but a 8.8% (67/33) or 7.8% (50/50) annualised real reward

Mean 13.06% 10.86%
Median 5.32% 4.89%
Stdev 34.42% 28.48%
Min -40.45% -34.68%
Max 197.60% 159.33%
CAGR 8.80% 7.81%
CAGR/Stdev 25.56% 27.44%
67/33 50/50
(note I use CAGR / Stdev as a quick-n-dirty Sharpe like measure)

Reminder - they are all real, after £ conversion and UK inflation figures.

That was for all non dividend stocks, so the broad average when equally weighted. It's not really viable for a individual investor to buy the full set, so in the absence of a available product to provide that [*A] you're relegated to perhaps picking 20 or 30 out of the set and rely upon a 'sampled' style DIY index - in a manner to how some funds opt to track their benchmark via sampling rather than full replication.

On the basis that equal weighting tends to instil smaller and higher volatility, some consider that higher volatility to be 'risk'. But when the volatility is to the upside that could also be considered as less risk. All a question of what you perceive 'risk' to be. Greater volatility will mean that it tends to zigzag around the less volatile, so over some periods will do worse, over other periods will do better.

[*A] Perhaps the reason for the absence of funds tracking equal weighted no-dividend stocks is due to the costs/complexities for a fund to see inflows and outflows from/to the fund and matching the actual holdings to account for that.

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Re: Equal weight equivalent of VWRL (or similar)

#329234

Postby dspp » July 28th, 2020, 5:36 pm

Newroad wrote:Hi dspp.

I agree with the initial tenor of your reply, identifying letting winners run vs mean reversion (and a similar argument can be made for active vs passive in small cap vs large cap). However, as before, and I think questioned by Lootman, I don't think your apparent conclusions re risk necessarily follow.

Regards, Newroad


I really don't know, and I know I don't know. That makes me consciously incompetent :)

The reason I don't know is that all the strategy arguments, and all the backtesting in the world, will not get us beyond the reality that humans as individuals and as a collective are complex adaptive beings in a complex adaptive system. So what works as a strategy one day will not necessarily work as a strategy another day. Furthermore as small-beer retail investors we are operating at a considerable disadvantage to larger professional investors. So genuinely I don't know.

As HariSeldon has pointed out, pace Bogleheads etc

===
viewtopic.php?p=93685#p93685

"@Richfool
Quite right, I did intend to add all the losers as well.
Posting in a mobile is not ideal..

This link is interesting concerning the disproportionate influence of the “winners” , it’s more important to catch ALL the winners rather than eliminate a loser. A loser can at worst be 100% but a winner can be 500% or more.

http://awealthofcommonsense.com/2016/05 ... -strategy/

The link is from the USA but I have seen other similar research for other markets."

===

Now as to whether there is sufficient value hidden in Japan Inc to be worth increasing ones asset allocation towards it, and by implication dialling down ones exposure to FANG+T is something I really do not know. Personally I think I have a view on the 'T' (TSLA) which is why I hold TSLA, but I don't have a view on the FANGs which is why I only hold them very indirectly via VWRL. Ditto for Japan Inc, where I am sufficiently concerned that I deliberately picked VAPX rather than being in something that includes Japan, i.e. my VWRL exposure to Japan is sufficient imho.

The more general argument of what % to allocate between classes is also relevant. When I look at my overall situation, even for my very modest numbers, it is not far off being the classic 1/3 property (my house); 1/3 bonds (my pension is a very good proxy in my particular case); and 1/3 equities (my 'regular' portfolio, largely index trackers). Regrettably, ordinarily, I can only dream of cash/gold given the normal state of my bank account.

Like I said I really don't know. But I know that for sure, which ought to make me petrified.

regards, dspp

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Re: Equal weight equivalent of VWRL (or similar)

#329235

Postby Newroad » July 28th, 2020, 5:37 pm

Hi 1nvest.

The following was very interesting

Consider for instance US non dividend stocks, yearly equal weighted. The cap weighted since 1928 annualised 8.7%, whilst the equal weighted annualised 12.5%. In equal weighting you hold more smaller so there's a distinct smaller cap tilt with that, and that shows in the standard deviations of 33 versus 45 for cap versus equal weighted respectively. However looking at the min (worst year) and the figures were -50 versus -54, whilst for the max (best year) the figures were 90 vs 185.


What initially surprised was the apparent outperformance - though in retrospect, less so - as you observe, depending on how wide you cast your equal weighting net, you'll be getting exposure to smaller (and perhaps small) caps in context. A higher number of (material but smaller) variations.

It would be interesting to see if that held true for the VWRL sample space, but as before, not sure if that's in any way easy to determine.

Regards, Newroad

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Re: Equal weight equivalent of VWRL (or similar)

#329240

Postby 1nvest » July 28th, 2020, 5:58 pm

Kenneth French's data
https://mba.tuck.dartmouth.edu/pages/fa ... brary.html
In August 2019, we added emerging markets portfolios to the bottom of the page. The global portfolios and factors have been renamed to developed.

likely contains the equal and value (market cap) comparisons for yearly and monthly. Don't know which dataset out of those sets might be the best once to access though.

This one perhaps
32 Developed Portfolios Formed on Size, Book-to-Market, and Investment (2 x 4 x 4)

that seems to have size and both equal and value weighted sets

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Re: Equal weight equivalent of VWRL (or similar)

#329246

Postby 1nvest » July 28th, 2020, 6:31 pm

I downloaded and measured this one (selected the BIG set and then opted for the middle choice of 'Investment') ...
Image
but don't really know if that's a good choice or not. But again there are indications that equal weighted was more rewarding than value weighted over that total date range and for that set of data, but equal weighted did lag at times into that run (so higher volatility, as indicated by the standard deviations in yearly total returns 16.15 vs 17.4 for value and equal weighted respectively).

Respective min and max's were

-39.31 -40.93
31.01 45.89

so again it looks like equal weighted had only marginally more downside volatility, but modestly more upside volatility.

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Re: Equal weight equivalent of VWRL (or similar)

#329443

Postby Newroad » July 29th, 2020, 2:46 pm

Thanks, 1nvest.

Much appreciated - seems broadly consistent with your earlier example.

The question in theory then morphs to, how to implement it in practise at a global stock allocation level?

Regards, Newroad

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Re: Equal weight equivalent of VWRL (or similar)

#329448

Postby dspp » July 29th, 2020, 3:06 pm

Newroad wrote:Thanks, 1nvest.

Much appreciated - seems broadly consistent with your earlier example.

The question in theory then morphs to, how to implement it in practise at a global stock allocation level?

Regards, Newroad


Interesting.

But will the last 30-years, where some significant IT innovations have born fruit, be representative of the next 30-years. Those minnows grew to be Msft+FANG+etc. If you equal weight (which is in fact a bias towards the small companies) and only do so in those countries/markets that are 'developed' then one might find that the growth of the last 30-years would not be replicated. How does this look if one sets the start point as being 1929 for example ?

regards, dspp

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Re: Equal weight equivalent of VWRL (or similar)

#329452

Postby Newroad » July 29th, 2020, 3:22 pm

Hi dspp.

1nvest's earlier example was taken starting in 1928.

Of course, these anecdotal examples may not be indicative, but it's two from two so far.

Regards, Newroad

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Re: Equal weight equivalent of VWRL (or similar)

#329462

Postby dspp » July 29th, 2020, 4:08 pm

Newroad wrote:Hi dspp.

1nvest's earlier example was taken starting in 1928.

Of course, these anecdotal examples may not be indicative, but it's two from two so far.

Regards, Newroad


Sorry, missed the first one.

Grabbing the inflation-adjusted Dow here (https://www.macrotrends.net/1319/dow-jo ... ical-chart) are those two periods. Excuse my scrappyness but I have marked both the relevant periods. I guess the question needs to be asked, how well does this result stand when one works through all the possible start points ? Is it just a reflection of the result one gets in a rising economy, or is it robust enough to hold true in falling or flatlining economic periods ?

regards, dspp

Image

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Re: Equal weight equivalent of VWRL (or similar)

#329499

Postby Newroad » July 29th, 2020, 8:14 pm

Hi dspp.

It took me a while to figure out where 1nvest was getting his data from and what he was doing with it, but I think I've sorted it now. The particular data-set he was using starts from 1964.

The biggest (real terms) drop from your chart, in that period, was roughly 1966-1981 inclusive. The nominal performance of 1nvest's data source for that period was

  • Market weighted: 5.0% cumulative pa
  • Equal weighted: 6.4% cumulative pa

The longest (real terms) "flat" period, in terms of start and end positions at least, that I could see from your chart during the period was roughly 1964-1994 inclusive. The nominal performance of 1nvest's data source for that period was

  • Market weighted: 4.965% cumulative pa
  • Equal weighted: 5.495% ave pa

The differences in precision are coincidental - I only went as far as I needed to match the cumulative data to two decimal places. Any others errors are my own. If you want further info, I suggest you model yourself to your heart's content. However, this would seem to suggest that not only is equal weighted better in a downturn, it performs relatively better again.

Regards, Newroad

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Re: Equal weight equivalent of VWRL (or similar)

#329515

Postby dspp » July 29th, 2020, 10:12 pm

Newroad wrote:Hi dspp.

It took me a while to figure out where 1nvest was getting his data from and what he was doing with it, but I think I've sorted it now. The particular data-set he was using starts from 1964.

The biggest (real terms) drop from your chart, in that period, was roughly 1966-1981 inclusive. The nominal performance of 1nvest's data source for that period was

  • Market weighted: 5.0% cumulative pa
  • Equal weighted: 6.4% cumulative pa

The longest (real terms) "flat" period, in terms of start and end positions at least, that I could see from your chart during the period was roughly 1964-1994 inclusive. The nominal performance of 1nvest's data source for that period was

  • Market weighted: 4.965% cumulative pa
  • Equal weighted: 5.495% ave pa

The differences in precision are coincidental - I only went as far as I needed to match the cumulative data to two decimal places. Any others errors are my own. If you want further info, I suggest you model yourself to your heart's content. However, this would seem to suggest that not only is equal weighted better in a downturn, it performs relatively better again.

Regards, Newroad


Thank you. And thank you both for making the effort to engage.

Measured over a 30-year term (because that time is the smoothing variable not discussed so far) :-

So at worst 0.5% better than 5% (10% overperformance), or alternatively 1.5% better than 5% (30% overperformance).

The causation behind the correlation would appear to be the increased exposure to smaller ('growthier') businesses.

If my causation is correct, then if one were to want to access that in the here-and-now, the most direct way would be to stay with the readily available mkt cap developed market index trackers (VUKE, VERX, VAPX, VWRL, etc) and to add in an emerging market tracker, and to add in a dedicated global small cap tracker.

Do such things exist ?

(By the way this runs counter to the observation in the US markets that most of the profit goes to ever-fewer but-larger incumbents. Is it that they are measuring dividends, rather than cap growth ?)

regards, dspp

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Re: Equal weight equivalent of VWRL (or similar)

#329549

Postby JohnW » July 30th, 2020, 5:53 am

Newroad wrote:If you want further info, I suggest you model yourself to your heart's content. However, this would seem to suggest that not only is equal weighted better in a downturn, it performs relatively better again.

Here's someone else's take on the question:
'And fundamental indexing has so far failed to show any obvious benefit. When it was new and getting a lot of press, three funds were getting written about a lot:'......
'The bottom line is "not much difference." But in fact not one of the three actually managed to beat Vanguard 500 index, and--in light of claims of bubble avoidance--two of them declined more than the Vanguard 500 index fund during 2008-2009. Not by a lot, but certainly there was no evidence of meaningful downside protection.'
https://www.bogleheads.org/forum/viewto ... 6#p5399460

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Re: Equal weight equivalent of VWRL (or similar)

#329596

Postby Newroad » July 30th, 2020, 9:24 am

Thanks, JohnW.

I suppose that begs the question is the difference between the funds you cite and 1nvest's data source a choice of dataset issue, or an execution issue?

I don't know the answer and don't have the resources (including time) to likely work it out. However, whichever is correct, the differences, though not always trivial, are not that great either.

Regards, Newroad

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Re: Equal weight equivalent of VWRL (or similar)

#329620

Postby xxd09 » July 30th, 2020, 10:25 am

Once you move away from cap weighted indexes then you are into serious active investing
Who knows what the stockmarkets /life will do ?
Second guessing the future is impossible?
Cap weighted means you are investing in an actual rather than a guessed at value
Value will adjust automatically as companies win or fail without your input
The changes will be real not made up
Same argument applies to country weighting
How many investors missed the last US Stockmarket gains?
Beating the market is tough and best left to geniuses like Renaissance Technologies
We ordinary average investors must be content with the plain market gains that the stockmarkets give us over time
xxd09

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Re: Equal weight equivalent of VWRL (or similar)

#329641

Postby tjh290633 » July 30th, 2020, 11:16 am

Newroad wrote:However, this would seem to suggest that not only is equal weighted better in a downturn, it performs relatively better again.

I came to the conclusion some long time ago, that the main reason for my own outperformance of the index was equal weighting. It sometimes works against you, of course, but most of the time it is in your favour.

TJH

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Re: Equal weight equivalent of VWRL (or similar)

#329667

Postby Newroad » July 30th, 2020, 12:28 pm

Hi xxod09.

I don't think it follows that moving away from cap weighted equates to moving into serious active investing. I think it's closer to the following

  • Cap weighted tracker ETF(s) and similar: passive momentum investing
  • Equal weighted tracker ETF(s) and similar: passive value investing

At different times, one will work better than the other. The data (and the ability to replicate it in reality) will determine which is better over relevant timeframes.

Regards, Newroad

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Re: Equal weight equivalent of VWRL (or similar)

#329674

Postby GeoffF100 » July 30th, 2020, 12:42 pm

dspp wrote:If my causation is correct, then if one were to want to access that in the here-and-now, the most direct way would be to stay with the readily available mkt cap developed market index trackers (VUKE, VERX, VAPX, VWRL, etc) and to add in an emerging market tracker, and to add in a dedicated global small cap tracker.

Do such things exist ?

There are plenty of emerging market and small cap trackers, e.g:

https://www.vanguardinvestor.co.uk/inve ... g/overview

https://www.vanguardinvestor.co.uk/inve ... c/overview

dspp wrote:(By the way this runs counter to the observation in the US markets that most of the profit goes to ever-fewer but-larger incumbents. Is it that they are measuring dividends, rather than cap growth ?)

Most of the profits do indeed go to the largest companies, and many of them are growing bigger. They also usually return the largest amount to shareholders via dividends and buy backs. You have to divide the total dividends paid by the huge market cap to get the dividend yield. Capital growth is usually the result of larger (actual or potential) returns to shareholders. Capital growth has been good for the tech stocks, but not for some of the older large companies.

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Re: Equal weight equivalent of VWRL (or similar)

#330252

Postby xxd09 » August 1st, 2020, 7:39 pm

Thanks Newroad
That certainly puts it better than I did
Of course even the act of selecting an index is a form of active investing so I could never be holier than thou with so called active investors
Momentum investing-never envisaged describing cap weighted index investing in that way-interesting
I knew about Value investing but understood it was still under investigation as a superior investing format
Seems it might be better over the very long term
Perhaps the next way for indexers to go
Did John Bogle ever have an opinion on value investing?
xxd091

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Re: Equal weight equivalent of VWRL (or similar)

#330339

Postby GeoffF100 » August 2nd, 2020, 1:27 pm

xxd09 wrote:Thanks Newroad
That certainly puts it better than I did
Of course even the act of selecting an index is a form of active investing so I could never be holier than thou with so called active investors
Momentum investing-never envisaged describing cap weighted index investing in that way-interesting
I knew about Value investing but understood it was still under investigation as a superior investing format
Seems it might be better over the very long term
Perhaps the next way for indexers to go
Did John Bogle ever have an opinion on value investing?
xxd091

Bogle said invest in the whole market index. He did not believe in value investing. Value investing has done badly in recent years. It may do better in the future, but why take the additional risk?

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Re: Equal weight equivalent of VWRL (or similar)

#330365

Postby Newroad » August 2nd, 2020, 5:01 pm

Hi GeoffF100.

Are you questioning value investing in general (in which case, probably best cover it in another thread elsewhere) or suggesting that the loose analogy I drew is way off base?

Regards, Newroad


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