Equal weight equivalent of VWRL (or similar)

[Newroad]

Hi HiRiskPaul.

I am fairly confident that a (say) monthly/quarterly equal-weight re-balancing would have fared well in the dot-com scenario you mentioned. Clearly, it would have appeared to lag as you "banked" part of the upside, but would then have held you in good stead during the crash phase. It strikes me instead that the worse case scenario is a slow death - as for such a company, it would be regularly re-balanced into. However, that is different and considerably less common.

The data to confirm my view is not available to me (it is perhaps to some) but perhaps an interesting proxy of sorts could be considered by looking at Wirecard and what a similar strategy might have achieved?

Regards, Newroad

[tjh290633]

The trouble is that, for the ordinary investor he has little choice about weighting. If he wants to go for market cap weighting, then he has little choice but to buy a tracker fund.

If he wants to paddle his own canoe, then equal weighting is virtually the only option possible to him. Not only that, he has to make a selection of the shares in the index, let's say the FTSE350, because he could not buy every share at that equal weight unless he had a sizeable fortune to invest. So what do you do? You select 15 or 20 or so of the shares that you fancy the most. Maybe they pay the highest dividends, maybe they are the largest cap shares in the index, or maybe he goes for maximum diversity.

As pointed out above, equal weighting is nigh on impossible for a fund. Cap weighting is nigh on impossible for an individual.

You have to cut your cloth according to your means.

TJH

[hiriskpaul]

The trouble is that, for the ordinary investor he has little choice about weighting. If he wants to go for market cap weighting, then he has little choice but to buy a tracker fund.

If he wants to paddle his own canoe, then equal weighting is virtually the only option possible to him. Not only that, he has to make a selection of the shares in the index, let's say the FTSE350, because he could not buy every share at that equal weight unless he had a sizeable fortune to invest. So what do you do? You select 15 or 20 or so of the shares that you fancy the most. Maybe they pay the highest dividends, maybe they are the largest cap shares in the index, or maybe he goes for maximum diversity.

As pointed out above, equal weighting is nigh on impossible for a fund. Cap weighting is nigh on impossible for an individual.

You have to cut your cloth according to your means.

TJH

Well you could do both. Tracker fund to cover the market, other hand pick shares to adjust the weighting, in any weighting you want as nothing is forcing you to buy equal weighted. In addition to cap weighted trackers there are also value funds, growth funds, small cap funds, individual sector funds, geographical region and single country funds. Then there are the various "Smart beta" funds, high yield funds, "dividend aristocrat" funds, momentum, low volatility and other factor based funds. Across all those are various environmental, sustainable, governmental, etc. overlays that are becoming available.

If you just want to underweight say US and Japanese shares for some reason, that is easily achievable using a combination of geographical trackers. Overweight technology or biotech, again no problem.

If anything I would say there are now too many ways for passive investors to shoot themselves in the foot, rather than too few.

[hiriskpaul]

Hi HiRiskPaul.

I am fairly confident that a (say) monthly/quarterly equal-weight re-balancing would have fared well in the dot-com scenario you mentioned. Clearly, it would have appeared to lag as you "banked" part of the upside, but would then have held you in good stead during the crash phase. It strikes me instead that the worse case scenario is a slow death - as for such a company, it would be regularly re-balanced into. However, that is different and considerably less common.

The data to confirm my view is not available to me (it is perhaps to some) but perhaps an interesting proxy of sorts could be considered by looking at Wirecard and what a similar strategy might have achieved?

Regards, Newroad

I am not at all confident, far too difficult to call. It would also depend on how far into the market you went with equal weighting. I would not be surprised if equal weighting the top 50 stocks gave a completely different outcome to weighting the top 500.

[hiriskpaul]

Good summary of the S&P 500 Equal Weight Index vs. S&P 500 Index: https://www.investopedia.com/articles/e ... weight.asp

Unfortunately the equal weight index did not get created until 2003, so it cannot be used to compare during the dot-com bubble.

[hiriskpaul]

A recent paper on Low Volatility Anomaly if anyone is interested: https://www.spglobal.com/spdji/en/docum ... -guide.pdf

[hiriskpaul]

A simulation of the S&P 500 Equal Weight Index back to 1990. According to this, the strategy performed well during and after the dot-com bubble.

https://papers.ssrn.com/sol3/papers.cfm ... id=2257481

[hiriskpaul]

.. and a critique of the paper!

https://www.advisorperspectives.com/pdf ... dexing.pdf

[dspp]

.. and a critique of the paper!

https://www.advisorperspectives.com/pdf ... dexing.pdf

Which is very well written, thanks for locating it. regards, dspp

[1nvest]

Professor Jeremy Siegel of the Wharton School calculated a hypothetical return (before transaction costs) if someone bought the 50 largest S&P 500 stocks on Dec. 31, 1950 and held on. Average annual return: 12.6%, a fraction of a point better than the market (which Siegel defines as all listed stocks). He then created separate buy and hold portfolios for every year since until 1996. Result: the buy-and-hold approach beat the market three-quarters of the time and it never underperformed by more than 0.6% a year.

https://www.forbes.com/forbes/1999/0614 ... 1a3ba68747

https://www.bogleheads.org/forum/viewtopic.php?t=62387

[hiriskpaul]

Professor Jeremy Siegel of the Wharton School calculated a hypothetical return (before transaction costs) if someone bought the 50 largest S&P 500 stocks on Dec. 31, 1950 and held on. Average annual return: 12.6%, a fraction of a point better than the market (which Siegel defines as all listed stocks). He then created separate buy and hold portfolios for every year since until 1996. Result: the buy-and-hold approach beat the market three-quarters of the time and it never underperformed by more than 0.6% a year.

https://www.forbes.com/forbes/1999/0614 ... 1a3ba68747

https://www.bogleheads.org/forum/viewtopic.php?t=62387

I have contemplated doing something like that with US shares in my SIPP. Now US listed ETFs are unavailable I am forced to by LSE listed ETFs to cover the US market. That means being hit for 15% dividend withholding tax. On a dividend yield of 2% that is 0.3%. Might not sound much, but if drawing down at 3% it amounts to 10% of the income.

Instead of buying the ETFs I could buy the top 50 or so shares and receive the income without withholding tax being applied. The up front cost would be high, mainly because of my SIPP provider's extortionate 1% FX fee, but after a few years this would be recovered.

My main concern is the risk of long term underperformance negating any tax gain. Over the long term most of the return from the stock market comes from a small minority of shares. By selecting just 50, the odds are against me in picking enough long term winners. Return on shares is similar to the return on premium bonds. Most premium bond holders underperform the average return.

Looking at the top 50 US shares now, how many would have been in the top 50 25 years ago? And to what extent would this have affected returns?

[1nvest]

Over the long term most of the return from the stock market comes from a small minority of shares. By selecting just 50, the odds are against me in picking enough long term winners. Return on shares is similar to the return on premium bonds. Most premium bond holders underperform the average return.

The right tail good case outcome that tends to uplift the whole, such that the majority of individual holdings underperform the average of the set, is a fractal function. With 1000 holdings you'll capture the few that might increase 10x, but in having diluted capital invested across 1000 holdings the benefit relative to the whole portfolio value will be relatively small. £1000 invested, £1 per stock, one increases 10x such that all else being equal the portfolio is up to £1010 value. With 10 stocks, the best might see a 10% gain, £1000 invested, £100 per stock, one increasing 10% uplifts the portfolio value to £1010 value.

Now US listed ETFs are unavailable I am forced to by LSE listed ETFs to cover the US market. That means being hit for 15% dividend withholding tax.

With ii I can hold foreign currencies and trade US stocks from/to that currency, dividends are also added to the US$ cash column, so after FX conversion costs once ... no further FX costs involved (until you opt to exchange it back to £). I only have trading and ISA with them however, but suspect it could be the same for SIPP's ??

Looking at the top 50 US shares now, how many would have been in the top 50 25 years ago? And to what extent would this have affected returns?

At least one US fund started in the mid 1930's (LEXCX) with a core set of 30 stocks buy and hold, is now down to around 20 stocks of which a Railroad stock is by far the largest holding, but where it also includes the likes of Berkshire Hathaway, which wasn't even around back then. https://individuals.voya.com/document/f ... -sheet.pdf - indicative of how natural evolution of the set occurs via takeovers etc. Don't really follow it closely, but it seems to wax and wane between matching/beating/lagging the broader S&P500, so broadly 'keeps up' so to speak.

[Newroad]

Hi 1nvest.

I (or should I say, we) are also with ii, having ISA's, JISA's, SIPP's and Trading Accounts. We have VWRL in the first three types.

VWRL pays its "dividend" in USD. I believe that ISA's and JISA's, or at least ii's ones, are not allowed to hold US$, so these dividends are automatically converted into GBP. For the SIPP's (and I assume, the Trading Accounts) this is the not the case, so the dividend is paid and held in USD, which you can convert should you choose to.

The rate is 1.5% up to £25K, reducing to 0.25% for £600K plus.

Regards, Newroad

[dspp]

With ii I can hold foreign currencies and trade US stocks from/to that currency, dividends are also added to the US$ cash column, so after FX conversion costs once ... no further FX costs involved (until you opt to exchange it back to £). I only have trading and ISA with them however, but suspect it could be the same for SIPP's ??

With ii the trading & SIPP portfolios have GBP, EUR, USD currencies; whereas the ISA only has GBP as a currency because those are the ISA regulations.

regards, dspp