Replicate expensive ETF yourselves?

S

shortbleu

Niche emerging markets ETFs like ECON, GXG or BRAQ have quite high Total Expense Ratio (over 0.75% per year). If you buy and hold these ETFs for many years, the cost will quickly add up.

I was thinking about buying the underlying stocks themselves rather than the ETFs since most of the underlying stocks are quoted on the US market NYSE and can be bought via a US discount broker.

Say you want to invest $ 10,000, you use a cheap broker like Lightspeed which charges $ 0.40 / 100 shares, and you decide to buy the 20 underlying stocks that makes up the GXG ETF.
That will cost you about 20* 0.4 = $ 8.

Once you've done this, you can hold the 20 stocks for the next 10 years if you choose to do so and that would have cost you only $ 8.

If you buy the GXG ETF and hold for a year only, that will cost you $ 10,000 * 0.86% = about $ 86. It will cost lot more if you hold for many years, especially if the market is going up and you could end up paying well over $ 1,000 over 10 years to hold the ETF.

Am I right to say that it's a lot more cost effective to buy the underlying shares making up the ETF, rather than buying the ETF itself, or am I missing something.

PS: I might only be able to buy say 15-17 of the 20 underlying stocks making up GXG if only 15-17 stocks are tradable on NYSE, but still it will give me the emerging market exposure I am looking for.
Similarly for the ECON ETF, I might only be able to buy maybe 22-23 of the 27 stocks that make up 97.7% of the ETF if only 22-23 are tradable on Nyse but it does not bother me that much. I am more interested in a cost effective way to get exposure to niche emerging markets.
 
Correlation is the highest its been since 1987. Right now diversification doesn't mean anything...

It might mean something once the Market corrects 20-30% though.
 
Agreed, so it means I don't need to buy ALL of the underlying stocks making up the ETF to track the ETF performance quite closely.

So you agree, that buying the stocks is a lot more cost effective in the long term, while having a similar performance to the ETF?
 
Quote from shortbleu:

Niche emerging markets ETFs like ECON, GXG or BRAQ have quite high Total Expense Ratio (over 0.75% per year). If you buy and hold these ETFs for many years, the cost will quickly add up.

I was thinking about buying the underlying stocks themselves rather than the ETFs since most of the underlying stocks are quoted on the US market NYSE and can be bought via a US discount broker.

Say you want to invest $ 10,000, you use a cheap broker like Lightspeed which charges $ 0.40 / 100 shares, and you decide to buy the 20 underlying stocks that makes up the GXG ETF.
That will cost you about 20* 0.4 = $ 8.

Once you've done this, you can hold the 20 stocks for the next 10 years if you choose to do so and that would have cost you only $ 8.

If you buy the GXG ETF and hold for a year only, that will cost you $ 10,000 * 0.86% = about $ 86. It will cost lot more if you hold for many years, especially if the market is going up and you could end up paying well over $ 1,000 over 10 years to hold the ETF.

Am I right to say that it's a lot more cost effective to buy the underlying shares making up the ETF, rather than buying the ETF itself, or am I missing something.

PS: I might only be able to buy say 15-17 of the 20 underlying stocks making up GXG if only 15-17 stocks are tradable on NYSE, but still it will give me the emerging market exposure I am looking for.
Similarly for the ECON ETF, I might only be able to buy maybe 22-23 of the 27 stocks that make up 97.7% of the ETF if only 22-23 are tradable on Nyse but it does not bother me that much. I am more interested in a cost effective way to get exposure to niche emerging markets.
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Unless you plan to invest $1 Billion+, it's worthless to try to replicate.
However you can somewhat improve the ETF by dropping bad companies (funds get a lot of crappy companies in their indices/ETFs to be able to manage more funds), and keep only the good companies.

Don't expect to outperform the ETFs, though.
It's only meant to be able to sleep well at night, since you know you don't own troublesome companies stocks.
 
If you check the ECON etf closer, you'll realize you're able to replicate about 35% of its shares with US-listed shares/ADR's.

So, how are you going to purchase the remaining 65% of the shares?

35% is not enough. You need at least 80% of the same shares.

I do my own indexing & dislike etf's for a variety of reasons but with some foreign jurisdictions, it's expensive to get in/out.

The same can be said of GXG. Most stocks are only listed in Colombia. Do you have an acct at a Colombia broker?
 
Hi Risktaker,

My mistake, you're absolutely right. I read an article a few days ago, it was saying most of the large emerging markets stocks were quoted on US exchanges. This article was awfully wrong! I made a bit of research now, and found that only 2 Colombian stocks are quoted on Nyse, and only 2 also for Peru.

I need to look at the Brazilian side, there are 33 Brazilian stocks quoted on Nyse, so a better chance to build an diversified porfolio for this country.

My goal is to build a portfolio of around 15 Brazilian stocks accross a few sectors so it is diversified enough. I will get my inspiration from the EWZ ETF to start with. It will be something simple and non weighted.
 
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