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Replicate expensive ETF yourselves?
- Thread starter shortbleu
- Start date
Quote from shortbleu:
Hi Risktaker,
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.
Brazil is one of the easiest country etf's to replicate, at least with respect to EWZ. There is another Brazil etf (BRF) which has about 60 stocks, however most are not US listed. They're smaller cap than the ones on EWZ.
Overall though, as long as you have 10-20 stocks in an "index", you can pretty much replicate it with just buying 50-200 shares of each stock depending on its price/market cap. This way, you're not overweight in any one stock and the long term results surprisingly equal most ETF's.
Good Luck.
BTW, for non emerging market stuff, the post above on Folio is probably a good idea for long term holdings.
Quote from crgarcia:
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.
Thatâs not necessarily true at all. Most ETFs launch with a NAV of $60 and are seeded with two Creation Units of 50k shares each. Thatâs 100k x $60 = $6million. Each ETF in the entire Direxion Shares ETF complex (the 3x ETFs like FAS & FAZ) were seeded with $6mm each. Mutual funds are much, much lower, even $50k can get a MF started. As for outperforming ETFs, it would depend on your per-share fees/ticket charges. If trading costs are low enough to beat a management fee you could outperform an ETF simply by replicating it 1:1 and paying lower fees.
If you take a look at most of the levered ETFs you will find that they all have âoptimizedâ baskets. TNAâs stock basket is optimized down to 680 (as of 9/30) from the 1973 members in the RTY â Russell 2000.Quote from shortbleu:
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?
EWZâs management fee is only 65bps which is fairly low ($650 per $100,000 invested, annually). You are going to have to weigh transaction and rebalance costs of the individual names vs. the management fee and one-time fee of purchasing EWZ. Also, unless you are at a retail broker you can only buy even lots. If thatâs the case you will need a substantial position in your stock basket to get your weightings correct. If you are trading retail and thinking about buying odd-lots or individual shares Iâd say there is almost no possible way to make your transaction costs lower than outright owning the ETF.
Also, are you searching for the actual stocks or the ADRs?
Quote from crgarcia:
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.
"You can somewhat improve the ETF by dropping bad companies...and keep only the good." Uhm, the reason you go the diversification route is because you can't - in most cases - distinguish the bad ones from the good (and you especially can't distinguish which ones will be bad or good in six months or a year). This is a bit like saying "buy the stock when the downtrend is over."
One benefit of ETF's is when you buy a foreign traded ETF listed on other exchanges.
Say for example you have an account at IB. If you buy stocks in London, you'll be paying their .005 customary stamp duty. If you buy an ETF on the same stocks there is no stamp duty. The same goes for other exchanges like Hong Kong.
Say for example you have an account at IB. If you buy stocks in London, you'll be paying their .005 customary stamp duty. If you buy an ETF on the same stocks there is no stamp duty. The same goes for other exchanges like Hong Kong.
Let's say you invest $50,000 in stocks for 35 years at an average annual return of 9%, your investment would have become 50,000*1.09^35 = $1,020,698 after 35 years.
If you invest $50,000 in ETFs for 35 years with an average expense ratio of 0.65% and an average annual return of 9%, your average annual return after management fees, will be 9% - 0.65% = 8.35% and after 35 years, your investment would have become 50,000*1.0835^35 = $827,908.
The difference in performance between investing is stocks or ETFs is almost $200K !!! or 23,3% !!!
Conclusion: over the very long term (several decades) a small difference in the average annual return can have a massive impact on the bottom line P&L figure and therefore it is very important to keep ETFs cost (management fees) to a minimum or purely and simply eliminate the fee by investing in stocks rather than ETFs.
I've read lots of articles about diversification and I know that if I invest in 20-30 stocks, the unsystematic risk will tend to zero, i.e if I invest in 30 emerging markets stocks, I will have a comparable level of diversification than if I invest in an ETF holding 300 emerging market stocks.
I've found lots of articles talking about diversification and explaining how to mitigate risk, especially the unsystematic of an individual stock.
However, I've not found articles comparing the average historic annual return of an index of say 300 stocks, compared against a basket of say 30 stocks randomly picked amongst the 300 stocks part of the index.
So, I don't know which of the following alternative I should use to invest for the long term:
1st choice:
Invest in emerging markets ETFS (combination of several emerging markets ETFs, global, regional and single country) covering Latin America, Asia, Africa etc. and pay on average around 0.6% expense ratio.
2nd choice:
Invest in emerging stocks, randomly picking 30-40 stocks spread accross Latin America, Asia, Africa etc. and not paying the management fees.
I have no idea which one of the two choices will generate the best average annual return over the long term. For sure, using the 2nd choice I get the advantage of not paying the fee, but the performance might be better or worst than a combination of ETFs, I really don't know.
Can someone provide advice?
If you invest $50,000 in ETFs for 35 years with an average expense ratio of 0.65% and an average annual return of 9%, your average annual return after management fees, will be 9% - 0.65% = 8.35% and after 35 years, your investment would have become 50,000*1.0835^35 = $827,908.
The difference in performance between investing is stocks or ETFs is almost $200K !!! or 23,3% !!!
Conclusion: over the very long term (several decades) a small difference in the average annual return can have a massive impact on the bottom line P&L figure and therefore it is very important to keep ETFs cost (management fees) to a minimum or purely and simply eliminate the fee by investing in stocks rather than ETFs.
I've read lots of articles about diversification and I know that if I invest in 20-30 stocks, the unsystematic risk will tend to zero, i.e if I invest in 30 emerging markets stocks, I will have a comparable level of diversification than if I invest in an ETF holding 300 emerging market stocks.
I've found lots of articles talking about diversification and explaining how to mitigate risk, especially the unsystematic of an individual stock.
However, I've not found articles comparing the average historic annual return of an index of say 300 stocks, compared against a basket of say 30 stocks randomly picked amongst the 300 stocks part of the index.
So, I don't know which of the following alternative I should use to invest for the long term:
1st choice:
Invest in emerging markets ETFS (combination of several emerging markets ETFs, global, regional and single country) covering Latin America, Asia, Africa etc. and pay on average around 0.6% expense ratio.
2nd choice:
Invest in emerging stocks, randomly picking 30-40 stocks spread accross Latin America, Asia, Africa etc. and not paying the management fees.
I have no idea which one of the two choices will generate the best average annual return over the long term. For sure, using the 2nd choice I get the advantage of not paying the fee, but the performance might be better or worst than a combination of ETFs, I really don't know.
Can someone provide advice?