Search Results for 'rydex'

Equal-Weight S&P 500 Index

Published
by
Dave
3 years, 7 months ago
in ETFs and Indexes
. 2 Comments

I found a little report on the equal weighted S&P 500 Index “Are equal weighted indexes better than market cap weighted indexes?” It summarizes what we knew already, that the S&P 500 Equal Weight Index holds more of more of the smaller large-caps and less of the large large-caps and so its superior performance of late can be attributed to the better recent performance of the mid-caps over large-caps:

There is nothing wrong with the S&P 500 Index – it is a well-constructed and maintained passive benchmark. For those who do not like market capitalization-weighted indexes,
the S&P 500 Equal Weight Index is an alternative. But as I have shown in Figure 1 through Figure 4, the S&P 500 Equal Weight Index behaves more like value and mid to small-cap indexes . . . Thus, if one wants to get the exposure to the factors that influence the S&P 500 Equal Weight Index, then they probably could combine a group of passive market capitalization-weighted indexes to produce a similar pattern of returns. Given the cost of replicating an equal weighted index (brokerage costs associated with periodic rebalancing), it would seem investors could do better over the long term by using a combination of lower cost, lower maintenance, market capitalization weighted index funds as opposed to an equally-weighted index fund to gain the portfolio sensitivities desired.

He is correct in that there are higher costs associated with an equal weight index. The rebalancing bonus is small but it might cancel out or even trump the effect of the slightly larger MER on the ETF that matches the S&P 500 Equal-Weight Index, the Rydex S&P Equal Weight ETF (RSP).

Popularity: 8% [?]

9 New Rydex Equal-Weight Index ETFs

Published
by
Dave
3 years, 8 months ago
in ETFs
. 0 Comments

Check out this podcast from November 15, 2006 about equal-weight indexes with a guy from Rydex Funds.

Rydex has recently created 9 new equal-weight sector indexes. He says that success of Rydex’s S&P 500 Equal Weight (RSP) is one of the reasons these 9 ETFs were introduced. If you are interested in equal-weight indexes at all I highly recommend listening to this, it’s so much better hearing about this in audio rather than in reading it in print.

Back-testing has shown that most of these equal-weight funds would have outperformed the market-cap based index. He seems to imply that this is due to the fact that they get more exposure to mid-caps, that have tended to perform better than large caps. I have mentioned before how RSP is actually closer to something like the S&P’s mid-cap index (MDY). Recently I looked up a bunch of recent additions to the S&P 500 and all of them had market caps of over $1 billion.

Popularity: 6% [?]

Portfolio Update: Settled In

Published
by
Dave
4 years, 5 months ago
in My Portfolio
. 19 Comments

Back on March 5th, I mentioned a proposed portfolio my advisor and I were working on. We finally came to an agreement on my allocation and what to buy, and this is what I bought on March 10, 2006:

RRSP holding Type Account %
CI
Value Trust		 US Equity 11.3%
Templeton
International Stock Fund		 International Equity 26.3%
Canadian TSX60 index Canadian Large Cap 33.7%
E&P
Growth Opportunities		 Canadian Small Cap 3.8%
TD Canadian Bond Fund Fixed Income 25%

The percentages don’t work out to nice even numbers because we took my advisors original numbers for the equities and multiplied them by 0.75 to make up the equity component of my 75-25 equity-bond split. We will find some nice round numbers to target eventually and then rebalance around those as need be.

You will notice two major differences between what my advisor had originally proposed, and what we ended up getting. The Canadian Energy Index is absent and the TD Canadian Bond Fund is in there as a significant fixed income component. The only change I wanted but I didn’t get, was the use of the Rydex Equal Weight ETF (RSP) instead of CI Value Trust. He seemed to really want to go with that so I let it be. He is interested in RSP though and will look into it some more. He felt it was not much different from a mid-cap index like MDY. If you look at a past performance comparison between MDY and RSP (before dividends) they look pretty similar.

Costs: I paid $75 commision (advised trade to get the iUnits S&P/TSX 60 ETF) and $0 for the mutual funds. As I said in a previous post, mutual funds at Clearsight are all essentially no-load because they buy front-load funds and charge no front-load sales charge.

Popularity: 4% [?]

Too Many Choices (or why I am ready to give up)

Published
by
Dave
4 years, 6 months ago
in Advisors/Brokers, Bill Miller, ETFs and My Portfolio
. 10 Comments

If you have read my last post you will know by now that I am set to start my new portfolio at Clearsight. I have been debating what to choose for my US equity component, and whether or not to go with my advisor’s recommendation of CI Value Trust (satellite fund of Legg Mason Value Trust). I said in my last post that am not interested in investing in Bill Miller’s Value Trust fund but that I said I would rather go with the Rydex S&P 500 Equal Weight Index ETF (RSP) instead. I have now come to the realization that RSP is very similar to the S&P 400 Midcap Index which is also available as an ETF (MDY). It is very highly correlated and comparing the performance of these two ETFs makes this obvious. There is also a small advantage to getting MDY over RSP in that “the higher volume on MDY is an advantage for that fund, as is the typically tighter bid/ask spread” but this is probably splitting hairs. Comparing either of these two funds to Bill Miller’s Value Trust is probably not a fair comparison, just as comparing S&P 500 (huge-cap) to S&P 500 Equal Weight (semi-large to large-cap) is not exactly a fair comparison as they are in different classes and will of course perform differently. I found yet another index choice today, the S&P 500 Value Index (IVE). It has beaten the S&P 500 index but it has not been able to catch Bill Miller’s Value Trust. Sounds like a great alternative to the S&P 500 index though as it screens out some stocks which aren’t a good value.

At this point I began to get frustrated with the number of choices out there. RSP, SPY, MDY, IVE, and that is only a few of the ETFs available. Then there are the actively managed mutual funds, LMVTX being only one of many, and of course there are the index mutual funds of which there are probably one for every index just like the ETFs I mentioned above. Sometimes I feel like I know exactly what I want, other times I can not makes heads or tails of it with all the choices and knowing there are even more choices out there that I have not examined is daunting. It is frustrating for some someone like me, skilled in the maths and sciences and now software, that there is not some exact deterministic way of determining the ideal choice.

When I left TD, one of the main reasons was because I did not have a proper selection process for what I would buy for my RRSPs. Usually I would scan the performance (usually the longest term possible, 10-years or since inception if available) and choose funds that looked like they had done well in the past. This was flawed because crappy funds can have a few stellar years and good funds can have a few bad years. Or sometimes I would look for funds that did well in the past, but might have just come off a bad year (hoping to catch the fund on the up-swing). This method was also flawed. The second reason I left TD was that I did not want to be a DIYer anymore. I felt like an amateur/hack trying to do a professional’s job, and I was not succeeding. Not only that but I did not have enough time to spend on this. You may think that writing and researching articles for this blog takes time, and yes is does (and I have learned a lot about investing by writing this blog), but it cannot compare to the amount of time financial advisors and their superiors have spent day in and day out trying to answer these same questions. It is after all their full-time job. My financial advisor says that he does not pick stocks. He leaves that to the professionals, such as Ross Healy or Bill Miller. He does not have time to research stocks for his clients. By the same token, I should leave the management of my portfolio to my advisor because I do not have time to do it myself.

This does not mean that I should leave everything up to my advisor. Much like my advisor will monitor the actions of Ross Healy and Bill Miller I should also vet all actions my advisor recommends for my portfolio. Right now I think I am ready to give up and let him decide what is best. I would like to have a say in the asset allocation and I really want to have 25% bonds and the rest balanced between Canadian, US, and International. But as for what is inside those categories I really do not have the time to examine his choices of holdings for me in microscopic detail. It has already taken far too much of my time. The portfolio that my advisor is recommending is already much better than my old TD portfolio for many reasons, and if going with an advisor helps keep my hands off my portfolio and helps me keep this allocation over the long term, then it will surely achieve much better performance in the long run than I was getting with TD as a DIYer.

No time to read over this rant, it’s too long. Grammar mistakes be damned!

Popularity: 12% [?]

Portfolio Update

Published
by
Dave
4 years, 6 months ago
in Asset Allocation and My Portfolio
. 11 Comments

My RRSP holdings at TD Canada Trust have been transferred from TD to Clearsight in-kind, meaning that they been transferred whole without being sold first. I was only required to sell my TD eFunds to transfer them. Now my advisor and I are getting ready to sell all my TD holdings and start my long-term retirement portfolio anew. My advisor forwarded me a suggested portfolio on Friday:

RRSP holding Type Account %
CI
Value Trust		 US Equity 15%
Templeton
International Stock Fund		 Global Equity 35%
Canadian TSX60 index Canadian Large Cap 40%
Canadian
Energy Index		 Canadian Energy Equity 5%
E&P
Growth Opportunities		 Canadian Small Cap 5%

Here’s the total asset allocation breakdown:
15% US Equity, 35% International Equity, 40% Canadian Large Cap Equity, 5% Canadian Energy Equity, 5% Canadian Small Cap Equity

This is similar to what he suggested before, the main difference being that he suggested a lower US portfolio allocation because he thinks their currency is set to take a beating; however, he says we will shift towards my 25%-25% allocation later as he, like me, believes in keeping a fairly static asset allocation over the long term. Also, it says TSX60 Index above, but it is actually iUnits XIC ETF which no longer tracks the S&P TSX 60 but tracks the X&P TSX Composite.

Here are the changes I want to make to it:

  • Add 25% to fixed-income. TD Canadian Bond fund or Altamira Bond fund would be my choices there.
  • No separate energy equity right now. There is plenty of energy stocks in the Canadian index and I am just not interested in playing around with an additional energy index right now, but it is something I will consider later.
  • Instead of CI Value Trust I would like to buy the Rydex S&P Equal Weight ETF. I have talked about it in several previous posts. Bill Miller’s fund is a lot riskier yet it has not managed to beat the equal-weight index.

This would make the allocation: 25% fixed income, 15% US Equity, 35% International Equity, 20% Canadian Large Cap Equity, 5% Canadian Small Cap Equity.

I am not sure what I will end up with. My advisor might be able to sway me the other way a bit, but hopefully we will end up with something he agrees is good for me and that I am comfortable with.

Popularity: 7% [?]

Non-Market Cap Weighted Indexes: The Next Big Thing

Published
by
Dave
4 years, 7 months ago
in ETFs and Investing
. 5 Comments

I predict that within the next 10 years we will see a wave of new index ETFs and index/passive mutual funds. Almost all indexes currently available (and the ETFs and mutual funds that track them) are market-cap weighted. The technique that is usually used is that the stocks in some set (all Canadian stocks for instance) are sorted by their market capitalization (and other factors as well, but market cap is the dominating one). The index is then made up of the first n stocks in that list, where n is however many stocks should be in the index. These indexes may suit the media or other people interested in tracking “the market,”, but there are many disadvantages to using this form of indexing as an investment, and investing my money in market-cap weighted indexes is a very non-intuitive way to to invest. I have talked about some of the disadvantages of market-cap based indexes here: past articles. Non-market cap weighted indexes have a huge advantage over their market-weighted counterparts. I have discussed this in past articles using examples in the Canadian market and the US market.

I noticed the FTSE has recently created a whole family of non-market cap weighted indexes. Here’s the explanation why:

Why did FTSE launch non - market cap weighted indices?
We wanted to offer the market an alternative to wealth weighted indices and created non-market cap weighted indices to offer our clients a greater choice in market measurement.

It’s interesting that they the indexing community is still hooked on just offering their “clients a greater choice in market measurement,” not a greater choice of “investment.” In the future I can envision more semi-passive/passive indexes being created not for the purpose of “market measurement” or “tracking,” but solely for the ETF market. Or, we will see passive ETFs being created (without an “underlying index”) which will use passive indexing techniques (lower MERs) rather than active management (with higher MERs, which have proven to be a losing prospect in the past). They continue,

What is the difference between market cap weighted indices and non-market cap weighted indices?

The stocks within market cap weighted indices are selected according to market capitalisation (price x number of shares x free float) whereas stock in non-market cap weighted indices are selected according to a factors dependent upon fundamental data such as: book price, cash flow, revenue, sales, income and dividends.

Here they are talking about their selection criteria, which is in a way separate from the weighting-criteria. Using this selection criteria they mention is ok, however, I hope that they use equal-weightings or constant-weightings rather than weighting based on these criteria. Unforunately it is not possible to obtain the constituent stocks of these indexes at FTSE’s website.

In the US there is only one index, the S&P500 Equal-Weight Index, that I know of, and fortunately there is an ETF that tracks it, the Rydex S&P Equal Weight ETF. This funds takes it’s selection from the S&P500, however, meaning that there is a bias towards large-market cap stocks. The disadvantage of this is that some speculative stocks with unduly high market capitalizations (based on an overvalued stock) could make it into the index. What I would like to see is a family of indexes, all with equal weights for all their constituent stocks, but with different selection criteria for each index. We see this today, with Dow Jones’ style-based indexes, which are focused on value stocks, growth stocks, etc… however, these indexes are still market-cap weighted, unfortunately.

In Canada, there are no known style-based ETFs or non market-cap weighted ETFs. There is only a brokerage which tracks their own equal-weight S&P60 Index and sells shares in it to clients.

I can see non-market cap weighted indexes becoming more popular in the future, if only because of their better past performance. We all know people’s insatiable thirst for better performance, and it is clear that non-market cap indexes have given better performance in the past as I showed here and here. When the market has it’s next significantly large drop/crash, average investors will invariably sell positions in market-cap weighted ETFs and index funds and when the market comes around again, will look for other places to put their money, chasing performance. I think passive non-market cap based indexing will be the next big thing.

Here’s more support for the idea that the poor performance of the indexes in the past few years is related in part to the fact that they are market cap weighted (from the Big Picture):

Incidentally, the Efficient Market theory is the prime motivator behind indexing, which has been a losing propostion over the past few years (but I think thats more a function of market cap weighting than inefficient markets). [emphasis mine]

Maybe I’m talking out of my ass, but I am just not satisfied with using market-cap weighted indexes, nor am I satisfied with putting my money in the hands of a fund managers, whose ability to beat indexes consistently is questionable. Passive non market-cap weighted indexes lie somewhere in the middle and I really like the idea.

More links:

  • At a recent conference, there was a talk entitled, “New Directions In Indexing.” Here’s the blurb: “Non-Market Cap Weighted Indexes for Portfolio Diversification and Enhanced Returns Carmen Campollo, SVP, Relationship Management, FTSE AMERICAS.” Looks like FTSE really is leading the way.
  • The Dow Jones-AIG Commodity Index is non market cap weighted and is rebalanced annually. According to “Kevin,” on the Morningstar forums, “because commodities are so highly volatile (and not that highly correlated) the rebalancing bonus can be large–and you don’t even have to do the rebalancing work. Keep in mind that you only get the rebalancing bonus in a non market cap weighted index—more equal weighted as the AIG index is. In a market cap weighted index there is no rebalancing going on within the index.”

Popularity: 7% [?]

Bill Miller Beats S&P 500 for 15th Consecutive Year

Published
by
Dave
4 years, 8 months ago
in Bill Miller and Mutual Funds
. 3 Comments

This is somewhat old news, but still newsworthy: Bill Miller’s Legg Mason Value Trust Fund has beaten the S&P500 for the 15th consecutive year. Canadian investors can invest in this fund through the CI Value Trust fund.

It is interesting that in the past two and a half years, he hasn’t been able to beat the S&P 500 Equal-Weight Index (^SPXEW) (as tracked by the Rydex Equal-Weight S&P 500 ETF (RSP)). This plot goes back a bit further. You can see that Legg Mason Value Trust has only beaten the S&P 500 Equal-Weight Index (^SPXEW) in the last 6 months. In 2005, 2004, and the portion of 2003 (the index’s year of inception), ^SPXEW has beaten Bill Miller’s Fund.

Popularity: 8% [?]

S&P TSX 60 Equal-Weighted Index

Published
by
Dave
4 years, 8 months ago
in Advisors/Brokers, Indexes, Investing and Stocks
. 6 Comments

For those who don’t already know, I am not a fan of market-cap-weighted indexes like all the S&P Canadian indexes and the US S&P 500. In the US S&P has the S&P Equal-Weight Index and there is an ETF that tracks it, the Rydex S&P Equal Weight ETF. In Canada there is no such index provided by S&P and no ETF. I knew that there was no Canadian ETF in existence that was equal-weighted but I thought that there must be at some theory, data-mining, or an informal index out there.

Yesterday, I finally found something: an equal-weighted index for the S&P TSX 60. After what seemed like hours digging through Google search results and varying the keywords I gave to Google, I finally found a company called Shaunessy Investment Counsel in Alberta that has formed such an index which they invest in using their clients’ money. The performance as of September 30, 2005 is shown here, where they also mention that the index is “equal weighted, re-balanced quarterly.” An older Shaunessy news article I found on Google compared this index to the S&P TSX 60 Index and shows excellent results, which I will reproduce below:

Canadian Large Cap versus Index Comparison
Rates of Return Ended June 30 2004

Q2 04 Year to Date One Year Three Years Five Years
TSX 60 TRI -0.1% 4.1% 22.1% 4.1% 4.7%
SIC 60 EWI* 2.5% 4.3% 26.2% 8.9% 9.9%
Mercer Median 0.9% 5.4% 25.3% 6.9% 10.0%
Source: RBC Capital Markets, Mercer Investment Consulting, Shaunessy Investment Counsel (SIC)
* Price Index only constructed by Shaunessy Investment Counsel

The “Mercer Median” is the median performance of a whole bunch of mutual funds, from the “Mercer Institutional Pooled Funds report.” They also note that “the EWI is a price index and does not include dividends which would add at least another 1-1.5% to total returns.” The results are even more impressive if you take into account the dividends paid.

Don’t get your hopes up about buying a piece of the index from Shaunessey. They require a $2 million minimum to be a client. To just buy the index and not have a “fully-managed” portfolio with them, you will need to invest $6,666,666 million (0.15% as percent of assets, minimum fee is $10,000). More evidence that the more money one has, the more access one has to better investment advice and services.

It is possible to create your own S&P TSX 60 Equal-Weighted Index (EWI), however, paying $50 commission for each stock would become prohibitively expensive. To keep your commissions to 1% of your initial purchase you would need $300,000 total assets. And rebalancing every quarter would also become very expensive.

Another way to have an approximation to Shaunessey’s index would be to buy certain amounts of sector ETFs and rebalance the allocation of each ETF regularly; however, within each sector ETF the stocks would still be market-cap-weighted.

The best way I can think of to create your own S&P TSX 60 EWI is to use Shareowner . It looks like you could buy 60 stocks for $36 using Shareowner and have your dividends reinvested for free.

Popularity: 12% [?]

S&P 500 equal-weighted index

Published
by
Dave
4 years, 9 months ago
in Asset Allocation, Costs, ETFs, Indexes and Stocks
. 1 Comment

Found an old article from 2004 about the S&P Equal Weighted Index, “Buy the S&P 500 with better returns,” which can be bought under the Rydex S&P Equal Weight EFT (RSP). The S&P Equal Weight index holds all the stocks in the S&P 500 index equally (0.2% each). Rebalancing works like this:

If the share price of one of the companies in the index climbs sharply, the Rydex fund pares it down to a 0.2% weighting when the portfolio is rebalanced every quarter. If a stock tumbles, more is added. Thus the fund is continuously funneling profits from stronger to weaker issues; in effect, selling high and buying low.

I wouldn’t even really call this value investing. This is just common sense. If you created a portfolio yourself of 60 stocks, like the S&P TSX 60 index, would you weight them according to their market capitalization? Probably not. If one of the stocks in your portfolio went up by 50% and another went down by 50%, would you sell the one that went up and buy more of the one that went down? Yes, you probably should, if your transaction costs aren’t too high. If you want to think of it as value investing, that’s fine. I guess compared to the run-of-the-mill S&P500 it is certainly more value-oriented:

“This is a poor man’s value tilt,” says Robert Deere, head of domestic equities for Dimensional Fund Advisors, the foremost operator of customized index funds for institutions.

DFA heavily favors small and downtrodden stocks, citing academic research that shows they outperform big-cap growth stocks over long periods. Since this fund does that implicitly, “I would expect it to give you a higher return — no doubt about it,” he says.

The article pooh-poohs the Rydex Equal Weighted Index’s MERs, “The ETF’s expense ratio is 0.4%. That’s more than three times that of the Spider, eroding indexing’s greatest advantage.” But that hasn’t hurt its returns. According to the article the equal-weighted index has beaten the market-weighted index by 2% over the past 10 years,

Rydex says that the equal-weighted index has greatly outperformed the market-weighted index over the last 10 years, delivering annualized returns of 14%, compared with 12% for the index.

However, this document on S&P’s website puts the 10-year annualized returns at 12% and 9.3% respectively. I will definitely be buying RSP over SPY and not because I am chasing after good past returns but because the methodology makes sense.

Popularity: 5% [?]

Is the S&P 500 a passive index or an actively managed mutual fund?

Published
by
Dave
4 years, 9 months ago
in ETFs, Indexes and Investing
. 3 Comments

I uncovered and interesting article, “The S&P 500 is a mutual fund - and a bad one,” written in 2002. As someone who has considered buying shares of SPY to make up the major part of his US portfolio, this article, claiming that the S&P 500 is a bad mutual fund was a must read. In it, Jon D. Markman says:

“Unlike most index publishers, such as the Nasdaq and Dow Jones, Standard & Poor’s adds and subtracts stocks from its three broad indexes — the largecap 500, the Midcap 400 ($MID.X) and the Smallcap 600 ($SML.X) frequently in accordance with a largely subjective list of criteria that includes market capitalization, liquidity and their representation of industrial sectors.” [emphasis mine]

The S&P 500 is supposed to be representative of “the market” (not the US economy which consists of 306 privately-owned US companies with revenues of at least $1 billion) and one of the ways they do this, is by matching the sector allocation of the entire US stock market (small-caps and all, almost 10,000 stocks as of 2005) to the index. In 2000, according to Mr. Markman, the S&P had a 14% weighting in technology stocks by market capitalization whereas the entire U.S. market had a weighting of 18% in technology stocks by market cap. The people at S&P proceeded to add the tech stocks with the next-largest market caps to its index, removing stocks in industries that had now become “over-weighted” compared to the entire US market sector allocations. Many of these technology-related stocks were at their peaks in 2000, and extremely over-valued. The S&P then held on to these stocks as they plummeted and lost sometimes greater than 80% of their peak values.

In their quest for ultimate sector diversification, they have performed one of the most banal rebalancing operations I have ever seen: buying tech stocks based on high momentum and high valuation. Standard portfolio rebalancing operations would normally involve selling stocks which have recently advanced to such a large degree so as to have overweight positions, compared to their original weightings. The tech stocks which were already in the S&P500 index had advanced significantly and the S&P500 was overweight in these positions compared to a few years ago, and probably should have sold off some shares in the technology sector; however, the broader market (including the large number of high tech companies barely post-IPO and with no earnings) just happened to have advanced even more (to make up 18% of the market vs. 14% for the S&P500), thereby triggering a technology stock buying spree for the S&P500 index managers.

This would be enough to put any holder of SPY in an uproar. Especially if SPY was a mutual fund with a mutual fund manager. Only the SPY (or S&P500 Composite) is in fact NOT a mutual fund, as the title of the above article claims, it is just an index. It was designed to be some representative figure of the value (as currently being traded) of the US stock market. This article, although it is misguided in laying blame on the people at S&P, highlights some key downsides of indexes, especially the ones based on market value, and sector allocation. There are also many other silly things which go into factoring how much of each stock is held, such as liquidity and available float. You get what you pay for I guess. ETFs which follow the major indexes are popular because of their low fees and the ability to beat the returns of a significant number of equity mutual funds. But the indexes are not mutual funds, and they are not supposed to be smart. They follow a passive strategy and stick to it.

There are other indexes out there which do not follow this type of methodology. Two of which I know of are the S&P Equal Weight Index (replicated by the Rydex S&P Equal Weight ETF), and also the Dow Jones Canada TopCap Value Index (replicated by TD Select Canadian Value Index Fund ETF). From Rydex’s website,

Equal weighting also offers increased diversification as compared to its cap-weighted counterpart. The composition of the securities of the S&P 500 Index combined with quarterly rebalancing avoids over concentration in popular (or momentum) sectors, such as the domination of the Information Technology sector that occurred in the S&P 500 in 1999 – 2000.

The S&P Equal Weight Index is just another alternative, and a good one if you want to avoid what happened to the S&500 in 1999-2000. I would not be surprised if the S&P Equal Weight Index was born out what happened in the late 1990s bull market, in the same way that the S&P TSX 60 capped index was created after Nortel became a huge percentage of the TSX 60 index during that same period.

See also: “The Hidden Risks of Index Investing” which I found out about from this article on the Investing Guide blog.

This article was first published on October 31, 2005

Popularity: 5% [?]

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