The Lemon Fool

AWOL wrote:For some reason I've never paid any attention to NASDAQ but looking at it now makes me wish I had a time machine!

seekingbalance wrote:2.5 years later - and no Time Machine needed.

In the last 2 years the Vanguard accumulation FTSE100 ETF is up 11%. The Amundi Nasdaq 100 accumulation tracker etf is up 31%

Over 3 yrs its 27% vs 46%, over 5 it’s 31% vs 154%

GeoffF100 wrote:FTSE 100 is now cheap in relation to the US market, and particularly the tech stocks. Everyone seems to be saying that the US market is great and the Footsie is rubbish. When that is happening, it is usually a good idea to stock up on the underdog. VUKE has beaten VWRL over the last three months in total return. Perhaps that is a good omen for the Footsie.

'it has always seemed to me that VWRL has excessive USA bias'.

'I certainly cannot see the rationale behind market cap. weighting for balancing ones ETFs.'

JohnW wrote:

'it has always seemed to me that VWRL has excessive USA bias'.

Unilever, in the FTSE100 is three times as big as Barclays. Is there a Unilever excessive bias in the FTSE100?
And what sort of bias is excessive in a cap weighted index fund? Indeed how can there be any bias that's not an appropriate weighting in a cap weighted fund that is cap weighted?

'I certainly cannot see the rationale behind market cap. weighting for balancing ones ETFs.'

Isn't the rationale the efficient market hypothesis, that cap weighting should give the best risk adjusted return of any stock allocation?

JohnW wrote:Isn't the rationale the efficient market hypothesis, that cap weighting should give the best risk adjusted return of any stock allocation?

Bubblesofearth wrote:

JohnW wrote:Isn't the rationale the efficient market hypothesis, that cap weighting should give the best risk adjusted return of any stock allocation?

There are many examples of stocks with similar (volatility) risk but very different market caps. For example, Shell and Tesco have similar beta (0.57 and 0.52 respectively) but Shell has MC of £182bn whilst Tesco has a MC of £19.6bn. For a private investor what is the rationale for investing almost 10X as much in Shell as in Tesco?

Bubblesofearth wrote:For a private investor what is the rationale for investing almost 10X as much in Shell as in Tesco?

GeoffF100 wrote:The professionals cannot beat a market weighted tracker with any more than luck chance of success, so why should you be able to do better?

Lootman wrote:If Shell has ten times the earnings then that might be one reason to do that.

Also Shell is international and Tesco is domestic in nature.

You might as well ask why not invest equal amounts in Apple and the smallest cap AIM share that you can find. Although that is really only possible for a small investor anyway - most equal weight trackers are limited to a single market or sector precisely to avoid such problems.

'The fact that bubbles happen suggests that there are times when groupthink overrides the efficiency of markets.'

'. For example, Shell and Tesco have similar beta (0.57 and 0.52 respectively) ;

'For example, ss an individual investor I can set up a portfolio, equal weighted at inception and then left alone. That's not possible for a fund manager.'

'The argument was that you can't beat the risk-adjusted market cap weighted index'

'. If Tesco and Shell have the same risk then why invest more in Shell? '

'even this risk can be mitigated by diversification across poorly correlated stocks.'

Bubblesofearth wrote:For example, ss an individual investor I can set up a portfolio, equal weighted at inception and then left alone. That's not possible for a fund manager.

Bubblesofearth wrote:It's earnings/share that matters to an investor not total earnings.

JohnW wrote:

'The fact that bubbles happen suggests that there are times when groupthink overrides the efficiency of markets.'

If so, can we act on it to make better than market returns without adding risk (or getting more returns for not so much more risk)? Is there something to suggest I or the next mug could pull it off?

'. For example, Shell and Tesco have similar beta (0.57 and 0.52 respectively) ;

Sorry, don't know about beta.

'For example, ss an individual investor I can set up a portfolio, equal weighted at inception and then left alone. That's not possible for a fund manager.'

If it worked, why couldn't a fund manager do it? Are they excluded from investing approaches that really work?

'The argument was that you can't beat the risk-adjusted market cap weighted index'

There might be a mixing of expressions here: risk adjusted return, and cap weighted index. The index or fund isn't 'risk adjusted'; the returns are the best, or not the best risk adjusted returns.
But that wasn't the argument; the argument was put as 'cap weighting should give the best risk adjusted returns'.

'. If Tesco and Shell have the same risk then why invest more in Shell? '

I don't think I know the answer, but the risk you mention is measured from past results, it's past risk; the market is forward looking to what returns are anticipated. If the market thinks Shell has better prospects, in pours the money.

'even this risk can be mitigated by diversification across poorly correlated stocks.'

As an input to a strategy, correlation needs considerable care with its use I think. It's measured on past data; future data can make correlations change, and change they certainly do. I don't think they're to be relied on.

Bubblesofearth wrote:For example, ss an individual investor I can set up a portfolio, equal weighted at inception and then left alone. That's not possible for a fund manager.

GeoffF100 wrote:

Bubblesofearth wrote:It's earnings/share that matters to an investor not total earnings.

A company's earnings per share is completely irrelevant. If a company does a two for one share split, that halves the earnings per share, but it does not affect the valuation of the company, its total earnings or its prospects of future earnings growth.

JohnW wrote:
Sorry, don't know about beta.

If it worked, why couldn't a fund manager do it? Are they excluded from investing approaches that really work?

I don't think I know the answer, but the risk you mention is measured from past results, it's past risk; the market is forward looking to what returns are anticipated. If the market thinks Shell has better prospects, in pours the money.

As an input to a strategy, correlation needs considerable care with its use I think. It's measured on past data; future data can make correlations change, and change they certainly do. I don't think they're to be relied on.