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North America Equal Weight

Index tracking funds and ETFs
torata
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North America Equal Weight

#375685

Postby torata » January 11th, 2021, 2:48 am

I'd appreciate comments on my dilemma below:

Background:
After rebalancing my SIPP, I have an amount which I want to put into the US pool of my SIPP.
This pool already contains an S&P tracker (40% of pool) and US Dividend Aristocrats (55%) and the Vanguard North American (5%).

My default would be to add to the Vanguard fund, but I'm rather concerned about over concentration at the top. It's slightly less extreme than the S&P, but nevertheless, the top 10 shares are 20%.

So my intention is to go for equal weight. I used to have equal weight FTSE100, till it got closed down, and use a "light-touch" equal weight on my HYP, a la TJH, so I'm happy to use that.

The options:
There's an equal weight S&P by x-trackers. It's big, reasonable fees, and quarterly rebalanced. But the fact (no sh1t, Sherlock) that each stock is only about 0.2% (even Tesla is only .25%) makes me start humming and hawing.

However there's a North American 100 equal weight ETF by VanEck, that I feel myself gravitating towards. Fees are reasonable .20% and it's been running since 2015. It's only rebalanced once a year, so Tesla has reached 2.92%. I don't mind that.

Issue one: But it's still only GBP8m in size despite running for almost 5 years (vs GBP1.8bn for the x-tracker). I can live with this though. I've had ETFs closed down before, and in fact this rebalancing is due to Vanguard closing down their beta ETFs

Issue two: It would be the first non-Ireland domiciled ETF, and I'm concerned about what is going to happen as a result of Brexit in terms of any Dutch withholding tax - it's a distributing fund. There's a small-print comment that says
The Dutch domiciled ETFs use a gross reinvestment index as opposed to many other ETFs and investment funds that use a net reinvestment index. Comparing with a gross reinvestment index is the purest form since it considers that Dutch investors can deduct or reclaim the dividend tax levied. Please note that the performance includes income distributions gross of Dutch withholding tax because Dutch investors can deduct or reclaim the 15% Dutch withholding tax levied. Different investor types and investors from other jurisdictions may not be able to achieve the same level of performance due to their tax status and local tax rules.

Am I overworrying about this? My very limited understanding is there's some kind of agreement about these products to carry on as they are that was signed last year and runs for three years on the basis of no-deal.

I appreciate this dilemma covers 3 separate areas that people can comment on
- use of equal weight products
- small vs large
- potential tax issues for overseas domiciled ETFs
but I'm happy to hear.

torata

tjh290633
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Re: North America Equal Weight

#375778

Postby tjh290633 » January 11th, 2021, 10:45 am

I think that the problem of nominally equally-based funds, covering a large market, is the lack of discrimination. Obviously a FTSE100 Equally based fund would have about 1% of each and a FTSE350 about 0.3% of each. My HYP can get out of balance very quickly at times, as early in 2020 showed. Quarterly rebalancing would involve a hell of a lot of trading, even if the limits were fairly loosely set.

US tax treatment would be a deterrent for me. I am not keen on either trackers or ETFs, and would prefer to go for an IT with a higher US proportion in its portfolio.

TJH

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Re: North America Equal Weight

#375862

Postby Hariseldon58 » January 11th, 2021, 2:16 pm

I’m not sure that an equal weighted tracker has merit, clearly it under weights the large, popular stocks and over weights the smaller companies, it’s a very blunt tool. I’m sure an equal weighted tracker would do well in a time frame when small companies are doing well and poorly when the emphasis is on the large growth companies with strong momentum.

I recollect reading about a thought experiment that you could choose to invest in a fund that would give you a percentage of your school classmates future income, the choice being made at the time of leaving school, would you choose an equal share of everyone ( say all 30 classmates) or would you prefer to select your pick of say 9 out of 30 ? ( your top 30%) I think I’d go for my choice of 9...

In the context of HYP when you are trying to diversify across a range of sectors then equal weight has an arguable justification.

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Re: North America Equal Weight

#375876

Postby Lootman » January 11th, 2021, 2:48 pm

Hariseldon58 wrote:I’m not sure that an equal weighted tracker has merit, clearly it under weights the large, popular stocks and over weights the smaller companies, it’s a very blunt tool. I’m sure an equal weighted tracker would do well in a time frame when small companies are doing well and poorly when the emphasis is on the large growth companies with strong momentum.

Agreed. Where I think there is a use for equal-weighted ETFs is in narrower market segments.

So if a market sector is dominated by just one or two companies, you might want to choose an equal-weighted ETF so as not to be unduly exposed to any one share. An example might be South Korea, where Samsung is about 25% of the index. Note however that there are also "capped" ETFs that limit the allocation to any one share, thereby deviating from the cap-weighted model to that extent.

Where I use them is for sector ETFs. For instance I want exposure to biotech but have no idea which shares will be the winners in the future, since it is such a specialised area. And there is a lot of takeover action in the sector as well. The US-traded ETF ticker XBI gives you equal weightings to the smaller biotech companies, which are more likely to be taken over or have their fortunes dramatically changed by a single blockbuster new drug e.g. Moderna.

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Re: North America Equal Weight

#375942

Postby tjh290633 » January 11th, 2021, 4:49 pm

Lootman wrote:
Hariseldon58 wrote:I’m not sure that an equal weighted tracker has merit, clearly it under weights the large, popular stocks and over weights the smaller companies, it’s a very blunt tool. I’m sure an equal weighted tracker would do well in a time frame when small companies are doing well and poorly when the emphasis is on the large growth companies with strong momentum.

Agreed. Where I think there is a use for equal-weighted ETFs is in narrower market segments.

So if a market sector is dominated by just one or two companies, you might want to choose an equal-weighted ETF so as not to be unduly exposed to any one share. An example might be South Korea, where Samsung is about 25% of the index. Note however that there are also "capped" ETFs that limit the allocation to any one share, thereby deviating from the cap-weighted model to that extent.

Where I use them is for sector ETFs. For instance I want exposure to biotech but have no idea which shares will be the winners in the future, since it is such a specialised area. And there is a lot of takeover action in the sector as well. The US-traded ETF ticker XBI gives you equal weightings to the smaller biotech companies, which are more likely to be taken over or have their fortunes dramatically changed by a single blockbuster new drug e.g. Moderna.

UK ITs are restricted to the amount that they can have in any one share, as I understand it. 10% maximum in any one share and more than 5% in a limited number of others. I think that limits them to 20 holdings as an absolute minimum, but that would put them in a straight jacket.

TJH

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Re: North America Equal Weight

#376183

Postby JohnW » January 12th, 2021, 10:48 am

torata wrote:I appreciate this dilemma covers 3 separate areas that people can comment on
- use of equal weight products
- small vs large
- potential tax issues for overseas domiciled ETFs

Your first: try this for an overview which basically says equal weighting should do better as it's heavy with small cap which are higher risk and higher return. https://www.bogleheads.org/wiki/Equal_weighted_indices
Your second: don't know what that refers to.
Your third: beyond me.
Fourth: we're talking about a holding that is currently 5% of your ? equities holdings. How much difference is a cap weighted vs an equal weighted fund going to make to your overall returns? It must be tiny.

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Re: North America Equal Weight

#376694

Postby hiriskpaul » January 13th, 2021, 6:03 pm

Trading S&P 500 stocks is cheap as the spreads are very low and there is no transaction tax such as stamp duty, but there will still be a drag on this ETF due to trading frictions. RSP is the biggest equal weight US listed ETF: https://www.invesco.com/us/financial-pr ... ticker=RSP

This has trailed its index by 0.37% per annum over the last 10 years and 0.20% of that would have been the management fee. So 0.17% due to trading and other frictions. Trading costs of a standard cap weighted S&P 500 fund are tiny, typically < 0.01%.

I would not want to invest in an ETF that had only 8m of assets. Personally I would go with the Xtrackers ETF if you are determined to go for an equal weighted ETF.

Have you considered other alternative weighted ETFs? I have been invested in the iShares MSCI USA Min Vol Factor ETF (USMV) since 2012. It has performed well, mostly following the S&P 500 but with lower volatility. Over the last 6 months the S&P has pulled ahead, but that has happened before only to see USMV subsequently catch up. Costs are higher than a basic S&P 500 index ETF and suffers from trading friction but much less so than RSP does (about 0.03%). If you look at the constituents it is clear that the ETF is not so heavily weighted to megacaps as standard S&P 500 ETF, but far from being equally weighted.

https://www.ishares.com/us/products/239 ... tility-etf

You are unlikely to be able to buy US listed ETFs now unfortunately as you would not have to pay US dividend wittholding tax in your SIPP, but iShares do a LSE listed S&P 500 Minimum Volatility Index ETF (MVUS). Xtrackers do one as well, but it is really small.

torata
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Re: North America Equal Weight

#382360

Postby torata » January 31st, 2021, 8:51 am

Thanks to all for the replies and apologies for responding so late (domestic issues).

I'd not considered Min Vol as an option, and generally I liked what I saw in the iShares MVUS (or SPMV/SPMD as it redirects me to).
It has about 100 shares. Max weight is around 2.5% (I didn't check if there's a weight limit in the index it tracks).
Surprisingly though the sector %s are almost same as vanilla S&P 500 ETF, with 25% in Info Technology (i.e. hard and software)

Another one that came up as I dug around was Invesco S&P 500 High Dividend Low Volatility GBP ETF (HDLG), which has a very different sector profile. However, it's performance in March last year was very poor (drop of 30%) compared to the S&P and MVUS, and has stayed poor, so it doesn't seem to be doing what it says on the tin.

Comparing XDWE (x-trackers S&P equal weight), MVUS (iShares S&P Min vol) and CSPX (iShares S&P acc) over 1, 3 and 5 years, there's not a lot in it, but I think I'll go with the xtrackers, as the sector %s are more balanced, and I like the idea of equal weighting as a counter balance to the cap weighting of the other ETFs in that part of my portfolio, even though as JohnW said, it'll probably make a tiny impact.

torata

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Re: North America Equal Weight

#390764

Postby compscidude » February 28th, 2021, 1:52 am

There is a poster on TMF USA , mungofitch, who occasionally writes about the balance between SP500 and RSP (equal weighted SP500) and has developed a mechanical investing for timing moves between them. It may be useful to read his posts regarding RSP.

For example: https://boards.fool.com/thank-you-for-e ... e#34763236

More generally, the problem with factor-weighted ETFs is that they have higher fees and higher turnover. The turnover is the real problem, not the fees. Jack Bogle wrote about this in his book 'little book of common sense investing'. He estimated 100% turnover annually eats about 1% of assets annually. Fees & turnover costs can outweigh the scale of any factor-weighting advantage - if it is indeed an advantage.

https://www.amazon.co.uk/Little-Book-Co ... 0470102101

You can however find an essay arguing in favour of factor weightings and looking at different weighting strategies here.

https://www.invesco.com/us-rest/content ... =investors

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Re: North America Equal Weight

#390765

Postby compscidude » February 28th, 2021, 1:57 am



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