Cheapest Way Into Global Tracker Funds

firestone

A_T wrote: »

That's an interesting one. It's approach: "The current chosen measure of economic scale is a company’s contribution to Gross National Product". Quite different to a market cap tracker it's top holdings are Walmart, Gazprom, VW, AT&T, General Electric, Chinese oil and banks. A sort of antidote to FAANGs.

Yeah not the same top 10 holdings as some which is different.I have been looking at it as a fund to partner with a more normal allocated fund but assumed with more risk but it also seems to have held up quite well since the start of the year which is a short time i know but could be encouraging hopefully.

A_T

firestone wrote: »

Yeah not the same top 10 holdings as some which is different.I have been looking at it as a fund to partner with a more normal allocated fund but assumed with more risk but it also seems to have held up quite well since the start of the year which is a short time i know but could be encouraging hopefully.

Morningstar reports 3 year annualised at 11.53% compared to VWRL at 10.78%. Only 3 years though.

About 18% in BRICs and only 32% in America - which may appeal to some.

bowlhead99

eskbanker wrote: »

It's actually £20 on £100,000 or £2 on £10,000, so just an order of magnitude out....

*misses point*

Thanks, have fixed to avoid confusion for others reading it.

firestone wrote: »

seeing mention of EM there is HSBC Economic Scale Worldwide Equity ETF (HEWD)

firestone wrote: »

Yeah not the same top 10 holdings as some which is different.I have been looking at it as a fund to partner with a more normal allocated fund but assumed with more risk

Trademark long post from me... Bank holiday train journey!

Allocating by market capitalisation, adjusted for free float and with some criteria on liquidity, is the standard and most-accepted way to run an index - because it reflects what stock is practically out there for purchase by investors who make up the weight of market opinion.

If you know the company-by-company market value of shares that are available for public investment and trading, you can weight your thousands of little parcels of cash accordingly, and deploy them into the various companies. The index then keeps score on what the investors around the world buying and selling think about where their money should be and what the free floating equity is practically worth for each of the companies. Where the market process is efficient, it will be a reasonable judge of the price, and the allocation is just going to be whatever you see is available when you add up all the stocks that the public can trade. So, makes sense for "free float cap weighted index funds" to exist, and you can see why people use it as a way of investing or a way of measuring what performance the overall "market" has delivered.

From an investors perspective, if you trust that the market has got the pricing right on individual companies - so you're not going to employ active fund managers to pick and choose on a company by company basis which companies to hold - it's then a question of what type of index to follow when carving your money up between investees.

Typically there's the cheap and popular cap-weighted approach where you just follow the index that's measuring how other people allocate their money, e.g. S&P 500, FTSE global all cap, etc. "The market" gives you both the price you should pay and the proportion of your money you should invest in each stock.

Or you could perhaps say that the market can be trusted to get the price right but you don't want to buy more Apple stock than anything else just because it's big and widely held; so you follow an 'equal weight' index instead.

The rationale for an equal weight index is that you trust the market prices to be fair so you're not going to pick and choose individual stocks to include or exclude to try to get an edge... but you don't want the concentration risk of putting a large proportion of your money into particular companies just because a particularly high value of shares exists for those companies and could be purchased by you if you wanted to buy them.

Being 'big' doesn't mean attractively priced, and doesn't imply that it is going to be more profitable per pound invested than any other company. If Tesco has 4x the number of stores as Morrison, and they are both priced at a fair price, do I need to put 4/5 of my "UK supermarket" allocation into Tesco and 1/5 into Morrison? I guess yes, if a goal is to put the same portion of my investment into each square foot of retail space that exists. But do you want to do that, and be 4x as financially exposed to a bad strategy or accounting scandal at Tesco? And do you want to be 30x exposed to Apple Vs Tesco? $890bn vs £23bn: Thirty times!?

I am not a huge fan of cap weighted indexes other than as a bit of filler in a portfolio - effectively we're saying there's a huge amount of people that want Apple just because Apple shares exist and the are lots of them so there is a lot of capacity to invest, so that's where you should put your money, because the shares exist in the market. Fair enough, if shares exist in the market, buy *some* of the company, but still, 30x Tesco and however many times Samsung or Sony or LG etc? You shouldn't say "it's fine to buy lots more Apple than anything else because they have such great prospects"... because the market has already ensured that the price of those prospects is a fair price for all of the companies on the market, and Apple has not been priced better for its prospects than Samsung or Sony or Tesco have been priced for theirs.

So, free float cap weight or equal weight, you decide. Of the two, on fund cost exposures, using free float cap weight will generally be cheaper, because to broadly equal-weight things as their prices naturally change means running a rebalance process every month or quarter or half year. Equal weight funds are more expensive and niche so less popular and less available, but the peace of mind you get from a less concentrated portfolio means some people will not mind the fee.

From the above, I wouldn't be surprised if anyone said they were following the market allocation of free float market cap, or if they wanted to go the alternate route of equal weight instead. And I wouldn't be too surprised if people used some other route designed to enhance performance or an achieve a particular result eg the "smart beta" ETFs tilted towards momentum factor, quality factor, high div etc.

But some funds are an answer looking for a problem to solve and perhaps that HSBC one falls into that bucket. Sure, Walmart has high revenues so makes an top ten GDP contributor; but that metric doesn't necessarily correspond to high investor profits because its 'contribution to GDP' includes the salaries of hundreds of thousands of staff, taxes it pays to governments and so on. So you're not buying it because it's a particularly good company for bottom live profits. Effectively you've got a high allocation to Walmart , "just because it's there". A bit like the 'Apple problem' that I don't really like when I buy a traditional free-float cap-weighted index from FTSE or S&P.

So if Walmart isn't there because of good profits or prospects, is it there because the $tens of trillions of independently-managed public investor money has allocated their cash to it? No, it's come from a different economic metric , e GDP figure, which is *not* how the active public markets choose to allocate money to Walmart equities. Walmart has a total market cap of $250bn, it's a huge company no doubt. But half of it is owned by the Walton family who like to keep it close to their chests and are not buying or selling their stake to set the market price or public market allocations. The free floating shares in which public markets investors participate is a much smaller pool of capital. In a normal index like S&P 500, Walmart sits just next to (slightly below) IBM ($130bn market cap). Similar story with Gazprom, half owned by the Russian state.

Ok then, if you invested in the HSBC fund, it's certainly "differently allocated". It's not allocating your money into its largest holdings based on them having a great % return on capital employed, having high income growth, having price movement momentum, being well priced on some value measure, or on any similar attractive quality. And it's not allocated based on how active participants in public markets have allocated their own collective capital.

So the allocation of that fund isn't the type of allocation that would be favoured by active fund managers looking at reasons to accept or reject stocks from their model. And it isn't the type of allocation that would be favoured by passive investors who believe that markets not stock pickers allocate capital most efficiently. There is instead quite an element of, "I'll invest money in this company just because it's there"

I'm a fan of investing broadly and a throwaway comment I've made before would be, if you don't know what to invest in, try investing in all of it, within reason, that aligns with the potential returns or volatility target that you're seeking. But once you are invested in everything, the idea of investing *more* in certain of those things "just because they're there, and have relatively more capacity for me to invest more" doesn't necessarily stand scrutiny.

If we all allocated our money to financial instruments weighted to how much exists, we would all mostly be invested in bonds rather than equities because that's what there's most of, in the world. But we don't share the same investment objectives as the average investor on the planet (which might be a bank or insurance company who really needs to hold a lot more bonds than equities).

If we don't have a goal of matching the investment pattern of that "average" investor across bonds and equities, we shouldn't really try to buy things just because they exist. If we have some kind of sensibly allocated fund portfolio, whether that's from a cap weighted index or equal weighted index, or from an active manager's view on the fundamentals of specific companies he's researched, that's fine. To then add another fund on top with a substantially different allocation methodology, with the premise of, "partnering well with what I've got, which was put together using a different model" doesn't make a great deal of sense to me, unless you are going to keep adding more and more models until you've bought all products your provider offers.

To go back to the Tesco/ Morrison reference -nobody really needs exposure to every square foot of floor space from every angle. The millions of them have the same function: generate profit.

lseems to have held up quite well since the start of the year which is a short time i know but could be encouraging hopefully.

When comparing things over a short timescale you always get meaningless noise.

Lungboy

bowlhead99 wrote: »

Or you could perhaps say that the market can be trusted to get the price right but you don't want to buy more Apple stock than anything else just because it's big and widely held; so you follow an 'equal weight' index instead.

The rationale for an equal weight index is that you trust the market prices to be fair so you're not going to pick and choose individual stocks to include or exclude to try to get an edge... but you don't want the concentration risk of putting a large proportion of your money into particular companies just because a particularly high value of shares exists for those companies and could be purchased by you if you wanted to buy them.

Being 'big' doesn't mean attractively priced, and doesn't imply that it is going to be more profitable per pound invested than any other company. If Tesco has 4x the number of stores as Morrison, and they are both priced at a fair price, do I need to put 4/5 of my "UK supermarket" allocation into Tesco and 1/5 into Morrison? I guess yes, if a goal is to put the same portion of my investment into each square foot of retail space that exists. But do you want to do that, and be 4x as financially exposed to a bad strategy or accounting scandal at Tesco? And do you want to be 30x exposed to Apple Vs Tesco? $890bn vs £23bn: Thirty times!?

I am not a huge fan of cap weighted indexes other than as a bit of filler in a portfolio - effectively we're saying there's a huge amount of people that want Apple just because Apple shares exist and the are lots of them so there is a lot of capacity to invest, so that's where you should put your money, because the shares exist in the market. Fair enough, if shares exist in the market, buy *some* of the company, but still, 30x Tesco and however many times Samsung or Sony or LG etc? You shouldn't say "it's fine to buy lots more Apple than anything else because they have such great prospects"... because the market has already ensured that the price of those prospects is a fair price for all of the companies on the market, and Apple has not been priced better for its prospects than Samsung or Sony or Tesco have been priced for theirs.

So, free float cap weight or equal weight, you decide. Of the two, on fund cost exposures, using free float cap weight will generally be cheaper, because to broadly equal-weight things as their prices naturally change means running a rebalance process every month or quarter or half year. Equal weight funds are more expensive and niche so less popular and less available, but the peace of mind you get from a less concentrated portfolio means some people will not mind the fee.

This makes a lot of sense. Are there any funds that track global equal weight indices? I see there's the MSCI World Equal Weighted Index, but it appears to suffer from the same apparent issue as mentioned earlier, that it's only 23 developed countries, and only mid and large cap. Alternatively there's the MSCI ACWI Equal Weighted Index, which covers emerging markets as well, although so no small cap. However, I'm struggling to find any funds that track these indices.

firestone

bowlhead99 wrote: »

Thanks, have fixed to avoid confusion for others reading it.




Trademark long post from me... Bank holiday train journey!

Allocating by market capitalisation, adjusted for free float and with some criteria on liquidity, is the standard and most-accepted way to run an index - because it reflects what stock is practically out there for purchase by investors who make up the weight of market opinion.

If you know the company-by-company market value of shares that are available for public investment and trading, you can weight your thousands of little parcels of cash accordingly, and deploy them into the various companies. The index then keeps score on what the investors around the world buying and selling think about where their money should be and what the free floating equity is practically worth for each of the companies. Where the market process is efficient, it will be a reasonable judge of the price, and the allocation is just going to be whatever you see is available when you add up all the stocks that the public can trade. So, makes sense for "free float cap weighted index funds" to exist, and you can see why people use it as a way of investing or a way of measuring what performance the overall "market" has delivered.

From an investors perspective, if you trust that the market has got the pricing right on individual companies - so you're not going to employ active fund managers to pick and choose on a company by company basis which companies to hold - it's then a question of what type of index to follow when carving your money up between investees.

Typically there's the cheap and popular cap-weighted approach where you just follow the index that's measuring how other people allocate their money, e.g. S&P 500, FTSE global all cap, etc. "The market" gives you both the price you should pay and the proportion of your money you should invest in each stock.

Or you could perhaps say that the market can be trusted to get the price right but you don't want to buy more Apple stock than anything else just because it's big and widely held; so you follow an 'equal weight' index instead.

The rationale for an equal weight index is that you trust the market prices to be fair so you're not going to pick and choose individual stocks to include or exclude to try to get an edge... but you don't want the concentration risk of putting a large proportion of your money into particular companies just because a particularly high value of shares exists for those companies and could be purchased by you if you wanted to buy them.

Being 'big' doesn't mean attractively priced, and doesn't imply that it is going to be more profitable per pound invested than any other company. If Tesco has 4x the number of stores as Morrison, and they are both priced at a fair price, do I need to put 4/5 of my "UK supermarket" allocation into Tesco and 1/5 into Morrison? I guess yes, if a goal is to put the same portion of my investment into each square foot of retail space that exists. But do you want to do that, and be 4x as financially exposed to a bad strategy or accounting scandal at Tesco? And do you want to be 30x exposed to Apple Vs Tesco? $890bn vs £23bn: Thirty times!?

I am not a huge fan of cap weighted indexes other than as a bit of filler in a portfolio - effectively we're saying there's a huge amount of people that want Apple just because Apple shares exist and the are lots of them so there is a lot of capacity to invest, so that's where you should put your money, because the shares exist in the market. Fair enough, if shares exist in the market, buy *some* of the company, but still, 30x Tesco and however many times Samsung or Sony or LG etc? You shouldn't say "it's fine to buy lots more Apple than anything else because they have such great prospects"... because the market has already ensured that the price of those prospects is a fair price for all of the companies on the market, and Apple has not been priced better for its prospects than Samsung or Sony or Tesco have been priced for theirs.

So, free float cap weight or equal weight, you decide. Of the two, on fund cost exposures, using free float cap weight will generally be cheaper, because to broadly equal-weight things as their prices naturally change means running a rebalance process every month or quarter or half year. Equal weight funds are more expensive and niche so less popular and less available, but the peace of mind you get from a less concentrated portfolio means some people will not mind the fee.

From the above, I wouldn't be surprised if anyone said they were following the market allocation of free float market cap, or if they wanted to go the alternate route of equal weight instead. And I wouldn't be too surprised if people used some other route designed to enhance performance or an achieve a particular result eg the "smart beta" ETFs tilted towards momentum factor, quality factor, high div etc.

But some funds are an answer looking for a problem to solve and perhaps that HSBC one falls into that bucket. Sure, Walmart has high revenues so makes an top ten GDP contributor; but that metric doesn't necessarily correspond to high investor profits because its 'contribution to GDP' includes the salaries of hundreds of thousands of staff, taxes it pays to governments and so on. So you're not buying it because it's a particularly good company for bottom live profits. Effectively you've got a high allocation to Walmart , "just because it's there". A bit like the 'Apple problem' that I don't really like when I buy a traditional free-float cap-weighted index from FTSE or S&P.

So if Walmart isn't there because of good profits or prospects, is it there because the $tens of trillions of independently-managed public investor money has allocated their cash to it? No, it's come from a different economic metric , e GDP figure, which is *not* how the active public markets choose to allocate money to Walmart equities. Walmart has a total market cap of $250bn, it's a huge company no doubt. But half of it is owned by the Walton family who like to keep it close to their chests and are not buying or selling their stake to set the market price or public market allocations. The free floating shares in which public markets investors participate is a much smaller pool of capital. In a normal index like S&P 500, Walmart sits just next to (slightly below) IBM ($130bn market cap). Similar story with Gazprom, half owned by the Russian state.

Ok then, if you invested in the HSBC fund, it's certainly "differently allocated". It's not allocating your money into its largest holdings based on them having a great % return on capital employed, having high income growth, having price movement momentum, being well priced on some value measure, or on any similar attractive quality. And it's not allocated based on how active participants in public markets have allocated their own collective capital.

So the allocation of that fund isn't the type of allocation that would be favoured by active fund managers looking at reasons to accept or reject stocks from their model. And it isn't the type of allocation that would be favoured by passive investors who believe that markets not stock pickers allocate capital most efficiently. There is instead quite an element of, "I'll invest money in this company just because it's there"

I'm a fan of investing broadly and a throwaway comment I've made before would be, if you don't know what to invest in, try investing in all of it, within reason, that aligns with the potential returns or volatility target that you're seeking. But once you are invested in everything, the idea of investing *more* in certain of those things "just because they're there, and have relatively more capacity for me to invest more" doesn't necessarily stand scrutiny.

If we all allocated our money to financial instruments weighted to how much exists, we would all mostly be invested in bonds rather than equities because that's what there's most of, in the world. But we don't share the same investment objectives as the average investor on the planet (which might be a bank or insurance company who really needs to hold a lot more bonds than equities).

If we don't have a goal of matching the investment pattern of that "average" investor across bonds and equities, we shouldn't really try to buy things just because they exist. If we have some kind of sensibly allocated fund portfolio, whether that's from a cap weighted index or equal weighted index, or from an active manager's view on the fundamentals of specific companies he's researched, that's fine. To then add another fund on top with a substantially different allocation methodology, with the premise of, "partnering well with what I've got, which was put together using a different model" doesn't make a great deal of sense to me, unless you are going to keep adding more and more models until you've bought all products your provider offers.

To go back to the Tesco/ Morrison reference -nobody really needs exposure to every square foot of floor space from every angle. The millions of them have the same function: generate profit.



When comparing things over a short timescale you always get meaningless noise.

Hope your train journey is going well:)
With regards the timescale it was just compering how some other trackers/smart beta had done since the start of the year with a few ups & down and said it was hopefully encouraging but over 3 years it still seems ok
Guess i am looking at it because its different for difference sake but then surely that's the same as holding say Fundsmith v Fidelity special sits unless you put all your eggs in one basket.My main investments are IT's some that i have held for between 15 - 25 years that i like to think do different things even within my 3 global one's.Yes i have a DIY scatter gun style that i prehaps could explain if i could type as quick as you( but my luck just needs to hold a bit longer).I like to think many years ago that i researched BG IT's before starting a share plan in them days (but it was pure luck on seeing an advert in the Sunday paper)
Due to the offerings & Fees within my company pension i have started to look more at some of the passive funds on the market.But you are right about companies looking for ideas that may not be needed but even Vanguard have gone down that route with Value,momentum etc or if you can't pick one lets do a multi factor of all of them for good measure

grey_gym_sock

perhaps you wouldn't leave out emerging markets to save 0.02%, but what about to save 0.06%?

0.06% saving is based on the even cheaper option of buying vanguard FTSE developed world ETF (VEVE) (OCF 0.18%) with vanguard investor (platform cost 0.15%), for a total cost of 0.33% .

(this only works because vanguard let you buy ETFs with no dealing commission. otherwise, using ETFs wouldn't be so cheap for a small monthly investment.)

that comes to £60 on £100,000 invested. we're up to a very nice bottle of whisky every year

i'd probably prefer a developed markets tracker, anyway. i'm not a huge fan of investing in emerging markets in general, or of using tracker funds for them.

there is a certain logic in buying a small slice of everything it's possible to own a slice of; but if the legal system in a country is dodgy enough, do you ever really own anything there? e.g. consider russia, which is included in emerging markets indices. now, many emerging markets are certainly on much firmer legal ground than that; but sticking to developed markets is a simple way to filter out less reliable legal systems.

by sticking to developed markets, you are also picking countries where people are relatively rich, which i see as a safety factor. it means you are unlikely to lose your whole investment in a communist revolution, because most people are seeing some of the benefits of capitalism. so the most drastic change is not likely to go beyond some tilting of the rules to favour workers and consumers more, and business owners less (which of course can happen anywhere - and might be a good idea, anyway).

i'm also not seeing any evidence of higher returns from emerging markets. the credit suisse global investment returns yearbook 2014 included a study comparing the returns from developed and emerging markets going back to 1900, and developed actually came out ahead (mainly due to 1 very bad period for emerging, around the late 1940s - without that, it would be close to a tie).

now, if you pay 0.06% extra to include emerging markets, and if included they are c. 10% of the portfolio (as they are in vanguard global all cap fund), then you need emerging to outperform developed by more than 0.6% per year to justify that extra cost. but what if they don't outperform at all?

is it strange that emerging markets might not outperform, when they (at least: many of them) are expected to have much higher economic growth than developed markets? well, that may not help if the higher growth is already "in the price" - i.e. everybody knows about it.

there is the question of who captures the benefits of high economic growth. not necessarily companies already listed on the stock exchange; it may also be companies which aren't yet listed, or haven't even been started yet. also, think beyond companies: perhaps it's the local people with the right connections to take advantage; why would they let passive (foreign) investors walk off with most of the gains? in the more developed markets, established companies dominate the economy, to a far greater extent than they do in emerging markets. in both cases, all you can easily buy are the listed companies; but in developed markets, that is nearer to being a fair representation of the whole economy than it is in emerging markets. (there is still some gap in the developed markets, too: you can't buy into all the unlisted small businesses in the UK.)

stphnstevey

It has been mentioned missing out on the growth of EM, but not the flip side of the losses. Yes they can be +20% but also -40%. The gains are relatively recent and it's been mentioned not to look at a recent period alone. EMs are far more volatile and you have to consider large gains can also come large losses

That said, for a relatively small additional cost cost, you can take the risk with a more volatile market with higher potential gains to offset the additional cost. But it up to the individual whether that is worth it for them

If your in a passive tracker, then your risk levels are probably fairly low

bowlhead99

Lungboy wrote: »

This makes a lot of sense. Are there any funds that track global equal weight indices? I see there's the MSCI World Equal Weighted Index, but it appears to suffer from the same apparent issue as mentioned earlier, that it's only 23 developed countries, and only mid and large cap.

Really, you'll struggle to find a fund with such broad a remit as to pull together all the companies from all the countries on the planet and literally invest the same amount of its money in Foxton's estate agents (£200m market cap) as it put into Apple ($930bn). One company is 3000 times the market size of the other and sitting on the other side of the world in a completely different industry sector, and there are not many investors would just shrug and say, "hmm, buy me a tenner's worth of each of them".

This means that although a global equal weight all-cap fund is a nice thought experiment, there isn't sufficient demand for someone to run one. The more holdings you have and the more disparity between company sizes, the more costly in terms of fund creation and monitoring costs and practical liquidity issues ; to create more shares of the ETF you are going to need to go and buy more shares of Foxtons and more shares of Apple, but the purchase of £500k of Apple shares will go through quickly with minimal spread while the purchase of £500k of Foxtons (or an equivalently sized Chinese or Indonesian or Russian equivalent) will take longer as you're buying a bigger percent of the company, will face a greater bid-offer spread etc, and this adds to fund OCF or tracking error.

So what you tend to find is that the equal weighted indexes offered to retail customers are restricted by geography (e.g. US S&P500) or by industry, or both, because they are looking at filling a niche sought by sophisticated investors to cover a particular part of their portfolio. And they are easier to get in the USA which has a bigger ETF industry, than they are here in the UK.

Really, the reason for me mentioning equal weight in the context of considering the HSBC Economic Scale fund was just that I find it one of the credible ways to passively allocate capital among investment choices.

In other words: I can see why there are free-float market-cap weighted funds in most areas (your allocations left to the market), and why there are equal weighted funds in some areas (to avoid high concentrations in particular companies that you get from looking at free float), but the idea of a 'gdp contribution weighted' fund is a bit of a weird one; it's not trusting the market to do the allocation and neither is it solving the 'a pure market allocation would allow high concentrations in certain indvidual companies' problem. It's not the sort of thing that many passive investors would be on board with.

Alternatively there's the MSCI ACWI Equal Weighted Index, which covers emerging markets as well, although so no small cap. However, I'm struggling to find any funds that track these indices.

I'm not aware of a one stop shop that actually tracks the thought experiment that is: every major country no matter how developed the stock market, and every company no matter what size, all equal weight. That index would be a measurement tool, but does not necessarily have a fund following it, due to implementation cost and lack of demand.

If you take the MSCI World Equal Weighted as a potential solution to helping you allocate your money, what are the flaws?

Well, for one as you mentioned, no emerging markets. Fine for me - many people believe that passive/index investing is something that's well suited to efficient and well developed markets, because market theory says you won't beat the market. But the thing about emerging markets is not that the economies are developing but that the markets are developing, and are much more imperfect than somewhere like USA. The lack of perfectly shared instant information, and lower standards of oversight and governance in the companies themselves, is a reason I prefer active management for less developed markets because you will get a a lot of crappy companies when you just grab the index.

The other issue, no smallcap. Well again, the 'what is an efficient market' comes into play, because companies that are smaller and less well known hold less interest for people and have less broker/analyst coverage than an Apple or Walmart. So the smallcap arena is ripe for active fund management (albeit less so in the US where the financial markets are very developed tbf).

So, in a broad self- managed portfolio containing a number of funds:

- emerging markets are taken care of and don't need to be covered by an index

- smallcap areas are taken care of and don't need to be covered by an index

- the biggest developed world companies are covered by a standard index or an active largecap manager depending on your preference

- what is left over, is the 'less big' companies in the developed world: mid caps. Which get drowned out of a traditional cap-weighted index because they're only a few billion dollars in size and the large/megacaps are 30bn or 100bn or 500bn or 900bn.

So, to cover that last item, the investor might find themselves needing a developed world tracker covering midcaps, and be looking for equal weighting rather than market cap weighting. An example of such an ETF is iShares Edge MSCI World Size Factor UCITS ETF which has an OCF of 0.3%

None of this really helps OP who is not looking to use multiple specialist funds to cover off the different parts of his portfolio and is just looking for an all-in-one fund that can be accessed efficiently for £50-100pm (which rules out ETFs due to cost of trading on a market). Its just a little exploration of the idea of equal weighting and the fact that there can be some useful products around depending on how you want to run your money.

firestone wrote: »

Guess i am looking at it because its different for difference sake but then surely that's the same as holding say Fundsmith v Fidelity special sits unless you put all your eggs in one basket.

Those two approaches are trying to capture quite different themes in how they allocate your money.

Mr Smith would say that following his plan is a great way to allocate your money and that he doesn't mind having most of his money in these global brands that he buys and holds for the long term. Whereas Fidelity would not say that you should have all your money in opportunities that present themselves as 'special situations'; such funds may be better or worse at different times of the economic cycle and Fidelity wouldn't say their special sits funds are balanced portfolios - thats why they offer tens of other funds too.

If you want, you can buy lots of investment trusts, and also buy Fundsmith and Fidelity SS, and the HSBC Economic fund, and whatever other types of funds you fancy having a bit of - growth funds, value funds, high dividend funds, funds that avoid banks, funds that avoid oil and mining, funds that love banks, funds that love oil and mining, funds that like a bit of this, funds that like a bit of that, funds that prefer the other. What you end up with, if you follow a "DIY scattergun style", is a bit of a mess without any real strategy or method to it.

Over the long term, such a style will still make money, because we know that investing in equities over the long term makes money, and when you look back you might be very happy with the results. But having a haphazard allocation can give you exposure that's skewed to certain markets or industries which can give volatility. Or alternatively, maybe you will end up without much overweighting in any particular area... but if there is no cohesive plan or model that you're aiming for, it seems a bit of a waste to be paying for active management in all of those trusts and ITs and specialist funds and grabbing more funds on top whenever you see something that sounds interesting.

Adding a fund to a portfolio should help you acheive a particular result, but when you don't really have much of a result in mind other than 'I hope this makes money over time, like equities are supposed to', then it seems like you would waste time and effort, or cost, or all of those things, by following a haphazard scattergun approach.

But you are right about companies looking for ideas that may not be needed but even Vanguard have gone down that route with Value,momentum etc or if you can't pick one lets do a multi factor of all of them for good measure

I guess they will create products to fill customer demand. The idea of 'factor' or 'smart beta' investing within passive products has some sense to it. It is based on academic studies which recognise that a basic cap weighted product might be good in theory but the people that outperform a cap weighted product have done something 'smart' to achieve that outperformance - and are getting some advantage by putting relatively more weight to smaller companies, or companies that offer more 'value' expressed as certain formulae, or companies with a certain share price momentum, or companies exhibiting certain other 'quality' characteristics within their balance sheet or income statement or trading history, etc.

I's not necessarily a good idea to put all your money into any one (or all) of those 'themes', but there is some kind of logic to saying if the active investors try to get ahead by capturing themes which a truly passive fund allocated on a free float market allocation cannot, then why doesn't the passive community use some screening formulae to make an investible custom index capturing some of those themes at low cost. Prior to those funds existing you might be putting your money into a fund with an active manager who was doing the exact same type of screening to narrow the universe of stocks that he wanted to pick, delivering a good track record, except he was charging you a lot of money because it was his proprietary system

The efficient markets hypothesis from decades ago has over the years had lots of people review it and come up with oodles of academic research on how to capture the nature of markets in more complex ways. And now specialist indexes will help people track and invest in those themes. We've never had so much choice as investors. But that doesn't mean you need to invest in every new thing you like the look of, unless it's better than what you've got - and if it is, you should probably think about discarding what you've got and starting again, rather than adding the new fund to the old fund and holding both.

firestone

stphnstevey wrote: »

It has been mentioned missing out on the growth of EM, but not the flip side of the losses. Yes they can be +20% but also -40%. The gains are relatively recent and it's been mentioned not to look at a recent period alone. EMs are far more volatile and you have to consider large gains can also come large losses

That said, for a relatively small additional cost cost, you can take the risk with a more volatile market with higher potential gains to offset the additional cost. But it up to the individual whether that is worth it for them

If your in a passive tracker, then your risk levels are probably fairly low

May not only be your risk level but your age as well - think most experts are looking at EM as a longer term investment

eskbanker

^ Has that train STILL not arrived yet?