Underweighting the US using index funds

aroominyork

Thrugelmir said:

aroominyork said:

The only single fund option is VLS, but that means overweighting the UK. 

Have you missed the repeated discussions on brass plate locations ? 

I thought the conclusion was that no global ex-US product is available to UK investors (I use Interactive Investor).

Prism

aroominyork said:

Thrugelmir said:

aroominyork said:

The only single fund option is VLS, but that means overweighting the UK. 

Have you missed the repeated discussions on brass plate locations ? 

I thought the conclusion was that no global ex-US product is available to UK investors (I use Interactive Investor).

I think Thrugelmir's point is that VLS doesn't overweight the UK as the biggest companies are so global. Much more global than the US markets which are pretty domestically focused. A higher allocation to finance and oil companies could be an issue.

AlanP_2

From a Bloomberg newsletter I read earlier today (EAFE is Europe, Australasia and Far East).

The point made is that an Equal Weighted US Index (Apple Inc., Amazon.com Inc, Microsoft Corp., Alphabet Inc. and Facebook Inc. account for exactly 1% of this version of the S&P 500, even though they have been far more than 20% of the market cap-weighted index over this period) has dramatically outperformed a Market Weighted one over ~ last 12 months as the impact of the FANGS early Covid growth has been diluted as "smaller" companies benefit from easing of lockdown and Biden stimulus package.

If you can't find a non-US index why not consider an equal weighted US one that effectively reduces reliance on the FANGS? 

The really dramatic and unusual effect of last year in the stock market was the massive impact of the FANG stocks. This is how the equal-weighted index fared compared to the cap-weighted, starting at the beginning of last year, for both the U.S. and EAFE:

coastline

This one will go back to March 2002 -May 2021.
Chart Tool | Trustnet
Long term view which shows the US rarely below 50%. Worth looking at the effects of Japan on the chart.
Historical Country Market Cap Weightings per year? - Bogleheads.org

Thrugelmir

aroominyork said:

Thrugelmir said:

aroominyork said:

The only single fund option is VLS, but that means overweighting the UK. 

Have you missed the repeated discussions on brass plate locations ? 

I thought the conclusion was that no global ex-US product is available to UK investors (I use Interactive Investor).

Probably because there's insufficient demand for such a product outside the US markets. The funds are like US ones, with a high concentration in a select group of companies. VXUS has 7554 holdings, with the top ten representing 10%.  

Sebo027

underground99 said:

Arguably the ethos of using an index for your allocation is to cheaply allocate capital to the places where everyone else is allocating capital because the market is probably right (until it isn't ) . The global index allocates more than 40% to US-listed companies for the same reason that the UK index allocates more to Tesco than to Sainsbury. There is simply more share capital available in free float according to current market values. If you reject the concept of using a capitalisation-weighted index to determine the allocations - in favour of custom allocations with caps or minimums on certain regions or industries etc - but you do want your individual building blocks for regions to still be allocated by index within those regions, you will need to use specialist regional index funds rather than generalist global index funds. 

I'd be interested in hearing justification for rejecting this concept.....

JohnWinder

Well, there was some research by Nobel prize laureates that demonstrated there was a better risk adjusted return by over-weighting small capitalisation value (as opposed to growth) companies, and that we might expect that benefit to continue to be available.

Separately, the returns and risk of equal weighted equity funds can be quite similar to cap weighted ones; better at times, and worse during other multi-year periods. So there’s more than one way to skin a cat, although all share the idea that you need broad diversification, and to get the best from them you mustn’t bail out of one ‘approach’ when it’s under-performed compared to another, lest its turn in the sun is about to happen such that you jump from ‘loser’ to ‘loser’.

Those non-cap weighted approaches tend to be more expensive (undesirable), less readily available, more prone to going out of business if they fall badly out of favour, and can have more internal costs such as buying/selling securities to keep the equal weighting (an issue cap weighted funds don’t face).

And perhaps there’s a behavioural justification: you get to feel like you’re doing something clever to enhance returns, without messing up a good product too badly.

Linton

Sebo027 said:

underground99 said:

Arguably the ethos of using an index for your allocation is to cheaply allocate capital to the places where everyone else is allocating capital because the market is probably right (until it isn't ) . The global index allocates more than 40% to US-listed companies for the same reason that the UK index allocates more to Tesco than to Sainsbury. There is simply more share capital available in free float according to current market values. If you reject the concept of using a capitalisation-weighted index to determine the allocations - in favour of custom allocations with caps or minimums on certain regions or industries etc - but you do want your individual building blocks for regions to still be allocated by index within those regions, you will need to use specialist regional index funds rather than generalist global index funds. 

I'd be interested in hearing justification for rejecting this concept.....

1) There seems to be no obvious correlation between high market capitalisation and high investment return. If anything his the reverse has been true.
2) Market capitalisation weighting can have serious effects on diversification One has to fight it in order to get broad variation in other and arguably more important % allocations - eg  geography, industry sectors, Growth vs Value. To take Underground's supermarket analogy - if you wanted to invest broadly in UK supermarkets would you put more money into Tesco than all other significant companies in the sector put together?

The only justification I can see for using market capitalisation is it reduces the costs of index funds. Is there another one?

aroominyork

Linton said:

Sebo027 said:

underground99 said:

Arguably the ethos of using an index for your allocation is to cheaply allocate capital to the places where everyone else is allocating capital because the market is probably right (until it isn't ) . The global index allocates more than 40% to US-listed companies for the same reason that the UK index allocates more to Tesco than to Sainsbury. There is simply more share capital available in free float according to current market values. If you reject the concept of using a capitalisation-weighted index to determine the allocations - in favour of custom allocations with caps or minimums on certain regions or industries etc - but you do want your individual building blocks for regions to still be allocated by index within those regions, you will need to use specialist regional index funds rather than generalist global index funds. 

I'd be interested in hearing justification for rejecting this concept.....

1) There seems to be no obvious correlation between high market capitalisation and high investment return. If anything his the reverse has been true.

Agreed. In every five year period over the last 30 years UK smaller companies have outperformed UK all companies. Smaller companies have a lower market cap because... well, because they are smaller! - not because the market considers them a fraction as valuable to hold as the FTSE100.

JohnWinder

Linton said:

The only justification I can see for using market capitalisation is it reduces the costs of index funds. Is there another one?

Oh, yes. You don't have to endure multi-year periods of under-performance, compared to the whole market, trying to stay your hand from doing something stupid like changing strategies because of market peculiarities. And it's an uncomplicated, easy to understand investing approach that ordinary folk can feel confident will give them their share of the economic prosperity, without the drag of advisor fees (which at 0.5%/year for 40 years will reduce their final investment value by 17%).