Creating my own S&P 100 index fund - Is the return worth the downsides?

[thai_tong]

Update:
I was able to successfully replicate the S&P with stock in 120 companies. After 6 months of testing I'm confident that I'm tracking the S&P well enough.

A bit of detail:
With the high tax rates on ETFs in Ireland, I can essentially under-perform by 1.5 percentage points and still be better off than buying ETFs.
If I could buy fractional shares I could buy all 500 companies and replicate the index. However, any brokers that do fractional shares have high fees.
I'd recommend anyone in the same situation with a bit of spreadsheet skills to try the same thing and test it for a few months before committing a lot of money to it.

My situation

I live in Ireland, the tax set-up here is a massive annoyance for people looking to reach FIRE.
I have an idea to change how I invest. On paper it's good but I want to get a second opinion from people who've got a good understanding of the market.

Basically, profits from buying/selling an ETF are taxed at 40% which sucks when you're trying to build wealth using index funds. When buying/selling individual shares the profit is taxed at 33%.

Potential returns
Usually I buy index funds for the S&P 500. I started to wonder if it's worth actually buying stock to match the S&P 100, as if I'm making my own index fund.
Doing some quick calculations. With the amount I have to invest, if the S&P index grows by 7% I could get 5.2% return after tax instead of 4.2%.

Of course there are some downsides but they are hard to quantify, I'd really like your opinion on this.

Reasons this is a bad idea
I find that people on this forum give thought-out answers instead of knee-jerk responses and that's why I'm posting here for advice

• I'm only investing in 100 companies instead of the S&P 500

I checked historical returns of both S&P 100 and S&P 500, they are very similar. However, the volatility of the S&P 500 must be lower.

• My broker only offers cheap fees for approx 75% of S&P companies, and they are all on the New York stock exchange

Using only the NYSE might reduce my diversification and bias me towards American companies. Maybe I could put some of my money into a world index fund to hedge against this.

• I'm not regularly re-balancing my portfolio like a professional trader

I will re-balance my portfolio annually, does this have a big effect on return/risk?

• I'm buying/selling an entire position in one trade, this exposes me to risk if I sell on a bad day

Since I'm selling stock in 100 companies I'm counting on the good days canceling out the bad days.

[iopsi]

Basically, profits from buying/selling an ETF are taxed at 40% which sucks when you're trying to build wealth using index funds. When buying/selling individual shares the profit is taxed at 33%.

That's a decent difference.

So yes imo it can be worth it to just buy the individual equities.

I would do that if i were you for sure (w/out buying all the 500 stocks ofc, there is no need for that).

This page goes into some details about "diy index funds":
https://www.bogleheads.org/wiki/Passive ... ual_stocks

[Qazwer]

I think off the top of my head that it after about 50 random you stack to get the average (been published just do not remember exact studies). It would come down to broker costs of buying and selling. Cap weighted means you do not have to buy and sell though which should lower brocker costs.
For the downside risk, you might miss the winners.
https://papers.ssrn.com/sol3/papers.cfm ... id=2900447

Most stocks are worst than short term bonds with a few making for all the gains (link above for paper). But with those tax rates ...

Also consider whether to rebalance at all with anything but new money
SP 500 and most indexes use cap weighting where they have a certain amount of each relative to their value. As the price of the stock goes up, the number of shares stays the same but its relative percent increases. This allows the index to not have to buy and sell when indexes first were created. There is some more complicated stuff going on now for tax and efficiency purposes. But you can just buy and hold and let the market rebalance it on its own.

[thai_tong]

Also consider whether to rebalance at all with anything but new money
SP 500 and most indexes use cap weighting where they have a certain amount of each relative to their value. As the price of the stock goes up, the number of shares stays the same but its relative percent increases. This allows the index to not have to buy and sell when indexes first were created.

Thanks, I had forgotten about that. So I don't need to worry about spending a lot on transaction fees to rebalance.

I really appreciate linking actual research papers about this stuff, it's much better than hearsay investing advice.

I think off the top of my head that it after about 50 random you stack to get the average

I read the Boggleheads page that iopsi linked. It refers to several research papers, each of them show that the benefit of buying more companies becomes really small after 50-100 companies, both in terms of return and volatility.

[wolf]

Are dividents also taxed that much? Maybe a divident oriented portfolio is an alternative?

[thai_tong]

Good point, the lower tax rate for dividends is 20%.
Previously I overlooked it because I thought I had to buy diversified index funds but if I'm going to buy and hold dozens of companies it could be worth making a dividend oriented portfolio