"direct indexing"?

[bryan]

https://www.bloomberg.com/news/articles ... -investors

A link from Matt Levine's column. Essentially:

Those who appreciate the lower costs and simplicity of passive investing can make their own edits to a benchmark with an approach called direct indexing.
...
Eaton Vance Corp.’s Parametric Portfolio Associates, Optimal Asset Management and Ethic Inc. all offer direct index strategies.
...
The accounts can be used in various ways: an Apple Inc. staffer who already owns company stock via benefits could reduce further exposure in their portfolios, for example.
...
Customers also pay a larger upfront management fee for the personalization. Direct-index strategies typically charge about 0.15-0.35%, according to data from Bloomberg Intelligence. That’s less than an active mutual fund, but still at least five times more than some of the most popular, cheap equity ETFs.

This sort of strategy/product seems to match what I've wanted to do for years: "The default is the index" and then tilt your "index"/portfolio. Or similarly build your own index, which could have default starting allocations.

Very often I am more bearish on particular companies, willing to bet: $COMPANY will do worse than $OTHER.
Where $OTHER could be competitors, sector, some fund/index it is part of, or the default (some stock market ETF).

How have you folks been handling this sort of thing already?

I never bothered learning the math/programming/or calculations for options (or pay for a product that does it for you) so just do occasional naked shorts at opportune times when I see something egregious, or for longer term bets I just tilt my portfolio manually by getting overweight into other ETFs that don't have the exposure. Less than ideal.

[Jason]

I'm not sure its a direct equivalent, but it reminds me of this company:

https://www.motif.com/products/

I never proceeded but the "theme" investing sounded intriguing. They offer indexes that you can customize. It's just something I never worked through. Maybe the bigger investing brains in the midst can explain what the benefit is, if there actually is one.

[unemployable]

This sort of strategy/product seems to match what I've wanted to do for years: "The default is the index" and then tilt your "index"/portfolio. Or similarly build your own index, which could have default starting allocations.

Very often I am more bearish on particular companies, willing to bet: $COMPANY will do worse than $OTHER.
Where $OTHER could be competitors, sector, some fund/index it is part of, or the default (some stock market ETF).

How have you folks been handling this sort of thing already?

Broadly speaking, it's a legitimate concern. I know of multiple large investment managers who started investment vehicles for their employees that invest completely outside the organization, to diversify away from career risk. Typically the largest investor is the founder, and some have opened up to outside investors (from whom they collect a management fee). I've heard of large pension plans concerned about their implicit exposure to AAPL or whatever the largest holding in the SPX is. Which considering how long ago this was, would have been a losing hedge.

If you want to take an explicit company or sector bet, the easiest way to purely capture alpha is probably a pairs trade: long A/short B in the same dollar amounts. The A position provides collateral in case you get a margin call on B.

Options have a limited time horizon and are more sensitive to short-term volatility, so may not be the best vehicle for what you want to do.

Then there's just holding cash if you don't like anything in particular. What does Buffet like to say... cash is a call option on any asset you want at any strike price you want with no expiration.

[slowtraveler]

I find this article relevant and something I want to try. https://www.joshuakennon.com/sp-500s-di ... le-secret/

Basically, buy the S&P 500 but in equal weight and with 0 subsequent changes. Hold all spin-offs. Reinvest privatized companies in the remaining components. Rebuy privatized companies if they become public again.

[Mister Imperceptible]

I find this article relevant
https://www.joshuakennon.com/sp-500s-di ... le-secret/

“The more cynical among you are likely to think this is an example of collusion; a way for the rich to get richer at the expense of everybody else by modifying the rules, quite literally raiding the retirement money of the masses so they can create a much more liquid and supported market when they begin systematic sales programs of their own holdings.

.....

But, wait! There’s more! Last year, the S&P methodology was modified again to permit the inclusion of mortgage REITs. These special types of securities don’t actually represent equity ownership. They don’t even represent real estate ownership. Rather, they are bundles of debt portfolios – fixed income investments! Somehow, in the mind of Wall Street, it makes perfect sense to sell investors de facto bonds when they think they are buying stocks.

.....

The old, mathematically-almost-guaranteed-to-be-higher-returning methodology is gone. Yet, not a single one of the major S&P 500 index funds offers an adequate disclaimer on the page showing the charts and figures with historical total return performance explaining that the product the investor is buying today would have resulted in significantly different results had those same rules been used in the past.

Anywhere other than Wall Street, they’d call this type of behavior fraud.”

[jacob]

@slowtraveler - I think there are equal weight ETFs out there. They would, by construction, have to engage in more trading to rebalance (that's why the S&P is marketweighted ... which avoids this).

One point that hasn't been mentioned is ... that if one is investing more than $500k (especially in these zero-commission times), it begins to make sense to DIY one's [zero-fee] index of 500 positions. Sounds like fun

[slowtraveler]

@Jacob

I've seen them. Bogle has talked about this in "Common Sense on Mutual Funds". Around pages 425-435, his idea was to buy the 50 largest stocks in equal weight and make no subsequent changes. The increased after tax gains should be significant.

The point is to make no subsequent changes and let a natural market weight develop. Less risk (not having 8% of assets in just 2 stocks). Lower taxes. Lower activity. Increased tax loss harvesting opportunities. Increased value and small bias due to equal weights. It would cost a day, unless I just wrote a script to do this for me.

Voya Corporate Leaders Trust is based on a similar principle and it has significantly beat the S&P500, even with a .50% fee and before all these methodology changes needed to allow the massive asset influx, over its lifetime.

There's recently been another methodology change prohibiting stocks with multiple share classes. No Google. These changes have some benefits but are of detriment to the CAGR because they almost always kick out some of the top performers that pull the average up so much.

Jeremey Siegel wrote an article about this available free online. He demonstrates that starting with equal weight with no subsequent changes typically beat the market weighted index by about a percent in all the situations he checked for.

The front page of the Siegel article has this title:

The Rodney L. White Center for Financial Research
The Long-term Returns on the Original S&P 500 Firms
Jeremy J. Siegel Jeremy D. Schwartz

The real headache is about what to do with companies that go private. Reinvest in S&P fund, in survivors from original list, reinvest in whole portfolio, etc.

[unemployable]

One point that hasn't been mentioned is ... that if one is investing more than $500k (especially in these zero-commission times), it begins to make sense to DIY one's [zero-fee] index of 500 positions. Sounds like fun

How would you hold AMZN?

[jacob]

Yeah yeah, I'd either leave it out or break the equal weight rule.

[Lucky C]

RSP is equal weight with 0.20% expense ratio. Since inception it has slightly underperformed VOO or other low-fee S&P500 ETFs.
https://www.invesco.com/us-rest/content ... 36b50aRCRD

Research Affiliates has created indices weighted by fundamentals rather than market cap, available as ETFs via Schwab. Compare FNDB to S&P500 weighting and see for example how Amazon, Facebook, and Alphabet are not in the FNDB top 10 holdings. Since inception, FNDB has underperformed the S&P500 but if you expect value to start outperforming growth in the coming years, FNDB could be a better bet.
https://www.schwabfunds.com/public/csim ... ntal-index

[Lucky C]

Just saw that iShares has EUSA, an equal weight USA ETF. Lower fee (0.15%) than Invesco RSP (0.20%). Slightly outperforms RSP and underperforms VOO since inception.

However it has slightly outperformed VOO from inception to the September 2018 peak. A sign that returns have gotten more concentrated in the big winners (AAPL, MSFT, etc.) and internal dispersion over the past year or two.

[bryan]

I'm not sure its a direct equivalent, but it reminds me of this company:
https://www.motif.com/products/

From what I remember, Motif's sells pitch is pretty equivalent to what I'm thinking. I was looking at ways to do this "direct indexing" back in 2013 or so since I had just become aware of Fidelity's "basket investments" and I remember Motif was the most exciting. However, there was some obvious reason not to go with either Motif or Fidelity at that time.. from looking at Motif's website for a minute, maybe it is their fees and restriction to 30 stocks in your "direct index portfolio"?

edit:
So I guess folks either don't "direct index" or just do some version of what @jacob said:

One point that hasn't been mentioned is ... that if one is investing more than $500k (especially in these zero-commission times), it begins to make sense to DIY one's [zero-fee] index of 500 positions. Sounds like fun

Which has the benefit of reducing the risks associated with indexing and "placing so much into Vanguard"