Thursday 8 July 2010

Fundamental vs Cap-Weight Portfolio - Status after mid-Year Distributions

A while back I came to the conclusion that adopting a passive cap-weighted index portfolio is inferior to a fundamentally weighted portfolio and subsequently on June 9th I set up two test portfolios - one for each strategy - to see which does better in a manner as realistic as possible.

Let's see how things are coming along one month on after the mid-year distributions made by many of the ETFs in the two portfolios. Here is what has happened:
  1. on pure market price changes before distributions, the fundamental portfolio is ahead by $244 as of market close today July 7th;
  2. the cap-weight portfolio received slightly more - $554 vs $508, or $46 more - in distributions mainly because ZRE in the fundamental portfolio paid out none at all. The folks at BMO who run the ZRE ETF told me that since the fund was only launched at the end of May, there was very little income received up to the end of June and they decided it would be included in next quarter's distribution at the end of September. On a total net basis the fundamental portfolio is still better off by $197.
None of the distribution money has been reinvested yet as the cash total is still too small and the commission to purchase would represent too much cost. In neither portfolio are the asset classes enough out of whack compared to their target allocation (must be more than 1/4 above or below the target percentage - see above linked post for details) to justify rebalancing anyway despite some quite drastic market moves during the past month.

Though it is early days, so far so good for fundamental weighting. No regrets yet about making the change in my portfolio.


larry macdonald said...

I think your portfolio of fundamental ETFs will look relatively good if markets stay weak. But if markets are strong for another few years, the market-cap ETFs might look better for quite sometime and it may not be until the next bear market that the fundamental funds catch up.

Preet said...

@Larry - I have an upcoming post which will discuss this in more detail. Historically, markets would have to be very, very strong before a cap-weighted outperformance would become reliable. Like, bubble strong.

CanadianInvestor said...

Larry, further to Preet's comment, the Fundamental Indexing book by Arnott et al and other papers found that in the past outperformance by fundamental weighted portfolios occurred even in rising markets like the 1990s. It was during the tech bubble that the cap-weighting surged ahead, though the fundamental still went up considerably, just not as much. I look forward to reading Preet's post on the topic.

Justin said...

I'm a young investor and I love your blog, have read everything you've posted since about mid-2008. I was curious to find out how you set up the portfolio in Google Docs? I help my parents manage their investments in addition to my own, and updating spreadsheets for multiple accounts every few months is laborious. This would be a great help!

CanadianInvestor said...

Hi Justin, Sorry this has taken so long to be posted and for this reply. Google's Blogger had shunted it into a "possible spam, to be approved before posting" folder.

To create a similar live update spreadsheet, the easiest way is to create one beforehand in Open Office or Excel, then upload it in Google Docs. When it is online, you can then edit to add three key things: 1) To get the live market price enter in the cell =GoogleFinance (B4), where cell B4 contains the ticker symbol for the stock e.g. CRQ; 2) For the CAD to USD conversion there isn't an actual direct source available through Google so I use the currency ETF FXC instead. The cell showing the number contains this =1/GoogleFinance ("FXC"; "price")*100; 3) To have the colours change depending on which portfolio is ahead, in Google Docs under the Format menu there is the Change colors with rules command that is quite self-explanatory. The only real constraint for portfolio tracking is that it cannot update the price of individual bonds. Plus you have to update for any distributions or dividends that are not on some sort of DRIP. Finally, you don't have to publish the spreadsheet as I've done, you can keep it private (within the security Google has, which is an account password for access).

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