Saturday, 26 February 2011

Portfolio Cap-Weight vs Fundamental Test and Monthly ETF Distributions

The portfolio contest between traditional Cap-Weight and Fundamental Weight Index ETFs has become a little more tedious to track manually with the switch by both BMO and iShares to more frequent monthly instead of former quarterly distributions on more ETFs.

It also undermines one of BMO's advantages compared to iShares, namely the automatic, free DRIP program since now much smaller amounts are being distributed monthly, which in many cases won't be enough to buy whole shares. Even with a $100k portfolio, the January and February amounts for ZRE are not enough to buy even one share. Since for ZRR both portfolios have the same holding it won't any difference between them. Therefore, I will simply accumulate the cash for both portfolios until rebalancing at the annual anniversary date in mid July presents an opportunity to re-invest it. The spreadsheet at the bottom of the blog now includes the cash for both January and February distributions (which is anticipating a bit since BMO only distributes the cash March 7th but again it doesn't make any comparative difference).

Cash or no cash, it is quite interesting to see that the Fundamental portfolio has now opened up a significant lead of $1602 since the beginning of the year. It's easy to spot that it is because of the huge leap of the Developed Markets Fundamental fund PXF over its Cap-Weight rival VEU. Both portfolios have positive returns in every asset class! It's just that "some are more equal than others" with bigger gains. That includes Canadian Bonds where the price level of XBB is flat but the cash interest distribution would push its return into plus territory. Nothing is really close to the 1/4 share out-of-whack rebalancing trigger point though XBB is starting to get down there with 21.5% versus its target 25%. If interest rates start to rise then XBB is likely to start falling though equities might too.


Anonymous said...

You should be comparing PXF to VEA not VEU. VEU includes Emerging Markets.

Anonymous said...

Also, while this is fresh, I do think it merits mentioning that the spread for PXF is 15 cents while VEA and EFA are 1 cent. That is a huge haircut to take. Also the exp ratio for EFA is 35 and VEA 15 versus 75 for PXF.

This is like a fight with gravity versus anything else - gravity wins eventually. The higher cost will most likely catch up with PXF just like it does with other active strategies.

CanadianInvestor said...

Thanks Anon, looks like VEA might indeed be a better comparator than VEU. I'll make the switch in the portfolio.

Re the expense ratios, that's part of the point of the test, to see how it works in real life, or as close to possible as I can make it. On the bid-ask spread, when I set up the portfolio, I had gone online during the day and used an ask price, which would reflect the spread. However, since the portfolio is quite passive - it has made no trades other than the auto DRIP for a few of the Canadian ETFs (not PXF or VEU) - that factor will be less and less consequential as time goes by. But again, the proof will be in the pudding, so we shall see.

Wikinvest Wire

Economic Calendar

 Powered by Forex Pros - The Forex Trading Portal.