Friday, 22 October 2010

Cap-Weight vs Fundamental Portfolios: Q3 Update after DRIP

The live updated spreadsheet at the bottom of this blog, which shows the on-going contest between a cap-weight portfolio and its fundamental weight counterpart, has now been updated to include the automatic reinvestment of dividends where the ETFs offer that feature.

The DRIP purchases included the following:

Fundamental Portfolio
  • CRQ - Claymore Canadian Fundamental Index Equity large cap - 6 extra shares
  • ZRE - BMO Equal Weight REIT - 2 shares
  • ZRR - BMO Real Return Bond - 6 shares
Cap-Weight Portfolio
  • ZRR - BMO Real Return Bond - 6 shares
The leftover cash is now sitting in each account. The Cap-Weight portfolio is starting to pile up the extra idle cash while the Fundamental Weight portfolio is putting it to good use by reinvesting.

I'm going to substitute the new Horizons BetaPro TSX 60 tracker ETF (symbol HXT) in the cap-weight portfolio since its total return swap construction reflects implicit automatic DRIPing and I want to find out about the difference in weighting strategy not the effects of DRIP, which will always be beneficial to the ETFs that do it in rising market.

The net difference between the two strategies is pretty slim, with each one ahead in 3 holdings (I ignore the RWX since they both hold it and the Cap-weight is ahead merely and always because it holds one more share) and the Fundamental Weight portfolio is in the lead overall by only 0.1% or so ($171 on a $111,000 portfolio). It's a tie so far.

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