Monday 20 January 2014

Cap-Weight vs Fundamental Portfolio 3 1/2 Year Update - Fundamental Widens Slight Lead

It is now three and half years since we started a realistic contest between a traditional cap-weighted portfolio and another based on fundamental factors. The live updated prices are shown in the spreadsheets at the bottom of this blog, though I only update the distributions every six months or so, which means the cash balance is not constantly up-to-date. Today, I've updated distributions up to and including December 2013.

Tight contest - small differences in total portfolio value
2010 Year-end - dead heat: 0.1% difference
2011 August - cap-weight slight lead by 0.6%
2012 March - dead heat, 0.07% difference
2013 August 7 - fundamental slight lead by 0.6%
2013 Year-end - fundamental slight lead by 0.8%

Both portfolios performing well
The fundamental portfolio value is up 37.9% since June 2010 inception to $137,901. The cap-weighted portfolio has risen 36.8% to $136,821. This is the largest difference since the start. The plunging Canadian dollar has given a boost to both portfolios since the last update in August.

More idle cash from cap-weighted portfolio
The latest year-end distributions from the various cap-weight ETFs have been a fair bit more than what the fundamental ETFs generated. This is despite the fact that the Canadian equity cap-weight ETF, the Horizons HXT, makes no distributions at all due to its construction as a swap. Whether the higher cash distribution is due to the higher MERs of the fundamental ETFs chewing up cash or is caused by the portfolio holdings with different dividends I cannot tell. In the meantime though, the cash sits idle, not invested, which is not the objective of the portfolio. By June, there should be enough cash to justify reinvestment and rebalancing purchases, considering trading costs, as stated in the rules set out for the portfolios at start-up. None of the holdings is currently beyond the policy limit of one quarter away from its target weight that would force immediate rebalancing.

Developed and Emerging equities will determine the winner?
Google Finance charts show that, up to now at least, the Canadian and US battling ETFs seem to track each other quite closely. It's the developed and emerging market equity ETFs that seem to follow much more different paths of ups and downs. Witness this chart of developed market ETFs VEU vs PXF since our portfolio launch.

Compare that to PRF and VV for US large cap equities.

The contest continues.

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