# Why I don't buy index funds



## Bupp (Nov 13, 2009)

People buy index funds because they say that it is impossible to consistently outperform the market. While there is a lot of truth to this statement, it ignores an important reality. It is very inexpensive to purchase a portfolio of stocks that is representative of the index.

Let us assume that the tsx 60 will earn 10% a year for the next 40 years and we are able to buy $10,000 worth of it each year. At the end of the 40 years it we will have $4,868,518.

Most people assume the best way to capture that 10% A year is to buy index funds. Using the low cost option of XIU which charges a 0.17% management (and assuming no tracking error) our $10,000 annual investment will grow to only $4,641,697.

For the service of giving us a portfolio that replicates the tsx 60 we have payed over $225,000 during our investing career.

Furthermore, during year 41 we will be paying $7,890. Ouch!

So what is the alternative?

*To keep costs to a minimum, an investor should invest in a no load index mutual fund until they have enough assets to purchase 100 shares of index etf. Once they have enough of the index etf to purchase the representative market (right now ~250k for tsx 60) they should sell their index funds and purchase the broader market.*

Your thoughts?

*Coles notes/tl;dr* - _if you invest 10k a year for 40 years at 10% indexing costs you $225,000 and $8,000+ per year during retirement. Why not just buy the stocks directly._


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## Jon202 (Apr 14, 2009)

I love the part about "will grow to *only*" 4.6 million. Eek! Cat food and Sally Ann for you!


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## Bupp (Nov 13, 2009)

Haha, so true. I guess the point I'm making is that index funds are great for small portfolios. But once you are over a certain size invested in an asset class (I would argue 100k though could see 250k also being reasonable) they no longer make sense.


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## Jungle (Feb 17, 2010)

Bupp said:


> So what is the alternative?


Go with HXT, 0.07%.


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## Jungle (Feb 17, 2010)

Your example is extreme in that it's unlikely that the average person will invest 10k a year for 40 years straight, and walk around with 4.6 million in retirement fund. 

Most people now are in their 20's with debt and can't even get a job after finishing school. So how they invest 10K a year starting in their 20's would be rather difficult. 

You've calculated your XIU on a 40 year cost, when it doesn't makes sense to start out with ETF's until you have at least 25-50K. For some, it may take 10 years to to reach that level.

If you have 4.6 million, does an extra 200k really matter? Does that really add additional quality to your life when you can already live a luxury retirement?


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## Jon202 (Apr 14, 2009)

Do you really believe someone with a 7 figure portfolio is concerned about 1/10th of %? They're probably paying a high networth advisor much higher than what ETF MERs are.


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## OptsyEagle (Nov 29, 2009)

I would focus on more important factors then the very small fee you are referring to. The dollar value of your costs (and I have not verified your math) is only large because of the large portfolio size you are using. 

Most people don't just plunk down a fixed amount and leave it for 30 years. They add to it, withdraw from it and of course make changes to their plan. ETFs will make this a lot less costly and cumbersome then individual stocks.


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## larry81 (Nov 22, 2010)

you know its getting crazy when people are concerned paying >0.20% MER when the majority of investors are paying 2.5% MER...


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## Belguy (May 24, 2010)

I am a simple man. Some might even say that I am a lazy man. Others may call me a cheapo.

Thus, I like to make one investment to track a given index and another to track a different index up to maybe a half dozen low fee, broad based ETF investments in total.

Then, I just like to hold them forever aside from rebalancing when required.

I consider the relatively small fee to be worth it in order to be properly diversified domestically and internationally.

Not to wish to sound flippant about it, but the rest of you can go about investing any way that you want and we will meet to compare results fifty years from now!!

Oh, and in the meantime, you'll find me on the 'Easy Chair' while you're doing all of your 'due diligence'.


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## Greyhound86 (Feb 21, 2010)

When I saw the title of this thread, I thought of one thing: * Nortel*


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## larry81 (Nov 22, 2010)

Greyhound86 said:


> When I saw the title of this thread, I thought of one thing: * Nortel*


Same thing here...


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## Jungle (Feb 17, 2010)

What would it cost to buy every share in VTI, VWO, VEA and XIC? (other than a big headace)


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## Assetologist (Apr 19, 2009)

*Cost of Doing Business*

Each and every business has a annual cost to conduct the business. The mer you use in your example is actually quite low especially if that is your business's only real overhead.

Consider altering your viewpoint - investing is your business. Create a business plan, mission statement, financial statement, policy etc and then compare your 'costs' to other businesses.

PS 
I buy individual stocks and target a buy cost of < 0.01% whenever possible but I am in the process of setting up a low-cost core ETF portfolio.


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## Four Pillars (Apr 5, 2009)

Bupp said:


> It is very inexpensive to purchase a portfolio of stocks that is representative of the index.


I disagree. In terms of trading costs and the time costs (I value my time very highly), it is way more expensive to buy and maintain/rebalance a portfolio of ~60 stocks to replicated XIU.

What if you wanted to do XIC or VTI or VWO or VEA? Mmmmm?


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## larry81 (Nov 22, 2010)

Jungle said:


> What would it cost to buy every share in VTI, VWO, VEA and XIC? (other than a big headace)


even using a cheap 5$ brokers, it cost way to much... As an example, VTI has 3389 holdings...


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## CanadianCapitalist (Mar 31, 2009)

Replicating an index on your own isn't very easy especially if you are adding money regularly to the portfolio. XIU's expense is 0.17%. Let's say you are paying $10 per trade. Just to replicate XIU's 60 stocks, you need to have $352,941 in Canadian stocks alone. More importantly, you have to live with some tracking error because you won't be able to perfectly mirror the index weights with this relatively small portfolio.

As other have noted unbundling an index is worthwhile in some cases: the REIT index, for instance. I don't see it being worthwhile in the case of XIU.


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## Bupp (Nov 13, 2009)

Talking about XIU again, the biggest 10 holdings are almost 50% of the funds assets. Why not just buy those 10 stocks directly. 

Conversely, the 10 smallest holdings are only 3.64% of assets. That 3.64% is not going to have a major impact on your returns.

Indexing has more problems then just the management fees...Index investor's get front run whenever there is a new addition to the index and for market-cap weighted indexes end up holding too much of past winners and not enough of past losers meaning that when markets mean-revert to the long term trend they get kicked in the nuts.

I get the whole idea that pro-managers are going to in aggregate underperform the stock market by the amount of their management fee. However, the same argument applies to index funds.

Why not just buy the stocks directly. Sure your holdings are no longer market cap weighted, but this is probably a good thing. Why does it make sense for an xiu investor to have an investment in royal bank that is 25 times greater than their investment in yellow media.

Sure you would need to rebalance periodically, but really your holdings would have to get really unbalanced to be as unbalanced as xiu is (you'd need a 5 bagger in a stock + a loss of 80% in a stock to approach the 25x royal/yellow media ratio.


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## humble_pie (Jun 7, 2009)

but CC as argonaut has said, one shouldn't buy an entire index, one just wants to buy some of the better stuff. And be happy to leave the losers behind.

indexes themselves follow the better stuff rule. They regularly shed weak components & add strong newcomers. An individual investor can narrow down & refine this process imho.


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## Jungle (Feb 17, 2010)

Well, you would not be properly diversified with just holding stocks from XIU. So how much would it cost, and how much time in your life would it take to manage stocks in XIU, VWO, VEA, VTI?


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## Bupp (Nov 13, 2009)

For more re: why owning the index is bad check out page 5 of this article.

http://www.itg.com/news_events/papers/sandpindexchange.pdf

In particular, this section:

"symbols added to the S&P 500 tend to gain 8.5% between the announcement and the rebalancing date, while names deleted from the S&P 500 index tend to decline by 11.7%.2 Most of these price changes tend to reverse over the next year following the rebalancing. In the case of the deletes, the rebound is much more rapid, occurring within 1-2 weeks of the
rebalancing."

what this is saying is that when a stock is added to the index, the index is overpaying by 8.5%, when the stock is deleted, it gets sold for 11.7% less than it is worth. In the case of overpaying, the loss on average takes about a year. In the case of selling, the price regains it's 11.7% loss within 10 trading days.

*This front running cost is a cost of indexing which is over and above the MER of the fund. It is a significant cost over longer periods of time.*


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## Argonaut (Dec 7, 2010)

humble_pie said:


> but CC as argonaut has said, one shouldn't buy an entire index, one just wants to buy some of the better stuff. And be happy to leave the losers behind.


That's right, you wouldn't be buying the whole TSX 60, just enough to be diversified. If you're going individual stocks, no sense in loading up on all six banks in the index. I think CC himself even advocated selling Royal and buying TD in December if it meant getting a tax loss without really changing your investments. They are similar stocks unless news comes out or earnings are released. And of course there are some stocks in the index, like Yellow Media, that I wouldn't want to touch at all.

An example portfolio:

TD Bank
Tim Hortons
Suncor
CN Rail
Goldcorp
Potash
BCE
Fortis
Research in Motion
TransCanada

I mean, what sector am I missing here, with this 10 stock portfolio? I like MacDonald Dettwiler better than RIM for high tech, but alas, it's not in the TSX 60. This is just an example anyways, and not investment advice. Although I'm sure one would do just fine with it.

A key point here is that the MER of an ETF is not the only reason some choose not to track an index. There are others, including avoiding owning a stake in something you know to be a poor investment. If you don't have time to research these things now and then, by all means track an index. But seeing as how people got here by their interest in investing, this discussion is certainly food for thought.


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## Mike59 (May 22, 2010)

Argonaut, 

The bigger picture problem here is that picking the top holdings still involves stock picking. If one is looking for the best return possible, stock picking has failed to exceed indexing in most good financial research studies. 

A hand picked "top 10" fund is no different than the dividend mutual funds that are out there. My question to you is, how/when would you plan to rebalance and allocate funds to each of those stocks, and in what proportion? When would you ditch or add new stocks as the index evolves? 

It the human-error factor that indexing takes out of the equation, and improves returns dramatically.

In a "pick the top 10 holdings approach" there is certainly an advantage over mutual funds and index funds as you skip the MER, but even then, mutual fund managers often fail to beat the index by a much larger margin than the MER. What makes you think you can do better at this than those who pick stocks for a living? 

I guess it depends on your objective, there may be a fun factor in this, but indexing statistically puts you in a better place to make money


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## humble_pie (Jun 7, 2009)

isn't it comical how the generals of the 2 opposing armies in the 30 years war between the Indexers & the Stock Pickers always wind up chuffing about their statistical studies.

good financial research studies prove that ... (no citation)

every academic research study shows that ... (no citation.)

then the Index sharpshooter fires his killer argument that goes What.Makes.An.Ignorant.Pipsqueak.Like.You.Think.You.Can.Beat.The.Index.

and the Stock Picker swat team replies with a salvo of daring stock choices & shouts of Warren.Buffett.Eric.Sprott.Ira.Gluskin.


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## Jon_Snow (May 20, 2009)

My time is as valuable to me as money - therefore I choose to index. 

And I'm honest enough to admit that I don't know enough to pick individual stocks.


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## Jungle (Feb 17, 2010)

humble_pie said:


> and the Stock Picker swat team replies with a salvo of daring stock choices & shouts of Warren.Buffett.Eric.Sprott.Ira.Gluskin.


And then Warren Buffet, the richest man in the world with like 66B net worth (before giving to charity), most successful investor, states this aloud on youtube:

http://www.youtube.com/watch?v=e_WF1NhSGIc

Basically he said:
"Average investors should buy low cost index funds. The last thing they should do is buy and sell stocks"


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## humble_pie (Jun 7, 2009)

notice he said institutional investors.

he didn't say individual investors.


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## humble_pie (Jun 7, 2009)

"most institutional investors are closet indexers."

who said that.


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## Jungle (Feb 17, 2010)

humble_pie said:


> notice he said institutional investors.
> 
> he didn't say individual investors.


He's referring advice to "the average investor." not institutional. I quoted him wrong in the initial post, I meant to put "individual" investor.


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## humble_pie (Jun 7, 2009)

a good journalist never quotes wrong.

my portfolio speaks the quotes i pay the most attention to. It's broad-based, strong, secure. Held in 3 currencies, which together form a natural hedge.

net, meaning with all income, dividends, interest & distributions stripped out, it's up approximately 20% since august 2008, just prior to the global crash. XIU by contrast is down a percentage point or 2 from the same date. So are most other broad index etfs.

owning index funds often means treading water. Many broad-index etfs have not budged, year-over-year, for several years. It's possible to enhance the return by market timing or by selling options against a very liquid etf. Of the 2 choices, the latter is by far the less risky when in the hands of a good option trader, imho.

to slightly mis-quote another saying:

them as can, do
them as can't, index.


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## atrp2biz (Sep 22, 2010)

What is a "natural hedge"? If one's currency exposure does not match the currency of the expected draw/spending, there is a mis-match.


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## Sampson (Apr 3, 2009)

humble_pie said:


> isn't it comical how the generals of the 2 opposing armies in the 30 years war between the Indexers & the Stock Pickers always wind up chuffing about their statistical studies.
> 
> good financial research studies prove that ... (no citation)
> 
> ...


so true.


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## CanadianCapitalist (Mar 31, 2009)

humble_pie said:


> them as can, do
> them as can't, index.


The list of them that can is really short. Them that can't is really, really long. Check out DALBAR study of investment returns to see how investors in mutual funds fare. For research into individual investors trading stocks, check out research by Terrance Odean (odean.org). Morningstar's studies into dollar-weighted returns shows investors consistently under performing mutual fund time-weighted returns.


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## andrewf (Mar 1, 2010)

The law of conservation of alpha (please, I'm only joking) states that as a system, we can't all be above average. For some people to capture alpha, others need to lose it. It's a zero sum game. So everyone who underperforms is better off indexing. If they all index, the remaining non-indexers will necessarily have to be split between those who capture alpha and those who lose it. There are certainly problems with indexing, and there will always be room for active investors who have inside knowledge (borderline or not so borderline insider trading), who play inefficient markets, who bet against irrational exuberance, or who arbitrage index insertions and deletions. But a large cohort of those who try will necessarily fail, for those who win to get anything.

You can try your odds against the hedge fund managers in that casino game where the odds tend to be stacked against you for a variety of reasons, or you can refuse to play the game and index instead.


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## humble_pie (Jun 7, 2009)

ooooh the border wars are raging fierce today.

CC you recently won first prize in a national media stock-picking contest, did you not, so my money suggests that you are a deep-in-the-closet Picker & possibly even a potential turncoat from the Index forces ...

now le petit caporal in the elite Index artillery hauls up his antique brass cannon & fires off his usual solitary blast. As the cannonball flies towards the hooting Pickers it trails a banner that reads This Devastating Message Brought To You By The All Star Casino Hedge Fund Players. The Pickers snicker as the cannonball lands uselessly in a field of oats beyond the mud-soaked battlefield.


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## CanadianCapitalist (Mar 31, 2009)

humble_pie said:


> CC you recently won first prize in a national media stock-picking contest, did you not, so my money suggests that you are a deep-in-the-closet Picker & possibly even a potential turncoat from the Index forces ...


Sorry to disappoint you humble. I'm no Benedict Arnold of indexing. The bulk of my portfolio is in index funds. 

Yes, I participate in stock picking contests -- they are not serious and for fun mostly. I also lose badly. Last year, I can in 375/425 in Claymore's summer etf contest.


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## Belguy (May 24, 2010)

You are never going to stop some people from buying lottery tickets and you are never going to stop some investors from trying to outsmart the market indexes over the long term.

That said, the odd person does beat the odds and wins the lottery and some individual stock pickers do overcome the odds and outperform the indexes, long term.

It's called pure luck because skill alone won't be enough.


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## Jungle (Feb 17, 2010)

For the entertainment of this thread, and to support index investing, he's some quotes from some of the smartest and most famous investors: 

(includes Benjamin Graham, Peter Lynch, Burton Malkiel, etc)

http://www.youtube.com/watch?v=4JDbmh99ZwM


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## Bupp (Nov 13, 2009)

If you picked your stock investments out of a hat you would be equally likely to pick a portfolio that outperformed or underperformed the index.

If you did this each year for 25 years, the years you got lucky picks would be offset by the years you got unlucky picks.

Over the course of your investing life you would have returns that approximate that of the stock market.

But you would have saved moneys on fees.

Not being able to beat the market is very different then automatically losing to the market..


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## andrewf (Mar 1, 2010)

There are fees associated with picking, too. I think you should do more reading on random walks if you assume random stock picking will on average match the market. If you hit zero you lose, like the gambler playing roulette. You lose your last dollar and the casino tosses you out.

I'm not saying that it's impossible for stock pickers to beat the market. I'm saying that it isn't easy and that the majority those who try, necessarily lose.


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## Square Root (Jan 30, 2010)

Interesting discussion. I agree that most people would be better off indexing. However, if you are a Canadian dividend investor I think you can pick your own equities and do quite well for these reasons: 1) ETF' fees are high in Canada in relation to dividend yields, 2) the universe of high quality Cdn dividend payors is relatively small. Why would I give a large proportion of my dividends away in fees? I really don't care if I beat the market. Just want my dividends. Granted diversification may be an issue but I don't think it would be worth the fees in this case. Maybe a bit like hiring a guy to buy GIC's for you then giving him 15% of your interest.


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## HaroldCrump (Jun 10, 2009)

Bupp, obtain a copy of the book "Winning the Losers Game".
I think you will find it quite enlightening.
Using a lot of common sense arguments and statistical data, the book re-inforces the message that for the majority of individual investors, passive, index based investing provides the best chance for success.

Note that I said _for the majority of individual investors_.
Do you have reason to believe, or past returns data, to prove (to yourself) that you are among the very small minority that can beat passive index based investing year-after-year?

Also, note that I said _best chance_ of success.
Sure, you can pick a penny stock that becomes a ten bagger and earn you hundreds of thousands within a short period of time.
But what is the probability of that happening?


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## humble_pie (Jun 7, 2009)

there is something that i am not getting, probably because i'm only a lump of pie dough.

but an index is an index, right. A simple index is just the median, right.

if so, half the players more or less have to be ahead of the median, right.

??

so what's all this constant refrain from so many folks in this forum about "the very small minority that can beat passive index based investing."

the way i see it, half the players have an excellent chance of besting the mediocre, and their chances are improved if they stay fit & focused.


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## I'm Howard (Oct 13, 2010)

No Fund consistantly beats an Index, neither does a fund Manager, and many Funds change managers, so you may be betting on the Horse, but they may change the jockey.

The annual MER'alone work for the index, and it is a Hare and Tortoise thing.

Not all indices are the same, that is why I own EWC and not XIC,CDZ and not XDV.

I always chart an index against its peers before I buy.


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## warp (Sep 4, 2010)

humble_pie said:


> there is something that i am not getting, probably because i'm only a lump of pie dough.
> 
> but an index is an index, right. A simple index is just the median, right.
> 
> ...



Humble:

What you are missing here is the high mer's that mutual funds charge, and the trading costs and taxes of constantly buying and selling, even for an individual trader.

The thoeory is that most money managers, fund managers, and people will NOT, (especially over any extended period of time ), beat an index AFTER costs.

Simple


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## CanadianCapitalist (Mar 31, 2009)

humble_pie said:


> the way i see it, half the players have an excellent chance of besting the mediocre, and their chances are improved if they stay fit & focused.


That's true only if market participants trade for free and incur no other expenses. In reality they do and the higher the turnover, the higher the costs. That's why the majority of investors trail the indexes.

Index investors incur costs too but by keeping costs down they aim to keep as much of the index returns as possible.

The best explanation of this I've seen is found in the 2005 Berkshire Hathaway letters to shareholders starting in Page 18:

http://www.berkshirehathaway.com/letters/2005ltr.pdf


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## Four Pillars (Apr 5, 2009)

humble_pie said:


> there is something that i am not getting, probably because i'm only a lump of pie dough.
> 
> but an index is an index, right. A simple index is just the median, right.
> 
> ...


A good point.

There are two factors that should be considered:

1 Fees 

As I recall, when actively managed mutual funds are measured based on gross performance (not counting fees), their results were similar to what you mentioned - half above/half below. 

When fees are included, they bring down everyone's results - especially high cost mutual funds. Suddenly instead of trying to pick from the top 50% of performing funds, you need to pick from the top 20% (or whatever) in order to beat the index.

2 Continuity

Various studies (which are referenced in Four Pillars and Random Walk) show that there aren't enough top performers in any quarter or year, that stay top performers. This makes it extremely difficult to pick a fund that will outperform for any length of time.

The argument that passive investing can't be beat, seems to be mostly applied to active mutual funds.

Individual investors who can keep their costs low (ie dividend investors with larger portfolios) can ignore the fee issue. They are on a level playing field and should be able to compete with the index or passive alternatives. 

Logically (to me at least), if you monitored a pile of active, low cost investors, I would think that you would find roughly half will beat the index in any given time period and half that will underperform.

Continuity will certainly be an issue as with any type of investing. My theory is that over time, most active (and low cost) investors will find their returns approaching the index.

If you do have the ability to outperform the market, I guess the last step is to determine if it is worthwhile to do so. If you really enjoy picking stocks then the $$ reward doesn't really matter. For others - spending 100 hours per year to beat the index by 2% with their $40,000 portfolio might not be a good use of their time.


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## humble_pie (Jun 7, 2009)

square root have you observed how your banks, pipelines etc held in outright ownership return far better than any dividend fund on the planet. And by more than just the mer. There's something about a combined structure of div payors whether it's a fund or an etf that acts like a black hole.


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## HaroldCrump (Jun 10, 2009)

humble_pie said:


> there is something that i am not getting, probably because i'm only a lump of pie dough.
> 
> but an index is an index, right. A simple index is just the median, right.
> 
> ...


HP, your statements are right _for any given year_.
Someone, somewhere is always beating the index.
The question is whether the same person (or manager) do it consistently every year - year after year.

Others like CC and FP have also pointed out other aspects of the issue, such as fees, etc.

I am personally not religious in this matter either way.
I don't consider those that index as not having investing skills.
Similarly, I don't draw swords against those that pick stocks and trade at some level of activity.
I'm doing both myself - part of my assets are in mutual funds, index and actively managed.
I also invest on my own.
Over time, I plan to consolidate the mutual funds into a single portfolio or passive index investing, while building up a self-directed portfolio as well.


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## andrewf (Mar 1, 2010)

Beyond that, we have the difference between buy-and-hold pickers and more active pickers. A lot of buy-and-holders are basically what you could call closet indexers and will get returns pretty similar to the index. The more active investors/speculators tend to do very poorly indeed. Various studies of retail investors who try to speculate, market time, etc. (ie, everything but buy and hold) show that these investors, in aggregate, tend to trail the index by whopping margins--on the order of 3, 4, 5 percentage per year. Some of that ends up in the pockets of brokerages. But a lot of that is alpha that is captured by hedge funds and institutional investors who take advantage of the irrational behaviour of retail investors who love to buy high and sell low, chase returns, play penny stocks, etc.


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## humble_pie (Jun 7, 2009)

harold a mixture of passive etfs & self-picked individual stocks is indeed a strong combo as you say, now add some OTM option sales & a definite sizzle begins.

in etfs all i have are xiu & xgd. I will only buy highly liquid etfs w liquid option markets. I just looked up my xiu history, something i've never thought much about because i've never sold any. I bought this etf in june 2001 at 11.30 taking the 2008 4/1 split into consideration. Today xiu is pushing 20. These are the raw figs, not including the 12.00 or more that the underlying has spun out over the course of a decade in assorted distributions & sales of call options. This is a pretty good record imho.

however, xiu's recent record, just since 2008, has not been nearly as good as my own. I reckon, although i am not sure, that this may be due to the preponderance of banks & financials in the tsx top 60; and these were so crippled by the crash of 08/09 that they've only recently regained their lustre. Myself i was more heavily into buying energy stocks starting in january 2009.

what i like about xiu is a bondlike characteristic, in that, somewhat like government treasuries, xiu will never go bankrupt. In that respect xiu is more secure than nearly all corporate bonds. It's more volatile than bonds, of course, but the volatility is all the better for selling the options.


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## Belguy (May 24, 2010)

Very few 'professional' managers beat the indexes on a consistent basis and they charge you dearly for trying.

I may not have mentioned this before, but the best strategy for the average investor is to simply purchase the lowest fee, broadest based ETF in each of the categories in your asset allocation and then just hold them forever aside from periodic rebalancing when required. Four to six ETF's should be plenty to provide you with lots of diversification.

Simple, cheap, and boring!!

On the other hand, if you crave more excitement in your investing, and wish to go another way, may I wish you the best of luck when we compare our long term results down the road sometime. 

Another idea is to invest the majority of your portfolio as mentioned and then set aside a small separate amount for play money to try to satisfy your human like urges.


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## humble_pie (Jun 7, 2009)

ah, the belguy. Is there a financial platitude anywhere in the universe that does not know his name.

belguy did you know your name means handsome guy.

sometimes i wish it were beau-gars-sans-un-seul-mot.


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## zylon (Oct 27, 2010)

ahhh yes ... those pesky "human like urges".

sometimes i wish i were a robot
.
.
.
*NOT*


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## Jungle (Feb 17, 2010)

humble_pie said:


> harold a mixture of passive etfs & self-picked individual stocks is indeed a strong combo as you say, now add some OTM option sales & a definite sizzle begins.
> 
> in etfs all i have are xiu & xgd. I will only buy highly liquid etfs w liquid option markets. I just looked up my xiu history, something i've never thought much about because i've never sold any. I bought this etf in june 2001 at 11.30 taking the 2008 4/1 split into consideration. Today xiu is pushing 20. These are the raw figs, not including the 12.00 or more that the underlying has spun out over the course of a decade in assorted distributions & sales of call options. This is a pretty good record imho.
> 
> ...


What's interesting, is that XIC, has out performed XIU in the last couple of years. I think last year alone, XIC returned 5% more than XIU. 

In this case, holding the entire index out performed holding 60 of the largest caps. 

Keeping this on topic, that could show how just buying the major players as stocks and building your own index will not out perform the benchmark.


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## Square Root (Jan 30, 2010)

humble_pie said:


> square root have you observed how your banks, pipelines etc held in outright ownership return far better than any dividend fund on the planet. And by more than just the mer. There's something about a combined structure of div payors whether it's a fund or an etf that acts like a black hole.


Interesting. I haven't really looked at the yield of a dividend ETF. But I have to figure they would not be as tax efficient not to mention the fees. More diversified for sure but maybe it's" deworsification"?


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## Bupp (Nov 13, 2009)

I still feel strongly that if you merely want to match the stock markets performance it is cheaper to buy the tsx 60 stocks directly then it is to use xiu. Yes you will not exactly own the index, but your results will be good enough.

I love how the indexers in this thread feel like if someone is not indexing they are going to put all their money into a nortel or aig. Just because someone is not indexing does not mean that they are not diversified. If you own 20-30 different stocks then buying nortel is less drastic an impact then if you had owned xiu when nortel was over 10% of the index.


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## andrewf (Mar 1, 2010)

Depends on the size of your portfolio. The MER on a $100,000 investment in XIU is ~$170 per year. That's $2.83 per holding (@ 60 holdings) If your commissions are $10 per trade, that means if you trade each security once every 4 years for rebalancing, reinvesting dividends, withdrawing cash for consumption, or for insertions/deletions, you'll be just matching the costs associated with XIU. Scale that up to $500,000, and you're looking at a trade every 10 months at least. Just to break even. Never mind that all this requires a fair bit of your time and effort to monitor. 

Do it if you want. I doubt it's a good use of your time to create your own index fund.


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## humble_pie (Jun 7, 2009)

_" I love how the indexers in this thread feel like if someone is not indexing they are going to put all their money into a nortel or aig."_

so true.

and it gets worse. Upthread is a post where we are warned that the " more active investors/speculators tend to do very poorly indeed."

next we are reproached that " various studies of retail investors who try to speculate, market time, etc.... show that these investors, in aggregate, tend to trail the index by whopping margins--on the order of 3, 4, 5 percentage per year."

in case we are not yet sufficiently traumatized by having lost our annual 3, 4 or 5 %, we are scolded that non-indexers are exhibiting " the irrational behaviour of retail investors who love to buy high and sell low, chase returns, play penny stocks, etc."

direst of all is an earlier message where stock pickers either get lumped in with criminal insider traders or else they are pathetic victims of cunning hedge fund managers.

life, it seems, offers only 2 choices to DIY investors. One is indexation. The other is gambling in a casino.


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## OntFA (May 19, 2009)

Unbundling Canadian ETFs 2008



> When it comes to ETFs I like to consider two options for long-term investors. The first option is to purchase the ETF and hold on. The second option is to bypass the ETF and buy the stocks that it owns. At first glance, the choice between buying a low-cost exchange-traded fund that holds many stocks or buying each individual stock appears to be obvious. The exchange-traded fund is likely to be the better bargain. However, buying stocks directly may be a good choice for some investors because the Canadian stock market is very small and it is dominated by a few big names. By holding only a few stocks you can reasonably approximate, or even fully replicate, some ETFs.


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## kcowan (Jul 1, 2010)

If all you are managing is $500k or less, maybe ETFs are the answer because you can get decent diversification and easy rebalancing. But if you plan to have a portfolio of several million, you need more than ETfs IMHO.


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## Larry6417 (Jan 27, 2010)

kcowan said:


> If all you are managing is $500k or less, maybe ETFs are the answer because you can get decent diversification and easy rebalancing. But if you plan to have a portfolio of several million, you need more than ETfs IMHO.


Not necessarily. Many institutional investors hold ETFS; however, large investors can take advantage of lower MERs e.g. XIU lowers its MER to 0.1% from 0.17% if the holdings are large enough. Also, institutions may write options on the ETFs or take advantage of arbitrage opportunities.


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## andrewf (Mar 1, 2010)

humble_pie said:


> _" I love how the indexers in this thread feel like if someone is not indexing they are going to put all their money into a nortel or aig."_
> 
> so true.
> 
> ...


I'm flattered.


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## andrewf (Mar 1, 2010)

And I'm not a doctrinaire indexer or buy-and-holder. I can see cases where it makes sense to hold individual securities--you just need to have a strategy that has a good chance of beating the index on a risk-adjusted basis. Trendfollowing seems to work, for instance. Most of the time, for most of the people, indexing will probably land them further ahead. I don't see why that's a controversial point.


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## humble_pie (Jun 7, 2009)

jungle i don't really pay attention to a one or 2 year return for XIU. It's part of a core group that i hold forever, while continuously selling options above & below its market price. This is a good way imho to increase the return from a conservative holding.

an investor with this strategy requires highly liquid etfs or stocks with liquid option markets. The problm with XIC is that its options are so few they are not worth bothering about. XIU on the other hand is one of the few canadians whose options are acceptably liquid, with significant open interest in most classes & series.

XIC looks a smidgen better on the 10 year charts, but XIU plus options will always return far more to the investor.

XIU's current dividend payout is also slightly healthier than XIC, as would be expected. One should take note that XIC is coming off 2 years of stellar gains in resource stocks many of which have unstable dividend histories but are able to increase, and do increase, their dividends during boom years only. These are boom years now, so XIC's dividend yield is relatively high, but any serious downturn in global demand could put the dividends of smaller companies at risk. Meanwhile dividends for senior stock holder XIU would tend to be more stable.

all these factors being considered there are actually disadvantages for myself in holding XIC ... everyone must find their own way, right.

" let a hundred flowers bloom;
" let a hundred schools of thought contend."

jungle do U know who said that.


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## Jungle (Feb 17, 2010)

humble_pie said:


> jungle i don't really pay attention to a one or 2 year return for XIU. It's part of a core group that i hold forever, while continuously selling options above & below its market price. This is a good way imho to increase the return from a conservative holding.
> 
> an investor with this strategy requires highly liquid etfs or stocks with liquid option markets. The problem with XIC is that its options are so few they are not worth bothering about. XIU on the other hand is one of the few canadians whose options are acceptably liquid, with significant open interest in most classes & series.
> 
> ...


No but I googled it and it's something chinese, 
http://en.wikipedia.org/wiki/Hundred_Flowers_Campaign

I don't really understand it to be honest. 

To comment in the index funds, it's only really been the last couple years as you said because resources have gains so much, the entire index has seen gains over the large 60 caps. 

Overall a longer period of time, most agree with the performance of the past that XIU is ok, equal or a tiny tiny bit better, compared to XIC. (the entire index) 

As you mentioned, you are not getting the losers in the past with XIC, but maybe this time, the small caps have expanded and provided the XIC index with more return. 

The conversation could go on and on.. you could say (mention up thread by OP ) that just owning a few large cap bank and railways (instead of owning the index) will do the trick. 

This thread was about buying the index or like 10 of the biggest stocks or the entire 60 large caps in xiu and saving the mer. 

For most, your portfolio dollar value must be pretty large to do this and is not realistic of an average investor. 

I would say the options you mention is not something carried out by an average investor, however if there is a good option on price and you are knowledgeable to make the transaction, I don't see why not.


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## Bupp (Nov 13, 2009)

Humble, I agree that an option writing strategy on an index like xiu is likely to outperform a mere buy and hold.

Perhaps I should have titled the thread "Why I don't buy and hold index funds".


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## cannon_fodder (Apr 3, 2009)

Bupp said:


> For more re: why owning the index is bad check out page 5 of this article.
> 
> http://www.itg.com/news_events/papers/sandpindexchange.pdf
> 
> ...


No. What this is saying is short a stock that has been announced it will be added to the S&P index and buy a stock that has been announced it will be deleted from the index.


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## andrewf (Mar 1, 2010)

Good point. Second order arbitrage opportunity!


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## Bupp (Nov 13, 2009)

Cannon Fodder, 

You got it backwards.

You buy a stock that has been announced it will be added to the index. Once it is added you then sell it or short it.

You sell a short a stock that has been announced it will be deleted. Once it is deleted you go long.

EDIT: There are many investment funds that use this strategy which is what creates the price action in the first place.


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## emerythomas23 (Feb 8, 2011)

Is it safe doing intraday ? Because one of my friend got a big loss in it, So I was little concern about it.


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## cannon_fodder (Apr 3, 2009)

Bupp said:


> Cannon Fodder,
> 
> You got it backwards.
> 
> ...


I've not written it down, but I've noticed that by the time the announcement is made a good portion (most?) of the gains/losses have been made. Thus, I was pondering if it's better to wait for the reversal - especially on the stock that has been deleted since that, apparently, only takes a couple of weeks.


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## OntFA (May 19, 2009)

cannon_fodder said:


> I've not written it down, but I've noticed that by the time the announcement is made a good portion (most?) of the gains/losses have been made. Thus, I was pondering if it's better to wait for the reversal - especially on the stock that has been deleted since that, apparently, only takes a couple of weeks.


The way hedge funds and arb traders profit from index changes and reconstitutions is is by studying index construction methodologies, inclusion and exclusion criteria, etc. so that they can anticipate inclusions and exclusions and take a position prior to announcements.

Then when index funds/ETFs and other benchmark-tracking pools of money implement the hedge fund can benefit from buying or selling pressure. And since index funds and other pools of money tracking an index want to minimize tracking error, they generally won't make changes before index announcements since doing so will create more tracking error, which they don't want to do. So, to the extent that you can anticipate changes you can potentially make some trading profits.


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