Motif Investing - own the S&P500 for less

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Tanelorn
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Motif Investing - own the S&P500 for less

Post by Tanelorn »

SPY, VOO, and Vanguard's S&P500 fund are very cheap at 0.05-0.10% ER, but could it be cheaper to just hold all the stocks yourself? Thanks to Motif Investing, a gimicky upstart brokerage where buying 30 stocks at a time only costs $9.95, this may be more practical than it has been for normal investors and especially those buying for the long term. Here I try to include all the explicit and hidden costs of owning the S&P500 vs directly owning the components. In general, these costs will include:

Commissions for buying ETF/fund/stocks (twice, buy and sell)
Spreads for buying ETF/stocks (once, or half when bought and half when sold if you prefer)
ER for holding a fund/ETF (annually)
Turnover costs of fund/ETF(?) (annually)
Securities lending revenue (annually)
Tax loss harvesting opportunities (ongoing)

VFIAX - Vanguard S&P500 Fund, Admiral Class
Commission: $0 at Vanguard
ER: 0.05%
Turnover: 3.4% annually, so 0.034% estimated trading costs (1)
Spreads: none
Securities lending: 3.23% of fund ER, so 0.0016% benefit (5)
TLH: very limited (4)
Total costs: 0.0824% (each year)

Vanguards S&P500 ETF, VOO
Commission: $0 at Vanguard
ER: 0.05%
Turnover: none (I think these costs are offloaded to the APs for an ETF)
Spreads: 0.01% (6)
Securities lending: not allowed for this ETF, I think (5)
TLH: very limited (4)
Total costs: 0.01% fixed and 0.05%/year

The 500 stocks via Motif Investing
Commissions: 17 Motifs with 30 stocks each (510, the "500" has 503 last I checked). $169.15 to buy, same to sell. $338.30 total.
ER: none
Turnover: none (3)
Spreads: 0.032% (2)
Securities lending: none
TLH: very high (4)
Total round trip costs: 0.032% + $338.30 (all fixed)

So let's say you have $100k to invest in a large cap fund for the next 10 years and then you'll sell everything. Assume further that the stock market appreciates at a 7% annual return. Your total costs before TLH benefits for various time frames are:

Code: Select all

Future Value
years fund	        etf	      stocks	free
5	 $139,716 	$139,914 	$139,804 	$140,255 
10	$195,205 	$195,778 	$196,182 	$196,715 
20	$381,052 	$383,330 	$386,083 	$386,968 
30	$743,834 	$750,551 	$759,647 	$761,226 

Costs (in future dollars)
years  fund  	   etf	    stocks	free
5	   ($539)	    ($341)	   ($451)	$0 
10	($1,510)    	($937)      ($533)	$0 
20	($5,917)  	($3,639)	   ($886)	$0 
30	($17,391)	($10,674)	 ($1,578)	$0 

Costs relative to holding stocks (% of future value)
years  fund	etf	    stocks
5	 -0.06%	+0.08%	0.00%
10	-0.50%	-0.21%	0.00%
20	-1.32%	-0.72%	0.00%
30	-2.13%	-1.21%	0.00%

Annual % savings with stocks (= costs difference as % of future value / years)
years fund 	etf	   stocks
5	 -0.01%	+0.02%	0.00%
10	-0.05%	-0.02%	0.00%
20	-0.07%	-0.04%	0.00%
30	-0.07%	-0.04%	0.00%

Present Value of Annual $ Savings ( = future cost difference / years, discounted at 7% rate)
years	 fund	  etf	  stocks
5	 ($12.55)	 $15.66 	$0.00 
10	($49.63)	($20.52)	$0.00 
20	($65.01)	($35.58)	$0.00 
30	($69.24)	($39.83)	$0.00 
With only $100k invested for 10 years, the Motif approach results in 2-4bp savings before tax benefit. At 20+ years, the fixed costs are basically irrelevant and you're saving most of the whole 5-8bp effective ER. This is about a $50/year savings, roughly speaking, on a $100k investment. On a $1M investment, it would be $500-750/year in savings (calculations not shown).

Remember too that TLH benefits are much, much higher when you hold individual stocks rather than a single investment vehicle that holds them all. I would not be surprised if that was a big wildcard that makes Motif far superior, but I'm not going to attempt to quantify that.

More generally, I'd like to discuss any cost or benefit factors I may have overlooked, as well as practical aspects to implementing this approach to index investing. For example, with less than $100k, one could hold smaller amounts invested in an S&P fund or ETF, and, if that had not appreciated too much, sell it and switch to a Motif approach once the accumulated savings got large enough to justify the fixed costs to switch.
Last edited by Tanelorn on Tue Aug 26, 2014 11:42 pm, edited 1 time in total.
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Re: Motif Investing vs S&P500 or other LC funds

Post by Tanelorn »

Citations for the costs estimates in OP:

---------------------------------------------

(1) The fund is trading even if you aren't, both due to other investors contributions/redemptions and to track changes in the fund's index. Trading costs of active funds due to turnover are estimated to be about 1% for every 100% of annual turnover. Bogle has cited this in favor of indexing, and various academic studies surveyed below agree that 1% is a good estimate (some higher, some lower, all in the same ballpark).
http://www.etf.com/publications/journal ... =1&start=5

(2) spread costs estimated for the weighted average stock in the S&P500 are 0.032%.
http://eng.wealthfront.com/2014/03/mark ... ating.html

(3) possibly you'd have a few trades per year for index changes, but I think this would be small and probably isn't worth worrying about even annually. Deletions from mergers/acquisitions happen automatically. Additions could be lumped in a single motif and bought with new money.

(4) I haven't done the math, but I know that owning 500 individual volatile stocks will have a whole lot more dispersion than holding a diversified basket of all of them. I welcome efforts to quantify this benefit.

(5) discussion of securities lending for vanguard funds/ETFs
http://www.bogleheads.org/forum/viewtop ... 0&t=143142

(6) spreads on Vanguard ETFs
https://advisors.vanguard.com/VGApp/iip ... daskspread
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JoMoney
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Re: Motif Investing - own the S&P500 for less

Post by JoMoney »

I used to hold a lot of individual stocks, partly under the premise of it being cheaper than the cheapest of index funds. Managing the stock portfolio was a bit of pain and led to quite a few behavioral problems (for me). It's nice knowing that there's no ongoing "expense ratio" holding a stock, but I am making regular contributions now which I like to do every pay check, and someday I'm going to be reversing that process making regular withdrawls. Considering that many Bogleheads "rebalance" between various types of stocks and bonds on the regular basis this would add some expenses when considering brokerage fees relative to expense ratios as well.

Also, the actual realized expenses of Vanguard's Admiral class 500 index VFIAX is surprisingly lower than you estimate. The funds internal brokerage/trading expenses are extremely low (much less than 1 basis point if you look at the what's stated in the SAI relative to the funds assets).
If you compare it to the actual index it's also very apparent just how low the overall cost is:
Image
Over the past 14 years the S&P500 Index return was $17,411.53
VFIAX return was 17,361.67 the effective difference/CAGR is .02%
IShares IVV return was $17,253.98 the effective difference/CAGR is .06%

Over the 5 year period from 2008-2013 VFIAX actually BEAT the index:
Image
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Re: Motif Investing - own the S&P500 for less

Post by denovo »

Sounds pedantic, but I think I'd give up before I could execute 500 trades.
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Re: Motif Investing - own the S&P500 for less

Post by bpp »

Have you seen the wiki page on Passively Managing Individual Stocks?

The main advantage for you would probably be better tax-loss harvesting opportunities, as you say. Hard to quantify, but in the couple-few tens of basis points range perhaps, depending on how aggressive you are about it, and if you are in a position to take full advantage of it.

Also, if you equal-weight, you'd pick up some small-cap tilt, for better or worse.
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Re: Motif Investing - own the S&P500 for less

Post by nisiprius »

Let's ask the question a little differently. Trading costs drop, and certainly a home computer could be programmed to send a automatic orders to a brokerage. How far are we away from having a software ecosystem of home computer software products designed to automate hundreds of trades, and online brokerages designed to work well and at low cost with those products, so that it could be "every man his own mutual fund?" The answer would seem to be not very far.

What would be the point? Well, here's one possibility. Index providers now are providing (!!!!) hundreds of thousands of indexes which nobody has gotten around to creating ETFs for, so one can imagine the index providers being the ones that would profit most from such a capability. The MSCI Custom Home Index Fund Kit! Create and own index funds for any of 200,000 MSCI indexes for just $89.95 a year... Now you can own the Emerging Markets Ex-Brazil Upper-Lower-Midcap-Value index fund you've been dreaming of...

All seems silly and unlikely to me, but I admit that I'd like to be able to build my own version of the Managed Payout Funds that operate off a three-fund portfolio instead of theirs...
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Re: Motif Investing - own the S&P500 for less

Post by Call_Me_Op »

Two comments:

1.) 30 stocks is not as diversified as 500.
2.) My time is worth something - certainly more than the minute cost savings cited.
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Tanelorn
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Re: Motif Investing - own the S&P500 for less

Post by Tanelorn »

Call_Me_Op wrote:Two comments:

1.) 30 stocks is not as diversified as 500.
2.) My time is worth something - certainly more than the minute cost savings cited.
You and denovo are not understanding. You place 17 trades, each for a basket of up to 30 stocks, up to 510 total stocks. You own all the same stocks, in the same weights, as the S&P500 fund. Diversification is exactly the same.

JoMoney - thank you for sharing your experience. I would be inclined to attribute the positive tracking error of the fund vs the index to luck rather than some systematic Vanguard skill aside from the factors I cited in OP. For the ETF, returns seem to differ by the ER as expected, and I think the ETF should have lower turnover and other hidden costs than the fund.

For practical rebalancing between a motif portfolio and bonds during a market drop/rise, it may make sense to hold a small portion, say 5% of your total portfolio, in a fund or ETF to facilitate easy rebalancing. So instead of a 60/40 AA, you might have a 55 Motif/ 5 stock fund / 40 bonds portfolio. This would get you the cost savings on the majority of your holdings while still retaining the ease and liquidity of a single fund for rebalancing purposes.
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Re: Motif Investing - own the S&P500 for less

Post by Tanelorn »

Thank you bpp for the link. The TLH benefit is cited from an academic paper simulating holding 500 stocks instead of a 500 fund at around 0.5% annually compared to doing nothing. Obviously a fund holder would get some benefit from TLH, but only during market crashes. I would guess the vast majority of the 0.5% TLH benefit would apply in this case relative to a fund/ETF holder. The study assumed a 35% marginal tax rate, so it could be scaled up or down by 50% per individual circumstances.

http://www.firstquadrant.com/downloads/ ... t_Loss.pdf

This makes the annual benefits about 10x higher than the 0.05% cost savings I estimated, or $500/year/$100k invested. This seems meaningful.
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Re: Motif Investing - own the S&P500 for less

Post by zaboomafoozarg »

Do it OP! Would be interested to see how it works out. Unfortunately I am too lazy to try it :)
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Re: Motif Investing - own the S&P500 for less

Post by in_reality »

Tanelorn wrote: You and denovo are not understanding. You place 17 trades, each for a basket of up to 30 stocks, up to 510 total stocks. You own all the same stocks, in the same weights, as the S&P500 fund. Diversification is exactly the same.
You'd have to place the same 17 trades every year to maintain the same weight (rebalancing). So your break even point would be $338,300 invested. Any less than that invested, and your yearly cost (17 * $9.95) is more than the 0.05% ER of a S&P500 ETF.

As for tax loss harvesting, what stock do you buy as a replacement for you one you harvested? You are changing your risks by doing so. By definition, you would change away from the S&P500 index in any attempt to TLH. Oh Apple has a big loss. Let's sell and replace it with ????. You can't replace it's unique nature.

So on every $1,000,000.00 invested, I can save $330.85. TLH is changing my risk unpredictably and introducing tracking error.

OK. Great idea but I want total market coverage. Who cares about the S&P500!
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Re: Motif Investing - own the S&P500 for less

Post by Tarkus »

Let's say Motif goes out of business. I assume you can transfer your 500 individual stocks to a different brokerage.

But wouldn't your new brokerage charge you some ungodly fee to sell 500 individual stocks?
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Re: Motif Investing - own the S&P500 for less

Post by InvestorNewb »

What happens when the S&P committee removes a stock from its index or adds a new one? How do you factor that in?
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Re: Motif Investing - own the S&P500 for less

Post by meowcat »

Too much work!
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Re: Motif Investing - own the S&P500 for less

Post by Tanelorn »

in_reality wrote:You'd have to place the same 17 trades every year to maintain the same weight (rebalancing). So your break even point would be $338,300 invested. Any less than that invested, and your yearly cost (17 * $9.95) is more than the 0.05% ER of a S&P500 ETF.
I already addressed this when I talked about rebalancing - hold a small portion in the ETF/fund and use that piece for rebalancing. Motif replacement for the fund/ETF is only cost effective if you're holding for the long term.
As for tax loss harvesting, what stock do you buy as a replacement for you one you harvested? You are changing your risks by doing so. By definition, you would change away from the S&P500 index in any attempt to TLH. Oh Apple has a big loss. Let's sell and replace it with ????. You can't replace it's unique nature.
You can do whatever your want for replacement, including nothing. If it was me, I would buy VOO with the cash and sell it when the 30 day wash sale window had passed (no commissions, 0.01% spread). There is always tracking error doing any TLH, but for 0.5%/year, I'll take my chances. Costs matter and tracking error can be positive as easily as negative.
So on every $1,000,000.00 invested, I can save $330.85. TLH is changing my risk unpredictably and introducing tracking error.
Updating for the TLH benefit at a 35% tax rate, it looks like you're saving $5k/year/million. Yes, that's not a lot when you've got a million, but it's real money.
OK. Great idea but I want total market coverage. Who cares about the S&P500!
You could do this Motif approach for the large cap portion and buy Vanguard's Extended Market fund or ETF for the remainder. Yes, the ER is 0.10% for that instead of 0.05% for TSM, but it's only a small fraction by market cap (1/5?), so you'd lose 5bp on 1/5 of your portfolio and gain 55bp on 4/5 of it. Not quite as good as the pure S&P500 case, but likely still compelling on cost ground.
Last edited by Tanelorn on Wed Aug 27, 2014 7:30 am, edited 1 time in total.
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JoMoney
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Re: Motif Investing - own the S&P500 for less

Post by JoMoney »

Tanelorn wrote:...I would be inclined to attribute the positive tracking error of the fund vs the index to luck rather than some systematic Vanguard skill aside from the factors I cited in OP. For the ETF, returns seem to differ by the ER as expected, and I think the ETF should have lower turnover and other hidden costs than the fund.
The Vanguard ETF (VOO) shouldn't have any different turnover then the fund, the ETF is simply a different share class of the same fund.
I'm sure a small part of the benefit is simply tracking error, but not all of it.

The SAI shows the 500 Index fund had costs of $1,008,000 in brokerage comissions for 2013.
The Annual Report shows the funds net assets as $159,817,337,000 at the end of 2013.
Which amounts to their broker/transaction costs being about .0006% ... much less than the .034% you estimated.
The Vanguard 500 fund (and the VOO ETF which is the same as the fund) do earn additional income from securities lending and interest, 2008 and 2009 this was a significant amount that pretty much covered the funds expense ratio and then some. It's been less in more recent years, but has been a benefit effectively decreasing the bite of expenses.
I don't believe the SPY ETF is allowed to use securities lending, but the Vanguard one does and gives all the proceeds back to the fund owners. The iShares IVV fund only gives a portion of the securities lending proceeds back to the fund.

The "institutional plus" version of Vanguards 500 fund (VIIIX) that's available to some 401k plan investors only has a .02% ER, and after interest/lending income is added back to the fund is very consistently less than it's expense ratio. Over the 20+ years of the fund, and many of the single year periods, it has "beaten" the index it tracks.
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Re: Motif Investing - own the S&P500 for less

Post by Tanelorn »

JoMoney - commissions are a small part of the turnover cost. Most of it is the spread and market impact of the trades. Observe that my estimate of 3.4bp for the funds total turnover costs are only slightly higher than the 3.2bp average spread for these large cap stocks.

VOO should have lower turnover because they don't have to deal with buying and selling costs to handle net investor cash flows (that's handled by the APs via the ETF mechanism). Upon reflection, I do think the ETF will have some turnover costs - if the index changes, they have to sell the deletions they're holding and replace them with the new additions. I am not sure how much of the mutual funds 3% turnover rate is due to investor activity vs index changes. Maybe it's fair to bill the ETF for 1/2 of the turnover costs of the fund?

Edit: well, maybe this doesn't apply to the Vanguard dual share class structure, but I think it would apply to a typical mutual fund vs an ETF tracking the same index that did in-kind creation/redemption.

As for securities lending, I didn't see VOO listed in the link I supplied for 2013 lending revenue so I assumed they were structured the same way as SPY, although I'm not sure.
Last edited by Tanelorn on Wed Aug 27, 2014 7:50 am, edited 2 times in total.
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Re: Motif Investing - own the S&P500 for less

Post by Tanelorn »

Tarkus wrote:Let's say Motif goes out of business. I assume you can transfer your 500 individual stocks to a different brokerage.

But wouldn't your new brokerage charge you some ungodly fee to sell 500 individual stocks?
Yes, if they go under, you would transfer all the stocks to somewhere else. Remember the point of this is that these are a long term holding, likely for decades. So yes, you might have to pay to sell them all eventually, but that's a long way down the road and brokerage commissions have been dropping steadily. There are brokers offering lots of free trades, both per year, and for new customers, at the $100k asset level where this starts to make sense so I think it's not unreasonable to assume you wouldn't take a big loss on this.
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Re: Motif Investing - own the S&P500 for less

Post by Tanelorn »

InvestorNewb wrote:What happens when the S&P committee removes a stock from its index or adds a new one? How do you factor that in?
I did not include it, although I referenced it in my footnotes. Personally I would do nothing. Index funds buy high and sell low during index rebalances. Maybe after 5 years I'd sell the old ones or start adding the new ones. Changing a single stock in a Motif costs $5, so you might expect to pay a few bucks per year extra if you wanted to track the index exactly.
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Re: Motif Investing - own the S&P500 for less

Post by bpp »

I do something like this with Japanese stocks, though not through Motif. Original motivation was to avoid PFIC issues, so was not actively pursuing TLH opportunities previously, but am now starting to exploit TLH opportunities at least to the extent of rendering dividends tax-free. Given Japanese investment tax rates, this should give me around 0.3%/year after commissions and spreads.

WagnerJB also does something like this with US large-caps.

Nisiprius's suggestion is an interesting one. I can't see paying licensing fees for a custom index, but could see an automated, personalized TLH program being of interest, especially if it also handled the tax paperwork.
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Re: Motif Investing - own the S&P500 for less

Post by JoMoney »

Tanelorn wrote:JoMoney - commissions are a small part of the turnover cost. Most of it is the spread and market impact of the trades. Observe that my estimate of 3.4bp for the funds total turnover costs are only slightly higher than the 3.2bp average spread for these large cap stocks.

VOO should have lower turnover because they don't have to deal with buying and selling costs to handle net investor cash flows (that's handled by the APs via the ETF mechanism). Upon reflection, I do think the ETF will have some turnover costs - if the index changes, they have to sell the deletions they're holding and replace them with the new additions. I am not sure how much of the mutual funds 3% turnover rate is due to investor activity vs index changes. Maybe it's fair to bill the ETF for 1/2 of the turnover costs of the fund?
The cost of brokerage transactions for VOO and VFIAX is the same. It's the same fund, it's just a different "share class", but as I showed above you would have to round up to make it even amount to 1/1000th of a percent.
Market impact and spreads impact everybody, even someone buying individual stocks, but as we can demonstrate by seeing how closely the fund tracks the actual index, we can show that this is trivial in the 500 Index fund (it may be more severe in small-cap or some international funds). Keep in mind that with the fund, investors are able to buy/sell at precisely the end of day net asset value, and precisely follow whatever the stocks in the index are valued at.
Some mutual funds (like Vanguard) are able to take advantage of cross-trading between other funds, as well as use futures contracts to synthesize trades to minimize impacts and costs from investors buying/selling in out of the fund. If you really dig in and look at the costs and how well managed the index funds at Vanguard are, it's pretty hard to beat.
Last edited by JoMoney on Wed Aug 27, 2014 8:00 am, edited 1 time in total.
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Re: Motif Investing - own the S&P500 for less

Post by looking »

i dont even know what is motif investing ??
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Re: Motif Investing - own the S&P500 for less

Post by Tanelorn »

JoMoney wrote: If you really dig in and look at the costs and how well managed the index funds at Vanguard are, it's pretty hard to beat.
I agree they are well managed and do a good job of execution. That said, execution and trading are not free, and why should I be paying for other people's trading when all I want to do is buy and hold for 20-30 years? As Vanguard gets more popular, all their new money incurs execution costs that I don't want. I'm giving up some (small) amount of my fund's return to subsidize everyone who trades more often than me, including new investors. In some sense, this is the same issue as the rapid mutual fund trading scandals, only now the costs involved are much much lower since there are policies in place to prevent frequent trading.

In short, it may be a small effect, but it's a real effect and one that disadvantages very long term holders.
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Re: Motif Investing - own the S&P500 for less

Post by JoMoney »

Tanelorn wrote:
JoMoney wrote: If you really dig in and look at the costs and how well managed the index funds at Vanguard are, it's pretty hard to beat.
I agree they are well managed and do a good job of execution. That said, execution and trading are not free, and why should I be paying for other people's trading when all I want to do is buy and hold for 20-30 years? As Vanguard gets more popular, all their new money incurs execution costs that I don't want. I'm giving up some (small) amount of my fund's return to subsidize everyone who trades more often than me, including new investors. In some sense, this is the same issue as the rapid mutual fund trading scandals, only now the costs involved are much much lower since there are policies in place to prevent frequent trading.

In short, it may be a small effect, but it's a real effect and one that disadvantages very long term holders.
I thought the same thing for a long time, but when I really started looking at what the actual costs were, it's remarkably low. The bigger Vanguard's funds get, the more economies of scale seem to lower the costs. With a large enough portfolio, bought and held long enough, you might be able to save a few bucks - but even that may depend on what future expenses and extra income from securities lending turn out to be.
If there's a cost advantage to going the individual stock route, I think it's for taxable accounts that wish to take advantage of potential tax loss harvesting... but that may cost more in commissions, will keep you from tracking the index (if that's a concern), and definitely complicates keeping track of your taxes and portfolio info. I'm really not against holding individual stocks, but you have to make it considerably more complicated to maybe save a few bucks over what a low-cost Vanguard index fund does.
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Re: Motif Investing - own the S&P500 for less

Post by jf89 »

Not to come across as a jerk or anything, but to save $500-$750 a year, this just doesn't seem worth it. The amount of time and effort this takes versus the return is way out of proportion, in my opinion. For that same amount of time I could easily beat $500-$750 a year by just staying at work an extra half hour a week. If you're bored enough at home, why not just pick up extra hours or try a side job like joining a landscaping crew for evenings/weekends?

Add in that you get some tracking issues during TLH and when the index changes, and I'm out.

Simplicity! You pay Vanguard (or whoever) a relatively small amount of money to deal with this for you through fund ERs, and they do a hell of a better job than any of us could hope for using this approach.
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Re: Motif Investing - own the S&P500 for less

Post by ftobin »

Re-investing dividends adds to the money-cost -- you can't assume that the dividends are re-invested into the same stock, if you're trying to match the index. Taking time to compare your holdings to the Index after each dividend payout or a split also time-costly.

Why pick arbitrarily pick the S&P 500, which primarily has value from being historical, not its investing value going forward compared to total market? Seems like the Dow would simplify things if you're willing to stick to large caps.
Buysider
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Re: Motif Investing - own the S&P500 for less

Post by Buysider »

Interesting, but as an aside, you might want to rethink your market impact costs. Vanguard can trade for a lot less than Motif.

As a reminder, here is when Motif says they will execute your trades:
Your order will be executed in the marketplace during market hours. And, if you decide to sell a motif, or some of the stocks it contains, those orders will also be placed in real-time.
Motif (and Wealthfront/Betterment) all receive payments for order flow when directing trades. These costs are an order of magnitude higher than the commission rate (depending on the stock and the market). And of course, is invisible to the client.
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Re: Motif Investing - own the S&P500 for less

Post by bpp »

ftobin wrote:Re-investing dividends adds to the money-cost -- you can't assume that the dividends are re-invested into the same stock, if you're trying to match the index. Taking time to compare your holdings to the Index after each dividend payout or a split also time-costly.

Why pick arbitrarily pick the S&P 500, which primarily has value from being historical, not its investing value going forward compared to total market? Seems like the Dow would simplify things if you're willing to stick to large caps.
Actually, the real secret is that there is no point in slavishly trying to track any index. The fact is that if one has enough separate holdings, it really doesn't matter too much what exactly those holdings are, or in what weights. One will end up tracking the overall market regardless. (Modulo, say, a small-cap tilt if selecting stocks randomly without regard for capitalization.) So spending time worrying about weights and tracking error is pretty much unnecessary.
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Re: Motif Investing - own the S&P500 for less

Post by inbox788 »

Tanelorn wrote:Thank you bpp for the link. The TLH benefit is cited from an academic paper simulating holding 500 stocks instead of a 500 fund at around 0.5% annually compared to doing nothing. Obviously a fund holder would get some benefit from TLH, but only during market crashes. I would guess the vast majority of the 0.5% TLH benefit would apply in this case relative to a fund/ETF holder. The study assumed a 35% marginal tax rate, so it could be scaled up or down by 50% per individual circumstances.

http://www.firstquadrant.com/downloads/ ... t_Loss.pdf

This makes the annual benefits about 10x higher than the 0.05% cost savings I estimated, or $500/year/$100k invested. This seems meaningful.
TLH and wash rule may be complicated. It would either be a terrific way to avoid the wash rule, or a nightmare fight with IRS as to what exactly constitutes substantially different asset.

You could box in different pairs and combinations and rotate in and out while selling losing stocks, taking a tax loss, and buying them back in different motif combinations.
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Re: Motif Investing - own the S&P500 for less

Post by inbox788 »

bpp wrote:Actually, the real secret is that there is no point in slavishly trying to track any index. The fact is that if one has enough separate holdings, it really doesn't matter too much what exactly those holdings are, or in what weights. One will end up tracking the overall market regardless. (Modulo, say, a small-cap tilt if selecting stocks randomly without regard for capitalization.) So spending time worrying about weights and tracking error is pretty much unnecessary.
Yes. The question is how many holdings are sufficient. How diversified? How do you measure diversification? And finally, how do you asses risk adjusted return?

If you were to listen to Cramer and have 5 holdings in 5 different sectors and matched the sp500 return, is that a good thing a bad thing or just par for the course? Would the total of all investors following this strategy do any different than the market?
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in_reality
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Re: Motif Investing - own the S&P500 for less

Post by in_reality »

Wow! You can make a motif with ETFs.

I haven't purchased anything but tried adding an ETF to one of their existing ETF motifs and it seemed to work.

If it's really possible, and I can't believe it is, you'd be able to make a portfolio of ETFs for $9.95 (which is about the price brokerages usually charge for one trade) and rebalance it every year for the same price.
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Re: Motif Investing - own the S&P500 for less

Post by bpp »

inbox788 wrote:
bpp wrote:Actually, the real secret is that there is no point in slavishly trying to track any index. The fact is that if one has enough separate holdings, it really doesn't matter too much what exactly those holdings are, or in what weights. One will end up tracking the overall market regardless. (Modulo, say, a small-cap tilt if selecting stocks randomly without regard for capitalization.) So spending time worrying about weights and tracking error is pretty much unnecessary.
Yes. The question is how many holdings are sufficient. How diversified? How do you measure diversification? And finally, how do you asses risk adjusted return?
Again, see the wiki page on Passively Managing Individual Stocks, which summarizes some studies that try to address that issue.
If you were to listen to Cramer and have 5 holdings in 5 different sectors and matched the sp500 return, is that a good thing a bad thing or just par for the course? Would the total of all investors following this strategy do any different than the market?
5 holdings? That would be pure luck if it tracked the S&P500 -- bad strategy, lucky outcome, as Larry Swedroe would put it.
Most investors holding only 5 stocks would underperform, due to skewness effects (again, see wiki).

I hold over 100, myself, and the number grows over time. WagnerJB gets away with much fewer (30-40, I believe), but he is much more careful about diversification among industry classifications, and he sticks to large-caps.
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Re: Motif Investing - own the S&P500 for less

Post by gogleheads.orb »

I started doing this. It is a lot of work to set up initially. If you feel a need to rebalance often, costs and work required will go up. I also wonder what the minium amount you need to invest before tax loss harvesting starts to make sense. The $5 cost for every stock sold will eat into the TLH gains.

Motif integrates with TurboTax, so doing the taxes on this stuff isn't a nightmare.


In the end the potential gains that you get from this is small enough that you probably need to see it as a hobby to justify it.
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Re: Motif Investing - own the S&P500 for less

Post by Tanelorn »

Buysider wrote:Interesting, but as an aside, you might want to rethink your market impact costs. Vanguard can trade for a lot less than Motif.

Motif (and Wealthfront/Betterment) all receive payments for order flow when directing trades. These costs are an order of magnitude higher than the commission rate (depending on the stock and the market). And of course, is invisible to the client.
It doesn't matter how much Motif can trade for, it matters what they charge me and I'm sure I'm not having any market impact investing $200/stock for $100k total - that's what, 10 shares each, give or take? They only support market orders, which is why I included the full spread costs for the Motif case. I know Vanguard can do better than paying the full spread with good execution, but it's still not free (or they'd run their own hedge fund or at least execution service); I tried to include their costs via turnover.
ftobin wrote:Re-investing dividends adds to the money-cost -- you can't assume that the dividends are re-invested into the same stock, if you're trying to match the index. Taking time to compare your holdings to the Index after each dividend payout or a split also time-costly.

Why pick arbitrarily pick the S&P 500, which primarily has value from being historical, not its investing value going forward compared to total market? Seems like the Dow would simplify things if you're willing to stick to large caps.
They don't do cash dividend reinvestment. I would just invest the extra cash, assuming it ends up being meaningful, in an ETF or mutual fund until it got large enough. Remember each decision to buy/reinvest in the market is a separate lump sum investment, and small lump sums don't justify the costs of own individual stocks.

I didn't pick the S&P500 for any particular reason, just that it is well known and includes a reasonable number of large stocks. A similar effort could probably be done with the S&P400 mid cap index, or the S&P600 small cap index. Spread costs would be higher, but ER savings would be too. It probably would make sense for a long time to do the same for those.
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Re: Motif Investing - own the S&P500 for less

Post by Pale Horse »

in_reality wrote:
You'd have to place the same 17 trades every year to maintain the same weight (rebalancing). So your break even point would be $338,300 invested. Any less than that invested, and your yearly cost (17 * $9.95) is more than the 0.05% ER of a S&P500 ETF.
And that's if you're only rebalancing yearly. What if you want to make periodic contributions quarterly (or even monthly)? The costs can easily skyrocket, not to mention the time involved in calculating the proper allocations to each stock.

Obviously the answer would be to sweep it to an index ETF and only make a single large deposit annually during rebalancing time. But if I'm sweeping money into an ETF, why don't I just put everything in Index Funds and be done with it?
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Re: Motif Investing - own the S&P500 for less

Post by denovo »

Tanelorn wrote:
Call_Me_Op wrote:Two comments:

1.) 30 stocks is not as diversified as 500.
2.) My time is worth something - certainly more than the minute cost savings cited.
You and denovo are not understanding. You place 17 trades, each for a basket of up to 30 stocks, up to 510 total stocks. You own all the same stocks, in the same weights, as the S&P500 fund. Diversification is exactly the same.
Unless the motifs have been prefabricated, I still have to enter in 500 stock tickers and execute 17 or so trades. Regardless, I need to execute 17 trades just for US stocks. And if you're going to go , you might as well double down and do this for intl stocks too.
"Don't trust everything you read on the Internet"- Abraham Lincoln
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Re: Motif Investing - own the S&P500 for less

Post by Tanelorn »

denovo - Yes, someone has to enter all the tickers and weights for the S&P500. If you were feeling ambitious, you could do it and then share your Motifs with BH and the world. Motif has some gimmick where you get $1 out of the $10 commission every time someone buys "your" ETF. It's not going to be something I expect to do, but maybe it gets done once and then no one else has to do it.

They do not support foreign stocks, so without the discount on commissions (essentially $0.30/trade, if you buy 30 stocks per Motif for $10), the math won't work out until you have a lot more assets or are willing to only hold ADRs traded in the US for your foreign exposure.
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Re: Motif Investing - own the S&P500 for less

Post by Rodc »

Sounds nice for the sort of person who wants investing to be a hobby.

Kind of like brewing your own beer. Benefits are low and effort high, but you really do it for the enjoyment of the process.

If one would enjoy the process, and can avoid making mistakes (including the increased risks associated with trying to tax loss harvest from Apple into ??? as noted above and other possible behavioral mistakes one might accidentally make), then this could be a great thing.

I like drinking my BIL's home brew, but I have other things I would prefer to dabble in, so I think I'll stick to using low cost index funds and total market investing.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Motif Investing - own the S&P500 for less

Post by Pale Horse »

Rodc wrote:Sounds nice for the sort of person who wants investing to be a hobby.

Kind of like brewing your own beer. Benefits are low and effort high, but you really do it for the enjoyment of the process.
Great analogy.
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Re: Motif Investing - own the S&P500 for less

Post by ogd »

I'm not even remotely attracted to this.

1) As JoMoney mentioned, the actual costs seem to be an order of magnitude less than Tanelorn's projections. You can't deny the numbers.
2) This is not feasible for Total Stock Market, the true no-turnover index. Underweighing small caps seems like a bad idea.
3) Tax loss harvesting only does something for a few years [*]. After that, there are very few losses big enough to be harvested, unless you keep buying.
4) Oh yes, what if you want to keep buying? More costs.
5) Selling to rebalance (into bonds) incurs yet more costs, while shortening the amortization interval.
6) Tax lots. Hundreds of them. I don't want to be responsible for the nervous breakdown of a tax accountant.
7) Motif is new and unproven. If five or ten years from now you are forced out of your investments because they close shop or because they have to increase expenses after the honeymoon period, the tax bill would be orders of magnitude greater than any ER savings.

[*] As an aside, I've never been comfortable with tax loss harvesting individual stocks. When I harvest TSM, I buy something with very similar performance. When BP falls because their oil well blows up, what do I buy instead? Can't find any company remotely in the same situation. How do I know I won't miss the bulk of a rebound if they patch things up? If you don't think selling low is a factor, see the "behavioral gap" caused by precisely this in mutual fund investor performance.
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Re: Motif Investing - own the S&P500 for less

Post by Tanelorn »

ogd wrote:I'm not even remotely attracted to this.

1) As JoMoney mentioned, the actual costs seem to be an order of magnitude less than Tanelorn's projections. You can't deny the numbers.
2) This is not feasible for Total Stock Market, the true no-turnover index. Underweighing small caps seems like a bad idea.
3) Tax loss harvesting only does something for a few years [*]. After that, there are very few losses big enough to be harvested, unless you keep buying.
4) Oh yes, what if you want to keep buying? More costs.
5) Selling to rebalance (into bonds) incurs yet more costs, while shortening the amortization interval.
6) Tax lots. Hundreds of them. I don't want to be responsible for the nervous breakdown of a tax accountant.
7) Motif is new and unproven. If five or ten years from now you are forced out of your investments because they close shop or because they have to increase expenses after the honeymoon period, the tax bill would be orders of magnitude greater than any ER savings.

[*] As an aside, I've never been comfortable with tax loss harvesting individual stocks. When I harvest TSM, I buy something with very similar performance. When BP falls because their oil well blows up, what do I buy instead? Can't find any company remotely in the same situation. How do I know I won't miss the bulk of a rebound if they patch things up? If you don't think selling low is a factor, see the "behavioral gap" caused by precisely this in mutual fund investor performance.
1. I got expected total costs of 8bp for the fund and 5bp for the ETF. Realized index underperformance has been 2bp and 6bp respectively per JoMoney, so lower, yes, but not an order of magnitude different. I'm not sure why the ETF, supposedly the same share class, did worse than the fund and worse than it's ER, failing to show whatever Vanguard magic makes the fund version outperform. As they say, past performance is no guarantee.

2. TSM is not a "no turnover" index. Do you think they include shares of every penny stock, most of which are frauds, to capture the whole market? No, they don't, but when these get their act together and get listed on a stock exchange, maybe then they're ready for inclusion. Furthermore, looking at the numbers, the turnover for Vanguard's TSM fund was 4.3% for last year, higher turnover than their S&P500 fund. Perhaps a lot of the turnover comes from investor flows? I'm not sure but TSM turnover isn't meaningfully better than other big index funds, despite what you might think from its mandate.

I did not propose underweighting small caps, only that this was a possibly superior alternative to holding the S&P500. If you want TSM exposure, you could do this for the large caps and hold the Extended Market completion index fund for the residual.

3. it's true that TLH matters most at the start, but to get a 50bp average over 10+ years, it matters a lot during that time. Also, remember that equity returns have lots of skewness so that most of the returns come from a few big winners with the remainder being about flat. About flat with 30% annual volatility will present numerous TLH opportunities in the bulk of the stocks outside these few big winners.

4. As I said, if you're still investing, hold a fund or ETF if your incremental investment isn't enough to justify the costs. When it gets big enough, you can switch to this, especially if it's a down time in the market.

5. If you've got a reasonably balanced AA, say 25-75% stocks / 75-25% bonds, there's going be a core of your equity holdings, perhaps 3/4 of it, that you never sell for rebalancing. That part, that gets held basically forever/until retirement, might as well be in something like this if the advantages are compelling. The part that might get sold on a shorter time frame, for rebalancing or any other reason, should be held in a fund or ETF. As I said, this approach is for the long term and if you're not planning on holding 10 years, don't do it.

6. Luckily reporting of wash sales is now required for brokers on their 1099, so unless they're making mistakes in their reporting to the IRS, you won't need to do anything besides put the aggregate numbers from your 1099 onto your tax forms and be done.

7. Motifs are baskets, but you actually own all the individual stock components. This is not like an ETF where it can liquidate and stick you with a big tax bill earlier than you wanted. It would be an inconvenience to transfer the holdings and potentially more expensive to sell them, but for reasons I discussed above, I don't think that's a big issue. Free trades are pretty common these days and I expect they will only be cheaper in the future.

I am open to critiques and errors in my analysis, but you don't need to exaggerate or mis-state the drawbacks just to scare people away from a potentially valuable opportunity just because you don't like it.
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Re: Motif Investing - own the S&P500 for less

Post by ogd »

Tanelorn wrote:1. I got expected total costs of 8bp for the fund and 5bp for the ETF. Realized index underperformance has been 2bp and 6bp respectively per JoMoney, so lower, yes, but not an order of magnitude different. I'm not sure why the ETF, supposedly the same share class, did worse than the fund and worse than it's ER, failing to show whatever Vanguard magic makes the fund version outperform. As they say, past performance is no guarantee.
Alright, I confess to thinking of my own 10y number that I was about to post before I saw JoMoney's. I got 0.00835%/yr over the last 10 years, which is almost precisely an order of magnitude less than your 0.0824%. I think the ER incentive just isn't there.

As for the ETF: for these minute differences the pricing of the ETF on the first and last day (given by the last market trade) makes the numbers unreliable, a known problem with Morningstar TR graphs. As an experiment, pick a period and move the slider back and forth. Watch the difference change with no rhyme or reason. Edit: nevermind, I was actually using VTI by mistake. With VOO, there is a rhyme and reason, despite a slight dependency on start/end and not just the period. I don't have a good explanation for this, but it does seem to have mostly gone away in the past few years. Were the expenses different in the past?
Tanelorn wrote:7. Motifs are baskets, but you actually own all the individual stock components. This is not like an ETF where it can liquidate and stick you with a big tax bill earlier than you wanted. It would be an inconvenience to transfer the holdings and potentially more expensive to sell them, but for reasons I discussed above, I don't think that's a big issue. Free trades are pretty common these days and I expect they will only be cheaper in the future.
Thanks for the correction. I didn't know you aren't forced to sell; ETFs and mutual funds are also billed as "owning the underlying stocks" when it comes to protection, but you're forced to sell nonetheless. Not that I welcome getting stuck with 500 stocks for the long term (to avoid realizing those capital gains), but it's better than liquidation at a time not of your choosing.
Tanelorn wrote:6. Luckily reporting of wash sales is now required for brokers on their 1099, so unless they're making mistakes in their reporting to the IRS, you won't need to do anything besides put the aggregate numbers from your 1099 onto your tax forms and be done.
I still find tax lots a burden proportional to their number. It's not as bad as it used to be, but it's still harder to double check numbers and figure out any discrepancy. As per the "owning individual stocks" point above, I realize now that it's one per stock not one per motif. So it's actually worse than I thought.

I don't want to exagerate anything here, but the cost in convenience is something to behold. There's also a reverse scalability problem: when your portfolio grows to seven digits I don't think you're as likely to trade a few hundred bucks for time. The projected absolute amounts just aren't as attractive to the projected mindset. So to speak.
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Re: Motif Investing - own the S&P500 for less

Post by Buysider »

I am open to critiques and errors in my analysis, but you don't need to exaggerate or mis-state the drawbacks just to scare people away from a potentially valuable opportunity just because you don't like it.
I think you outline a case that you can save 2-5 bps annually on a static +$1 million portfolio. Offset by the time, inconvenience, and RISK. Risk you say? beside the snarky: Your assets are custodied at a privately owned financial institution located in the same state as Stanford Financial Group, that has only existed for 2 years and sure, you can transfer your individual securities out of your account into another brokerage account ... until you can't ... :annoyed

Risk is - let's say you have your $1 million portfolio that saves you $500 a year. Now say you need to reduce your equity allocation by 5%. At $9.95 a trade, plus their informal rebate on their supposed "market orders", that isn't a feasible option. But, let's say you did want to do 500+ trades. At a 0.0011% error rate, you will make an average of 1 trade error per execution. Just hope you don't put a ticker in that will cause a market impact to undo.
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Re: Motif Investing - own the S&P500 for less

Post by Tanelorn »

Buysider wrote:I think you outline a case that you can save 2-5 bps annually on a static +$1 million portfolio. Offset by the time, inconvenience, and RISK. Risk you say? beside the snarky: Your assets are custodied at a privately owned financial institution located in the same state as Stanford Financial Group, that has only existed for 2 years and sure, you can transfer your individual securities out of your account into another brokerage account ... until you can't ... :annoyed
I agree that at the 5bp level, you'll probably not get many takers for the time-vs-reward tradeoff. With the updated TLH value being worth ~50bp extra (not included in my original estimates), now you're talking $5k/year (plus the other $500 in ER savings), so that's potentially worth the time and hassle if it's not too much trouble. Plus, they've got Goldman as their lead investor (article), which suggests the smart guys think they've got a good business. I think I know why too, but that's for another thread.
Risk is - let's say you have your $1 million portfolio that saves you $500 a year. Now say you need to reduce your equity allocation by 5%. At $9.95 a trade, plus their informal rebate on their supposed "market orders", that isn't a feasible option. But, let's say you did want to do 500+ trades. At a 0.0011% error rate, you will make an average of 1 trade error per execution. Just hope you don't put a ticker in that will cause a market impact to undo.
If you want to sell down a Motif, you sell a fixed dollar amount and it sells all 30 pieces proportionally with market orders and they bill you $9.95. At most you'd be doing 17 trades, not 500+, even if you wanted to sell some of everything (rather than selling the losers or something less slavishly index-following). Ideally you'd do some sort of principle components analysis of the S&P500 from most to least explanatory of the returns and sort them into Motifs that way. Then you could sell the least likely to matter blocks first and still have a good, representative basket with only having to make 1-2 trades.

I would also recommend, per your 5% equity sale example, that you probably keep 5% worth of equities in something more traditional like VOO or VTI or whatever. That way you're only faced with dealing with the hassles of individual stocks when it pays you (i.e. TLH) and you can always just ignore that if you want and save the costs on ~90% of your portfolio with nearly no overhead, timewise.
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Re: Motif Investing - own the S&P500 for less

Post by Wagnerjb »

Tanelorn wrote:More generally, I'd like to discuss any cost or benefit factors I may have overlooked, as well as practical aspects to implementing this approach to index investing.
One factor to consider is your ability to diversify away from your employer. You may have employer stock options, or you may have Restricted Shares. Even without those employer exposures, you have your personal capital tied up in your employer and in certain markets your home value may be influenced by your employer's fortunes too.

If you choose to buy all 500 stocks of the S&P500, you would want to eliminate your employer. I use the strategy that you outlined, but I implement it with 30-35 individual large cap stocks. I simply exclude the sector of my employer. This is a value adding tactic that cannot easily be duplicated by those holding a broad index fund, but I cannot easily put a tangible value on the benefit. But it certainly is real.

Best wishes.
Andy
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Re: Motif Investing - own the S&P500 for less

Post by inbox788 »

Taxwise, are motifs treated like a fund when you buy and sell? TLH and wash sales are complications or opportunities depending on accounting and tax treatment.

Let's say you bought a motif with 3 stocks ABC, and AB are winners while C is a loss. On the day you sell, you have a net loss on the motif, so if it's like a fund and you buy back the motif, it would be a wash sale, but if you just buy back stock C, could you still take the TLH on the motif? (similar to selling PPH for loss and buying JNJ).

So, out of your 17 motifs, take some of the top losers and identify the losing stocks from those motifs. Regroup the motifs so the losers are in one fund and shuffle the winners among other motifs. Buy back in same proportion as before you started. Individually the motifs are very different, but as a whole, you're keeping the same net position.

Using Bogleheads investment, let's say you bought VT in a year where US stocks went up, but ex-US went down a lot more, so VT is a loss. You sell VT and buy VTI and VXUS in similar allocation. Claim the tax loss on VT? What if the allocation is slightly or somewhat different? Only your accountant and IRS investigator know.

All these ideas are fairly theoretical questions since practically, it's going to be difficult to use motifs to replace low cost index funds. Only practical reason would be to lower costs and that means minimizing transactions, so that eliminates a lot of the potential benefits like TLH. Still, TLH is a two edge sword, since you're deferring taxes, not eliminating them. Those in the same tax bracket when investing vs retiring aren't impacted, and you're at risk for tax law changes. Tax policy changes like the 3.8% Medicare Tax may actually increase tax burden from TLH for some.
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Re: Motif Investing - own the S&P500 for less

Post by TareNeko »

Tanelorn wrote:
ogd wrote: 4) Oh yes, what if you want to keep buying? More costs.
4. As I said, if you're still investing, hold a fund or ETF if your incremental investment isn't enough to justify the costs. When it gets big enough, you can switch to this, especially if it's a down time in the market.
Well, of course we're still investing... We are not born with $1MM, to get there I have to save and contribute to my 3 fund portfolio every month (on average). Your method makes DCA very expensive.

Now, in your method, during retirement, every time I take money from my holdings (I'd guess twice a year), I have to pay transaction costs. Again, adding to the overall cost.

I think the Motif investing is only for "play money" portion of your portfolio. I can see the advantage there. Instead of buying 1 stock, you can buy 10-30 stocks to sort of diversify with your play money.
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Re: Motif Investing - own the S&P500 for less

Post by ftobin »

bpp wrote:Actually, the real secret is that there is no point in slavishly trying to track any index. The fact is that if one has enough separate holdings, it really doesn't matter too much what exactly those holdings are, or in what weights. One will end up tracking the overall market regardless. (Modulo, say, a small-cap tilt if selecting stocks randomly without regard for capitalization.) So spending time worrying about weights and tracking error is pretty much unnecessary.
I think following an index would be important, else how do you measure whether or not you are being successful at being cheaper than paying Vanguard a small amount to handle it for you? If you aren't following a measuring stick, any divergence could be attributed to exposure to different risk factors.
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Re: Motif Investing - own the S&P500 for less

Post by JoMoney »

ogd wrote:...With VOO, there is a rhyme and reason, despite a slight dependency on start/end and not just the period. I don't have a good explanation for this, but it does seem to have mostly gone away in the past few years. Were the expenses different in the past?...
When the VOO ETF was introduced it had a much wider spread in its market price and was more thinly traded. Trading volume on it has grown considerably over the past couple years, and the ETF price spread narrowed to trade often around a penny. Last year they did a reverse split making the per share % cost of that spread even smaller relative to the higher per share price (due to the reverse split). Investors can avoid the ETF spreads by simply using the traditional index fund where you can buy/sell at net asset value at the end of the day.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
inbox788
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Joined: Thu Mar 15, 2012 5:24 pm

Re: Motif Investing - own the S&P500 for less

Post by inbox788 »

bpp wrote:
inbox788 wrote:
If you were to listen to Cramer and have 5 holdings in 5 different sectors and matched the sp500 return, is that a good thing a bad thing or just par for the course? Would the total of all investors following this strategy do any different than the market?
5 holdings? That would be pure luck if it tracked the S&P500 -- bad strategy, lucky outcome, as Larry Swedroe would put it.
Most investors holding only 5 stocks would underperform, due to skewness effects (again, see wiki).

I hold over 100, myself, and the number grows over time. WagnerJB gets away with much fewer (30-40, I believe), but he is much more careful about diversification among industry classifications, and he sticks to large-caps.
Thanks for pointing out skewness. I wasn't expecting that 5 stocks would track the sp500, but that the performance would be on average similar as sp500. I was looking at the million Cramer viewers who are each holding 5 stocks (chosen only from sp500 stocks, assuming they're random, as a whole, they're representative of the market - market cap weighed). In aggregate, I would expect they'd do the same as the lot of Bogleheads who have bought the sp500 index, ignoring transaction costs, so like you said, most underperform, but some outperform.

I was wondering what the outcome could be if you randomly selected 30 stocks in the sp500 (sampling; either market weighed or equal weight) and invested in them for 10 years or longer (1 motif). Expense wise, it could be lower than an index fund. Performance wise, I think things will average out over the years. Now if I did this with another 30 stocks each year (maybe choosing from all 500 again, or excluding those that are already in the portfolio), I'd be getting closer to the sp500 each year I did this. Measured over decades, will the cost savings outweigh the skewness? After 20 years x 30 stocks a year = 600 stocks, I'd have opportunity to do a little rebalancing if I wanted to be active. Or just roll the dice passively. Will have to come up with a simple algorithm to weigh and adjust the contributions so the early contributions (year 1) don't over shadow the later ones (year 30). Maybe buy a motif every $10k? Adjust for market growth?
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