Roll your own index fund current viability

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JackInTheGreen
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Roll your own index fund current viability

Post by JackInTheGreen » Sun May 20, 2018 3:40 pm

A few zero-commission brokers have cropped up over the past few years, like M1 and Robinhood. In light of this, is the "roll your own index fund" method more viable than in the past? Robinhood in particular has integrated with Quantopia, meaning the process could even be automated with modest effort.

My intuition on this is that rolling your own would probably underperform, but only very slightly, due do fund managers being able to lend out shares, bid/ask spreads etc. Are there any other pitfalls I'm missing?

Silk McCue
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Re: Roll your own index fund current viability

Post by Silk McCue » Sun May 20, 2018 7:33 pm

Welcome to the forum.

The greatest pitfall is gaining little to negative advantage by designing an unnecessarily complex investing approach. Bogleheads are focused on low expense broadly diverse investing primarily using index funds.

If you haven’t already done so click on Start Here on the main page and learn about our philosophy.

Cheers

Quickfoot
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Re: Roll your own index fund current viability

Post by Quickfoot » Sun May 20, 2018 7:50 pm

ETF index fund costs are so low you'd never be able to match them even with zero trade costs, your time has value. Just insuring your investments were tracking your desired index would result in more cost than investing in a low cost fund (automated doesn't really help you here because you have to develop, test and maintain the automated system which could easily be decades worth of ETF expense). You'd be incurring cost orders of magnitude higher than an ETF index fund for no benefit.

livesoft
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Re: Roll your own index fund current viability

Post by livesoft » Sun May 20, 2018 8:02 pm

Another pitfall is that one would have to reinvest dividends from individual stocks and keep track of that cash coming into the sweep account.
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JackInTheGreen
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Re: Roll your own index fund current viability

Post by JackInTheGreen » Sun May 20, 2018 9:26 pm

Thanks for the responses - I know that expense ratios are too low to make this approach worthwhile on its own. I just have an approach that I want to experiment with, mostly for fun and with a smallish amount of money, based on some academic research I've come across.

(For the record, I'm a long-time lurker and apart from my emergency fund, 100% of my money is in a Vanguard target-date fund.)

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whodidntante
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Re: Roll your own index fund current viability

Post by whodidntante » Sun May 20, 2018 9:53 pm

We peons can access securities lending at several brokers now. IB, Schwab, E*trade, and others offer it. You could accumulate your positions at a no commission broker and then transfer shares over if you like.

I remember one poster here was doing his/her own emerging markets factor fund here. You could shadow a DFA fund or something. I have a hard time imagining why it would produce better outcomes to replicate the S&P 500 index yourself over the long haul.

JackInTheGreen
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Re: Roll your own index fund current viability

Post by JackInTheGreen » Sun May 20, 2018 10:17 pm

It probably wouldn't. But that's not exactly what I have in mind - I want to mostly replicate the S&P 500, but with some stocks removed based on some academic research I've read. (Basically stocks that appear overvalued.)

I know we're all efficient market true believers, here, and my main approach is still straight index funds, it's just something I want to try out.

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dccboone
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Re: Roll your own index fund current viability

Post by dccboone » Sun May 20, 2018 11:21 pm

Welcome to the forum. I can’t answer your question whether or not the "roll your own index fund" method is more viable than in the past? I don’t know. And I don’t want to try and discourage your effort to find a better way. After all, that’s exactly what Jack Bogle did. Since then, many have come before you believing that index investing is equivalent to leaving money on the table especially if you’re smarter than the average guy walking down the street. If you haven’t read Bogle’s The Little Book of Common Sense Investing, I encourage you to do so. There are many permutations of Voltaire's, “Perfect is the enemy of good”. The more I learn, the more I’ve come to appreciate the beauty and simplicity of Vanguard’s Total Stock Market Index. It’s a “good” fund and I haven’t found anything that meets my needs better. :sharebeer

JackInTheGreen
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Re: Roll your own index fund current viability

Post by JackInTheGreen » Sun May 20, 2018 11:39 pm

We don't disagree. Like I said, I'm 100% in index funds in both my retirement and taxable accounts.

But I'm also a geek and this sort of thing is my idea of fun.

JackInTheGreen
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Re: Roll your own index fund current viability

Post by JackInTheGreen » Sun May 20, 2018 11:50 pm

Quickfoot wrote:
Sun May 20, 2018 7:50 pm
ETF index fund costs are so low you'd never be able to match them even with zero trade costs, your time has value. Just insuring your investments were tracking your desired index would result in more cost than investing in a low cost fund (automated doesn't really help you here because you have to develop, test and maintain the automated system which could easily be decades worth of ETF expense). You'd be incurring cost orders of magnitude higher than an ETF index fund for no benefit.
I think you may be overstating the costs a bit. A cap-weighted index doesn't require much in the way of ongoing adjustment for an individual investor because I don't have to deal with constant inflows and outflows. I'd have to handle dividend reinvestment, but that's easily automated as well.

I am a professional software engineer, by the way - quantopian is a free platform and a "close enough" mirroring of a simple index wouldn't take me more than a few hours of work.

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alpine_boglehead
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Re: Roll your own index fund current viability

Post by alpine_boglehead » Mon May 21, 2018 1:12 am

I once did a calculation for my situation (European ETFs getting double taxation due to US withholding taxes not being passed through, and paying local taxes again, plus 0,07 ER for the cheapest S&P 500 ETF). The advantage would be 0,27 basis points assuming a dividend yield of 2%. Tax loss harvesting on individual positions might boost that a bit further.

Might be interesting for large-ish portfolios and with commission-free brokers. Both not available to me for the time being :)

But that's in Europe, in the US the advantage would be much smaller. Your biggest gain would probably be the ability to tax-loss harvest on the individual losers. From what I've read, the robo-advisors do that, but then they charge their own management fee.
The worth of tax loss harvesting depends on the market situation and your personal situation, some members have posted that they are still winding down the tax-loss-harvesting losses they built in 2008/2009. So if a sever drop should come along, no need for sophisticated strategies on that side :twisted:

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oldcomputerguy
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Re: Roll your own index fund current viability

Post by oldcomputerguy » Mon May 21, 2018 7:23 am

JackInTheGreen wrote:
Sun May 20, 2018 3:40 pm
A few zero-commission brokers have cropped up over the past few years, like M1 and Robinhood. In light of this, is the "roll your own index fund" method more viable than in the past? Robinhood in particular has integrated with Quantopia, meaning the process could even be automated with modest effort.

My intuition on this is that rolling your own would probably underperform, but only very slightly, due do fund managers being able to lend out shares, bid/ask spreads etc. Are there any other pitfalls I'm missing?
In order to do your own index fund, you'd have to be able to buy shares of all the companies in the index. A quick check shows that buying just one share each of just the top ten companies in the S&P500 would cost $2,54.04 at today's NAV. Do you have enough cash laying around to be able to build your fund?
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

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oldcomputerguy
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Re: Roll your own index fund current viability

Post by oldcomputerguy » Mon May 21, 2018 7:26 am

JackInTheGreen wrote:
Sun May 20, 2018 10:17 pm
It probably wouldn't. But that's not exactly what I have in mind - I want to mostly replicate the S&P 500, but with some stocks removed based on some academic research I've read. (Basically stocks that appear overvalued.)
Sounds maybe like you're trying to duplicate the S&P 500 Value Index.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

JackInTheGreen
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Re: Roll your own index fund current viability

Post by JackInTheGreen » Mon May 21, 2018 11:35 am

oldcomputerguy wrote:
Mon May 21, 2018 7:23 am
In order to do your own index fund, you'd have to be able to buy shares of all the companies in the index. A quick check shows that buying just one share each of just the top ten companies in the S&P500 would cost $2,54.04 at today's NAV. Do you have enough cash laying around to be able to build your fund?
This is a very good point and I'm glad you raised it. That said, without going into specific numbers, this won't be an issue for me personally.

I will note that this is the reason I said I'll be able to create a "close enough" mirror of the index. A few outliers with huge share prices like GOOG will probably wind up being a bit over-weighted. (Cap-weighting will help mitigate that, of course.)

JackInTheGreen
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Re: Roll your own index fund current viability

Post by JackInTheGreen » Mon May 21, 2018 11:38 am

oldcomputerguy wrote:
Mon May 21, 2018 7:26 am
Sounds maybe like you're trying to duplicate the S&P 500 Value Index.
The idea I have is indeed similar in some ways, but uses a different methodology. One the the things I want to test is how closely my idea tracks that very fund.

gogleheads.orb
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Re: Roll your own index fund current viability

Post by gogleheads.orb » Mon May 21, 2018 11:42 am

I tried a simple version of this. I ended up buying 1000 stocks through Merrill edge. The problem I had in the end was that my taxes got too complicated. I figured that with the requirements to report cost bases everything would transfer automatically from the brokerage to turbotax and it would all be easy. It turns out that every year I had many transactions that didn't have cost bases. There were lots of different reasons for this. It took too much effort to calculate each basis. I ended up selling the stocks and ending the experiment.

Broken Man 1999
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Re: Roll your own index fund current viability

Post by Broken Man 1999 » Mon May 21, 2018 11:55 am

In one of Mr Bogle's books he opined that a high net worth investor might do exactly that. I don't recall if he defined a high net worth investor in the book.

I believe his idea was to buy 20-25 individual stocks (largest by market cap) and just hold them.

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David Jay
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Re: Roll your own index fund current viability

Post by David Jay » Mon May 21, 2018 11:59 am

Would it be less complex to hold the SP500 in an index fund and short the stocks you wish to exclude?
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aristotelian
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Re: Roll your own index fund current viability

Post by aristotelian » Mon May 21, 2018 12:08 pm

With increased opportunities for tax loss harvesting, it is possible that you could have a negative expense ratio. I would say give it a shot if you have the energy and enough money to be able to construct a diversified portfolio for yourself.

TravelerMSY
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Re: Roll your own index fund current viability

Post by TravelerMSY » Mon May 21, 2018 8:50 pm

Interesting topic.

It would be easy to do it cheap at IB or via their wealthfron/betterment clone, but why reinvent the wheel unless you want a special index or absolutely must have the tax loss harvesting?

I’d be more inclined to use replication for something like Baupost’s 13Ds, but that’s active management and off topic here.

JackInTheGreen
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Re: Roll your own index fund current viability

Post by JackInTheGreen » Mon May 21, 2018 11:06 pm

gogleheads.orb wrote:
Mon May 21, 2018 11:42 am
I tried a simple version of this. I ended up buying 1000 stocks through Merrill edge. The problem I had in the end was that my taxes got too complicated. I figured that with the requirements to report cost bases everything would transfer automatically from the brokerage to turbotax and it would all be easy. It turns out that every year I had many transactions that didn't have cost bases. There were lots of different reasons for this. It took too much effort to calculate each basis. I ended up selling the stocks and ending the experiment.
Yes. I'll be doing it in a IRA. I'd never even consider it in a taxable account. This is mostly for fun, and messing with the taxes would most definitely not be fun.

JackInTheGreen
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Re: Roll your own index fund current viability

Post by JackInTheGreen » Mon May 21, 2018 11:13 pm

David Jay wrote:
Mon May 21, 2018 11:59 am
Would it be less complex to hold the SP500 in an index fund and short the stocks you wish to exclude?
I had considered this. It makes sense in theory, but in practice it won't work for my idea, since the stocks I have in mind often have high short fees.

rockonhumblepie
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Re: Roll your own index fund current viability

Post by rockonhumblepie » Mon May 21, 2018 11:29 pm

JackInTheGreen wrote:
Mon May 21, 2018 11:13 pm
David Jay wrote:
Mon May 21, 2018 11:59 am
Would it be less complex to hold the SP500 in an index fund and short the stocks you wish to exclude?
I had considered this. It makes sense in theory, but in practice it won't work for my idea, since the stocks I have in mind often have high short fees.


I used to roll my own but the pre-roll are a tighter product 8-) rockon'

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