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Learning, Sharing, and Teaching => Investor Alley => Topic started by: bermudasq on June 23, 2015, 08:07:46 AM

Title: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: bermudasq on June 23, 2015, 08:07:46 AM
I need to sell about $180k in stocks in the coming weeks (you're welcome tax-man) and I'd like to put much of the proceeds in sector-specific ETFs.  I already have my retirement accounts in low-fee Vanguard index funds.  I searched prior forum posts and didn't see much in the way of sector-specific recommendations. 

Currently I have access to the Vanguard ETFs, and any ETFs sold through Capital One/Sharebuilder.  I'd prefer more concentrated ETFs (under 50 positions) than the 400+ position Vanguard ETFs.

I'm thinking maybe biotech, pharma, financials, software, internet, consumables, healthcare, semiconductor, and/or media.  Probably not industrials, materials, telecommunications, or utilities.

I know past performance does not guarantee future returns, but any favorite ETFs around here?

Thanks!

(Reason for stock sale - In the near future, I'm starting a job in a 2,000+ attorney law firm.  Lots of attorneys equals lots of clients and adverse parties.  I don't want to be conflicted out of work matters and I also want to be 100% safe from insider trading allegations.  I'm donating my most-appreciated stock positions to lesson the tax burden.)
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: forummm on June 23, 2015, 08:43:31 AM
If you just buy and hold VTI and VXUS is that really a conflict of interest? You'd own a pittance of any firm. And if any listed firm is suing another listed firm, either verdict would be fine, right?

I've got to believe that there's a common standard of practice here. Surely the entire legal industry isn't skipping index funds altogether?
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: forummm on June 23, 2015, 08:49:39 AM
For simple math, if you bought 50% VTI and 50% VXUS, your single largest holding would be Apple, at 2% of your portfolio (<$4k). Is that amount enough for a conflict?

You could also buy extra portions of small and mid cap indexes to decrease the amount of the mega caps you own. So if you did 20%VTI 20%VB 20%VO 40%VXUS your single largest holding would be Apple, at 0.8% of your portfolio (<$1500). Is that amount enough for a conflict?

If you start buying sector ETFs, you are going to have much more dollar value of certain firms.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: hodedofome on June 23, 2015, 10:07:37 AM
I could see someone equal weighting each available sector using SPDR or Vanguard ETFs (best expense ratios and very liquid) as this has historically (from ETF inception in 2000 to today) outperformed the total US stock index (possibly due to equal weighting or to rebalancing) by 5.8% vs 4.9% for VTI/VTSMX. But just cherry picking certain sectors while leaving others out doesn't make sense unless you know something the rest of us don't. I would just hold all the sector ETFs in equal weight, or do a total stock index like forummm says.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: sol on June 23, 2015, 10:51:50 AM
Generally speaking, owning whole market index funds will be equivalent and is sufficient to shield you from conflict of interest allegations.  I'm my case, I'm barred from owning lots of individual stocks and some sector-specific indices, but whole market indices are fine. 
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: milesdividendmd on June 23, 2015, 11:41:21 AM
If you want to pursue a quantitative strategy then you could consider dual momentum sector rotation as described in Gary Antonacci's Dual Momentum investing.

I wouldn't recommend it in a taxable account though.

I would echo others here and keep it simple with broad low cost index funds like VT, and VTI.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: bermudasq on June 23, 2015, 11:53:05 AM
Thanks for responses.  I apologize for my unclear email - I'm not selling any of my vanguard indexes.  I'm keeping the retirement accounts as is.  I'm selling all my individual stocks in Capital One/Sharebuilder.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: bermudasq on June 23, 2015, 11:57:01 AM
But just cherry picking certain sectors while leaving others out doesn't make sense unless you know something the rest of us don't. I would just hold all the sector ETFs in equal weight, or do a total stock index like forummm says.

My reasoning for cherry-picking is that I want to retain some of the industry exposure I've had in the stocks I'm selling.  Avoiding industrials and materials, because those do well when the global economy is growing strongly.  Telecommunications are too volatile for me - too much of competition.  And, I'm too young for utilities :)
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: forummm on June 23, 2015, 12:00:46 PM
If you want to pursue a quantitative strategy then you could consider dual momentum sector rotation as described in Gary Antonacci's Dual Momentum investing.

I wouldn't recommend it in a taxable account though.

I would echo others here and keep it simple with broad low cost index funds like VT, and VTI.

It seems that sector rotation would potentially open OP up to the conflict of interest problems he's setting out to avoid. Buy-and-hold of the whole market would remove those issues that may arise from trading or concentrating even temporarily in one sector or another.

But just cherry picking certain sectors while leaving others out doesn't make sense unless you know something the rest of us don't. I would just hold all the sector ETFs in equal weight, or do a total stock index like forummm says.

My reasoning for cherry-picking is that I want to retain some of the industry exposure I've had in the stocks I'm selling.  Avoiding industrials and materials, because those do well when the global economy is growing strongly.  Telecommunications are too volatile for me - too much of competition.  And, I'm too young for utilities :)

I think this kind of sector selection, especially for the reasons you mention, is unlikely to serve you well.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: milesdividendmd on June 23, 2015, 12:08:31 PM

If you want to pursue a quantitative strategy then you could consider dual momentum sector rotation as described in Gary Antonacci's Dual Momentum investing.

I wouldn't recommend it in a taxable account though.

I would echo others here and keep it simple with broad low cost index funds like VT, and VTI.

It seems that sector rotation would potentially open OP up to the conflict of interest problems he's setting out to avoid. Buy-and-hold of the whole market would remove those issues that may arise from trading or concentrating even temporarily in one sector or another.

But just cherry picking certain sectors while leaving others out doesn't make sense unless you know something the rest of us don't. I would just hold all the sector ETFs in equal weight, or do a total stock index like forummm says.

My reasoning for cherry-picking is that I want to retain some of the industry exposure I've had in the stocks I'm selling.  Avoiding industrials and materials, because those do well when the global economy is growing strongly.  Telecommunications are too volatile for me - too much of competition.  And, I'm too young for utilities :)

I think this kind of sector selection, especially for the reasons you mention, is unlikely to serve you well.

Its very unlikely that owning a sector specific index fund would open him up to conflict of interest problems. That's a stretch to say the least.

But I agree that haphazardly picking sectors in order to maintain industry exposures is unlikely to bring additional returns and is likely to bring additional costs.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: hodedofome on June 23, 2015, 12:19:41 PM

But just cherry picking certain sectors while leaving others out doesn't make sense unless you know something the rest of us don't. I would just hold all the sector ETFs in equal weight, or do a total stock index like forummm says.

My reasoning for cherry-picking is that I want to retain some of the industry exposure I've had in the stocks I'm selling.  Avoiding industrials and materials, because those do well when the global economy is growing strongly.  Telecommunications are too volatile for me - too much of competition.  And, I'm too young for utilities :)

How do you know the global economy will not be strong in the future?
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: forummm on June 23, 2015, 12:20:41 PM

If you want to pursue a quantitative strategy then you could consider dual momentum sector rotation as described in Gary Antonacci's Dual Momentum investing.

I wouldn't recommend it in a taxable account though.

I would echo others here and keep it simple with broad low cost index funds like VT, and VTI.

It seems that sector rotation would potentially open OP up to the conflict of interest problems he's setting out to avoid. Buy-and-hold of the whole market would remove those issues that may arise from trading or concentrating even temporarily in one sector or another.

But just cherry picking certain sectors while leaving others out doesn't make sense unless you know something the rest of us don't. I would just hold all the sector ETFs in equal weight, or do a total stock index like forummm says.

My reasoning for cherry-picking is that I want to retain some of the industry exposure I've had in the stocks I'm selling.  Avoiding industrials and materials, because those do well when the global economy is growing strongly.  Telecommunications are too volatile for me - too much of competition.  And, I'm too young for utilities :)

I think this kind of sector selection, especially for the reasons you mention, is unlikely to serve you well.

Its very unlikely that owning a sector specific index fund would open him up to conflict of interest problems. That's a stretch to say the least.

But I agree that haphazardly picking sectors in order to maintain industry exposures is unlikely to bring additional returns and is likely to bring additional costs.

The scenario I was thinking is that the rotation strategy you recommended could play out like this:
OP's signals tell him to sell X and buy Y.
Coincidentally the next day he's assigned to some cases involving a big firm in X suing a big firm in Y.

It just could end up looking funny. Maybe that's a problem, maybe not. But that was OP's original reason for liquidating old portfolio.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: milesdividendmd on June 23, 2015, 12:42:34 PM


If you want to pursue a quantitative strategy then you could consider dual momentum sector rotation as described in Gary Antonacci's Dual Momentum investing.

I wouldn't recommend it in a taxable account though.

I would echo others here and keep it simple with broad low cost index funds like VT, and VTI.

It seems that sector rotation would potentially open OP up to the conflict of interest problems he's setting out to avoid. Buy-and-hold of the whole market would remove those issues that may arise from trading or concentrating even temporarily in one sector or another.

But just cherry picking certain sectors while leaving others out doesn't make sense unless you know something the rest of us don't. I would just hold all the sector ETFs in equal weight, or do a total stock index like forummm says.

My reasoning for cherry-picking is that I want to retain some of the industry exposure I've had in the stocks I'm selling.  Avoiding industrials and materials, because those do well when the global economy is growing strongly.  Telecommunications are too volatile for me - too much of competition.  And, I'm too young for utilities :)

I think this kind of sector selection, especially for the reasons you mention, is unlikely to serve you well.

Its very unlikely that owning a sector specific index fund would open him up to conflict of interest problems. That's a stretch to say the least.

But I agree that haphazardly picking sectors in order to maintain industry exposures is unlikely to bring additional returns and is likely to bring additional costs.

The scenario I was thinking is that the rotation strategy you recommended could play out like this:
OP's signals tell him to sell X and buy Y.
Coincidentally the next day he's assigned to some cases involving a big firm in X suing a big firm in Y.

It just could end up looking funny. Maybe that's a problem, maybe not. But that was OP's original reason for liquidating old portfolio.

Buying a sector ETF and buying a firm are in no way equivalent.

Although a sector ETF may contain his client's firm, it will also contain his clients competitor's firms.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: nobodyspecial on June 23, 2015, 12:51:28 PM
Quote
Buying a sector ETF and buying a firm are in no way equivalent.
Although a sector ETF may contain his client's firm, it will also contain his clients competitor's firms.
Could still be a conflict though.
A client firm in sector hires them because there is going to be a big anti-trust / monopolies / whatever, case that is going to effect the whole sector.
He dumps that sector - still looks like insider trading.

Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: bermudasq on June 23, 2015, 01:01:02 PM
Thanks again for all replies.  I have benefited immensely your guys' writings in this and other posts.  If you (or others not yet present) could please excuse my perhaps unusual (or foolish) risk tolerances and investing goals, I'd still greatly appreciate any recommended ETFs from those in this forum who do go down the sector-specific path.  I'm still interested in these ETFs for the same reasons that I've done so much individual stock picking.  My stock picking results have greatly exceeded the performance of my Vanguard admiral index funds.  Could be dumb luck, but I'm still looking to continue my concentration in certain industries.

As an example, I own Apple through the following in my retirement accounts (which are staying as is):

Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
Vanguard 500 Index Fund Admiral Shares (VFIAX)
Vanguard Wellington Fund Admiral Shares (VWENX)

But, the actual amount of Apple exposure in these is small.  I donated a lot of Apple stock (up 135%) to avoid capital gains, and now I want to buy a tech ETF to get that exposure back, without buying more Apple stock.  I could buy Vanguard Information Technology ETF (VGT), but I was curious if those on this forum preferred other ETFs in that sector.  Without listing each of the 25 or so stocks I'm selling, I have the same goals for these other sectors.

I see from a subsequent post that there might still be possible conflicts of interest.  Fascinating - I'll have to give that some more thought. 
Title: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: milesdividendmd on June 23, 2015, 01:06:38 PM
Quote
Buying a sector ETF and buying a firm are in no way equivalent.
Although a sector ETF may contain his client's firm, it will also contain his clients competitor's firms.
Could still be a conflict though.
A client firm in sector hires them because there is going to be a big anti-trust / monopolies / whatever, case that is going to effect the whole sector.
He dumps that sector - still looks like insider trading.

This is so far-fetched as to be laughable, particularly if he is trading based on a system such as dual momentum which uses publicly available price information.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: forummm on June 23, 2015, 01:20:27 PM
Not to repeat myself, but I've got to believe that there's a common standard of practice for the legal profession. Perhaps the OP should just consult his new firm about a safe investment practice instead of having people speculate for him on the Internet.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: bermudasq on June 23, 2015, 01:49:11 PM
Not to repeat myself, but I've got to believe that there's a common standard of practice for the legal profession. Perhaps the OP should just consult his new firm about a safe investment practice instead of having people speculate for him on the Internet.

Indeed, my inquiry is not a conflict of interest inquiry.  No need to speculate on my conflict of interest risk, though I have found the discussion interesting.  Additionally, any concerns are likely obviated by my buy and hold tendencies.  It may be of interest to some, but the common standard of practice that I've observed is that those in the legal profession are too far in debt to do any investing.  It is due to my MMM ways that I was able to pay back my loans in short order and start my investing journey.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: mrpercentage on June 23, 2015, 02:30:04 PM
If I had to pick sectors it would be
50% XLY
50% XLV


Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: bermudasq on June 23, 2015, 02:55:40 PM
If I had to pick sectors it would be
50% XLY
50% XLV

Thanks a lot!  Just did a quick review, but those seem to be what I'm looking for.  I may still dabble in Vanguard Information Technology ETF (VGT) as well, unless I get a good alternative recommendation for that sector.  Even though VGT has almost 400 positions, 55% of the portfolio is concentrated in these stocks:

 1   Apple Inc.
 2   Microsoft Corp.
 3   Google Inc.
 4   Intel Corp.
 5   Facebook Inc.
 6   International Business Machines Corp.
 7   Oracle Corp.
 8   Cisco Systems Inc.
 9   Visa Inc.
 10   QUALCOMM Inc.

 So, still concentrated in positions I'm interested in (particularly Apple). 
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: dungoofed on June 23, 2015, 04:26:49 PM
Agree with forummm - ask your company to clarify their requriements. I've worked at companies that required you to liquidate (single stock) positions before starting, others that didn't care what you hold before you join the firm, others that the moment they bring on a new client require everyone to disclose and/or liquidate (single stock), and others that require you to place all trades via the firm after an application process and a wait of approximately 2-3 weeks.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: bermudasq on June 24, 2015, 07:17:33 AM
Agree with forummm - ask your company to clarify their requriements. I've worked at companies that required you to liquidate (single stock) positions before starting, others that didn't care what you hold before you join the firm, others that the moment they bring on a new client require everyone to disclose and/or liquidate (single stock), and others that require you to place all trades via the firm after an application process and a wait of approximately 2-3 weeks.

Thanks.  As I mentioned, I'm not primarily concerned about conflicts because of the preemptive actions described above.  I plan to sell all my stock positions before I start.  Then, if the firm asks, I'll be happy to disclose that I am invested in only certain specified index funds and ETFs.  To this point I have received only one ETF suggestion post, leading me to believe this in not the right forum to ask my question.  That is not to dismiss the other wealth of knowledge contained on this forum.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: dungoofed on June 24, 2015, 07:26:06 AM
Hm you might have some more luck on a ETF-picker's forum (if such a thing exist).
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: bermudasq on June 24, 2015, 07:43:12 AM
Hm you might have some more luck on a ETF-picker's forum (if such a thing exist).

Indeed.  My reasons for picking this forum are simply that this is the only forum I frequent, and that I find much helpful information and wisdom in the Investor Alley sub-forum.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: Aphalite on June 24, 2015, 10:31:00 AM
Historically, consumer staples, energy, and healthcare are the sectors that reward investors the most - the vanguard ETFs are VDC, VDE, and VHT

For the most part (unique company cases certainly exist) consumer discretionary is at the whims of overal economic health, industrials/materials/telecom requires too much free cash reinvestment to be good investments, tech is prone to overvaluation, and financials always have the chance of complete collapse (the way to juice shareholder return in financials is to lever up). Staples, energy, and healthcare are normally the safest and produce the most free cash for either shareholder distribution or company reinvestment

Energy is probably the cheapest right now (as a result, 10 year returns have decreased quite a bit over where it was last year), but be aware that all three (as well as the general market) could fall if interest rates rise due to P/E compression
https://personal.vanguard.com/us/funds/etf/all?assetclass=ss&assetclass=ss

PS: If you can find a way to hold a tobacco ETF - that would probably give you the best long term returns of them all - those stocks are constantly undervalued because of regulatory concerns, a dying customer base, and general health awareness, but the relatively high dividend + reinvestment into a depressed P/E gives you higher than normal returns
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: Eric on June 24, 2015, 10:49:13 AM
To this point I have received only one ETF suggestion post, leading me to believe this in not the right forum to ask my question. 

So you just want us to guess on what sectors will return the most money?  Hold on, let me get out my dart board and trained monkeys (http://www.automaticfinances.com/monkey-stock-picking/).
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: Scandium on June 24, 2015, 10:49:49 AM
I donated a lot of Apple stock (up 135%) to avoid capital gains, and now I want to buy a tech ETF to get that exposure back, without buying more Apple stock.  I could buy Vanguard Information Technology ETF (VGT), but I was curious if those on this forum preferred other ETFs in that sector.  Without listing each of the 25 or so stocks I'm selling, I have the same goals for these other sectors.

Why do you want more exposure to Apple? What's the rationale behind this?
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: milesdividendmd on June 24, 2015, 12:03:21 PM
Keep your Apple unless you can't.

If you believe in the company then investing in tech at large is a great example of "deworsification."
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: bermudasq on June 24, 2015, 01:05:30 PM
So you just want us to guess on what sectors will return the most money?  Hold on, let me get out my dart board and trained monkeys (http://www.automaticfinances.com/monkey-stock-picking/).

Not at all.  I am looking for recommended ETFs in the listed sectors.  My inquiry seems to have touched some sort of forum-nerve.  Seemed innocent enough when I raised it. 
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: bermudasq on June 24, 2015, 01:16:53 PM
Historically, consumer staples, energy, and healthcare are the sectors that reward investors the most - the vanguard ETFs are VDC, VDE, and VHT

For the most part (unique company cases certainly exist) consumer discretionary is at the whims of overal economic health, industrials/materials/telecom requires too much free cash reinvestment to be good investments, tech is prone to overvaluation, and financials always have the chance of complete collapse (the way to juice shareholder return in financials is to lever up). Staples, energy, and healthcare are normally the safest and produce the most free cash for either shareholder distribution or company reinvestment

Energy is probably the cheapest right now (as a result, 10 year returns have decreased quite a bit over where it was last year), but be aware that all three (as well as the general market) could fall if interest rates rise due to P/E compression
https://personal.vanguard.com/us/funds/etf/all?assetclass=ss&assetclass=ss

PS: If you can find a way to hold a tobacco ETF - that would probably give you the best long term returns of them all - those stocks are constantly undervalued because of regulatory concerns, a dying customer base, and general health awareness, but the relatively high dividend + reinvestment into a depressed P/E gives you higher than normal returns

Thank you very much for your comments and links.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: hodedofome on June 24, 2015, 02:42:35 PM
Not at all.  I am looking for recommended ETFs in the listed sectors.  My inquiry seems to have touched some sort of forum-nerve.  Seemed innocent enough when I raised it.

It's because none of us can tell you with any certainty what sectors of the market are going to do the best over the next 20-30+ years. In fact no-one can. You have to decrease your timeframe by a lot, and do a bunch of analysis to make a calculated bet (with a lot of variables) over the next 2-5 years. Anyone giving buy/hold/sell recommendations past 5 years out is delusional. Anything can happen over that timeframe.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: bdbrooks on June 25, 2015, 07:06:07 AM
A couple of thoughts...


Here are a few ETFs to look into

Let me know if you have any questions. (I am ready for backlash of people screaming about how you can't beat the market so you have to get the cheapest fund).
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: bermudasq on June 25, 2015, 07:58:52 AM
A couple of thoughts...

Very helpful.  Thanks a lot. I'll look into those ETFs. 

The 'Monkeys Pick Stocks' Eric posted said "most investors should choose index funds."  The Business Insider article you linked to said: "Most people are just terrible at investing."  This may certainly be true, but in a few select areas, I might not be in the "most people" category.

If I didn't have this job coming up, I would keep all $180k in individual stocks (this is about half of my net worth).  I would have left a lot of money on the table in prior years if I had kept the money in Vanguard index funds (like my retirement accounts). 

Business Insider says: "One big problem is that investors often find themselves buying at highs and selling at lows, especially when volatility picks up and patience is tested." My investing success has come from picking great companies and never selling at a loss.  Often (maybe 50% of the time), after I buy a stock, the price falls.  Then I buy more.  If the stock price keeps dropping, I keep buying.  I then sell down to a 5% position when the stock returns to black.  I may have to repeat this process a few times for some stocks, but overall, this has worked really well for me.  I currently have 5 stocks in the red, but the paper losses are far outweighed by the paper gains in my other 22 stocks.  This is in addition to my many realized gains and no realized losses.  I also happen to really enjoy investing.

I don't think I'd keep much more than $200k in individual stocks.  I need to be in a position to 'double down' without having to sell other stocks at inopportune times, and that only works when my initial investments are small compared to my paycheck.  So, there's more context in case anyone cares.  Not everyone has the same investing/retirement goals or risk tolerances.

I'm new to ETFs, so I'm still in gathering information.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: Scandium on June 25, 2015, 08:06:49 AM
A couple of thoughts...

Here are a few ETFs to look into

Let me know if you have any questions. (I am ready for backlash of people screaming about how you can't beat the market so you have to get the cheapest fund).

I guess I'll be that guy..
These really sound like some serious market timing nonsense! Always amazed what those marketing people come up with. No wonder there are more mutual funds that stocks in existence.

But hey, if you want to pay 9 times the expenses of an index knock yourself out. I really don't care, and take no personal offense whatever you do. Actually I find reading about these "fool proof" market beating strategies pretty hilarious so keep 'em coming!

And since OP is above average per his own admission, and I'm decidedly average myself, I'm afraid I can't help anyway.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: Aphalite on June 25, 2015, 08:40:44 AM
I'd be careful with the momentum ETFs - they're popular right now because we're in a long bull market, if one sector falls, there's always another sector that's rising. Unless if there's a trigger to hold cash when markets are falling rapidly, you're going to be switching between losers on a bear, and then you'll miss the initial pop when equities start rising again (momentum uses a lookback period). I think my main qualm with momentum is that you're constantly chasing returns - and we all know past performance does not predict the future. Momentum is more of a play on the psychology of other investors than actual intrinsic company value - but I guess you can also debate which force is more powerful - investor irrationality or intrinsic company value

Consider this passage from Peter Lynch's One Up on Wall Street (which is about stock picking not indexing during the last great bull run we had in the late 90s):
"If you put $100,000 in stocks on July 1, 1994, and stayed fully invested for five years, your $100,000 grew into $341,722. But if you were out of stocks for just thirty days over that stretch—the thirty days when stocks had their biggest gains—your $100,000 turned into a disappointing $153,792. By staying in the market, you more than doubled your reward."

See this link also - 33% of wealth would be gone since 1926 if you take away the best 100 days (out of 30,000+): http://theconservativeincomeinvestor.com/2013/06/06/stop-market-timing-and-start-dividend-investing/

P.S. bdbrooks, can you explain this:
"Buying sectors in a systematic approach in a taxable account is probably a great way to end up paying taxes (depending on your system)
Buying an ETF that will systematically buy or sell sectors is a great way to get around both of those previous points (and certainly leaves you clear from insider trading speculation)."

point #1 is only true if you're selling as part of your systematic approach or if you're buying a high turnover ETF - there's no tax consequences when you buy and hold
point #2 is not true - turnover in ETF generates tax consequences, whether through tax loss or through capital gains (unless you're swapping for like kind ETFs, which wouldn't be the case in a momentum fund) - you end up paying the bill at the end of the year, or, more likely, as a reduction on your actual return
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: bermudasq on June 25, 2015, 08:59:51 AM
And since OP is above average per his own admission, and I'm decidedly average myself, I'm afraid I can't help anyway.

There doesn't seem to be much backlash in the 'Share Your Badassity' sub-forum.  I also have no reason to doubt those in the 'Throw Down the Gauntlet' sub-forum claiming to run x miles a day, or swing a kettleball x number of times, even though "most people" can't do those things.

I am genuinely surprised that I've had more responses from those who took the time to say they couldn't/wouldn't help than posts from those offering their own experiences/views on ETFs.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: hodedofome on June 25, 2015, 09:22:59 AM
Consider this passage from Peter Lynch's One Up on Wall Street (which is about stock picking not indexing during the last great bull run we had in the late 90s):
"If you put $100,000 in stocks on July 1, 1994, and stayed fully invested for five years, your $100,000 grew into $341,722. But if you were out of stocks for just thirty days over that stretch—the thirty days when stocks had their biggest gains—your $100,000 turned into a disappointing $153,792. By staying in the market, you more than doubled your reward."

See this link also - 33% of wealth would be gone since 1926 if you take away the best 100 days (out of 30,000+): http://theconservativeincomeinvestor.com/2013/06/06/stop-market-timing-and-start-dividend-investing/

People throw this stat around but they don't mention the inverse - what if you missed the 100 worst days? From 1928 to 2010, if you missed the best 1% of all days your return gets crushed from 4.86% down to -7.08% per annum. However, the converse is true, if you miss the worst 1% of returns your returns explode to 19.09% a year. And take special note that if you miss both the best and worst 1% of days your return is higher than buy and hold. Source:

https://drive.google.com/file/d/0BzyyTlvGE-T2WUpTcThDVzlWeEE/view?usp=sharing

point #2 is not true - turnover in ETF generates tax consequences, whether through tax loss or through capital gains (unless you're swapping for like kind ETFs, which wouldn't be the case in a momentum fund) - you end up paying the bill at the end of the year, or, more likely, as a reduction on your actual return

It depends on how the ETF is structured. ETFs can have turnover and cause no taxable events for investors if they do it right. http://www.etf.com/etf-education-center/21017-why-are-etfs-transparent-and-tax-efficient.html
http://mebfaber.com/2011/04/29/active-etfs-just-the-beginning/
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: bdbrooks on June 25, 2015, 09:29:25 AM
A couple of thoughts...

Here are a few ETFs to look into

Let me know if you have any questions. (I am ready for backlash of people screaming about how you can't beat the market so you have to get the cheapest fund).

I guess I'll be that guy..
These really sound like some serious market timing nonsense! Always amazed what those marketing people come up with. No wonder there are more mutual funds that stocks in existence.

But hey, if you want to pay 9 times the expenses of an index knock yourself out. I really don't care, and take no personal offense whatever you do. Actually I find reading about these "fool proof" market beating strategies pretty hilarious so keep 'em coming!

And since OP is above average per his own admission, and I'm decidedly average myself, I'm afraid I can't help anyway.

First off, most people don't realize this, but Mr Bogle thinks that active management can make sense. He does think that it has to be done in a low cost manner, and he thinks you shouldn't go for the cheapest fund because it is the cheapest fund. (http://www.cnbc.com/id/102688265). It still needs to lowish in fees. There is no excuses for disconnecting your brain cells and getting a mutual fund paying 2% a year in fees.

Secondly, why do people that believe in passive management also believe that any deviation from a market cap weighted index is incredibly foolish? http://www.followingthetrend.com/2015/06/a-random-ass-kicking-of-wall-street/ Here he talks about how ridiculous this assumption is. He also shows how just changing how portfolios are weighted can have a huge impact on the returns.

Now if you are asking, "Aren't the momentum and sector rotation etfs different because they are actually choosing which to own and which to not own?" That is a fair and true point. However, momentum has been well documented to work over incredibly long timeframes (including out of sample tests) and across several asset classes (bonds, currencies, futures, commodities). Now these strategies are invested 100% of the time. Most issues with market timing involves jumping in and out of the market at the wrong times. This will not have that issue. It will be jumping in and out of sectors/stocks and there is risk there, but to call it market timing is a bit misguided (I would call it both systematic investing and active management but not market timing). If you are questioning whether momentum (or value investing for that matter) actually works then you haven't looked at the research with an open mind. If you don't want to do the research and look for ways to get a slight edge in the market, then that is fine. Your approach is reasonable. However, so is mine.

Furthermore, I didn't say this was "fool proof" (at least that I can find), and I am not saying that these strategies will beat the market every year. Some years they will lag, but momentum has generally outperformed even on a risk adjusted basis (http://blog.alphaarchitect.com/2015/03/26/the-best-way-to-combine-value-and-momentum-investing-strategies/). They are generally more volatile, but they have higher sharpe ratios and sortino ratios than their market cap weighted brethren.

Also, these are ETFs not mutual funds. The tax structure of a mutual fund would render these strategies useless if they were done inside of a mutual fund.

Furthermore, is .15% really that expensive for a strategy that has historically beat the market (over long enough time frames (should I really have to say that, no strategy ever beats the market every year, but if I don't put in this qualifier then people start interpreting it as "fool proof", rant over))?
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: hodedofome on June 25, 2015, 09:38:31 AM
And since OP is above average per his own admission, and I'm decidedly average myself, I'm afraid I can't help anyway.

There doesn't seem to be much backlash in the 'Share Your Badassity' sub-forum.  I also have no reason to doubt those in the 'Throw Down the Gauntlet' sub-forum claiming to run x miles a day, or swing a kettleball x number of times, even though "most people" can't do those things.

I am genuinely surprised that I've had more responses from those who took the time to say they couldn't/wouldn't help than posts from those offering their own experiences/views on ETFs.

Look, I'm an active trader/investor but it's all I do with my free time. I've put in thousands of hours of deliberate practice, read over 50 books, have at least 100 on my shelf I need to get to, and I daily follow about 100 trading/investing blogs. It would be hard for me to believe that someone could beat the market, apart from luck, from just making active investing a small hobby. It's hard, really hard. Making calculated predictions about the future takes a lot of work, for someone to just whilly nilly do it based on a gut feeling is pure luck. You can say you're just doing the Peter Lynch strategy of buying what you know, but if your research strategy was simply "I like the product, I'll buy the stock" that's not a good one. Lynch was much more sophisticated than that, and had the biggest bull market in history to provide a huge wind in his sails. There's position sizing and exit strategy which amateur investors don't understand but is vital for long term success. Do you understand the risks of your martingale strategy? If you buy a stock, and it goes down, you keep buying. What if you're wrong? What if it permanently stays depressed or goes to $0? At what point do you admit you are wrong? You need to know this in advance and calculate the probability of a risk of ruin so that you determine if you have a positive expectancy or not. If you haven't done this already, then I'm confident your past performance is mostly due to luck and you have no idea the risks you are taking to get your returns.

I'm not trying to be a jerk here, I encourage anyone who wants to get into active investing to go for it, as long as they know the risks ahead of time. Everyone told me I was stupid for trying but thankfully I didn't listen to them. But I started off really small and only increased my positions as I made money in my trading account. My hard earned savings were never at serious risk... But I had a ton to learn before my profits could be attributed more to skill than to luck.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: hodedofome on June 25, 2015, 09:43:08 AM
First off, most people don't realize this, but Mr Bogle thinks that active management can make sense. He does think that it has to be done in a low cost manner, and he thinks you shouldn't go for the cheapest fund because it is the cheapest fund. (http://www.cnbc.com/id/102688265). It still needs to lowish in fees. There is no excuses for disconnecting your brain cells and getting a mutual fund paying 2% a year in fees.

Secondly, why do people that believe in passive management also believe that any deviation from a market cap weighted index is incredibly foolish? http://www.followingthetrend.com/2015/06/a-random-ass-kicking-of-wall-street/ Here he talks about how ridiculous this assumption is. He also shows how just changing how portfolios are weighted can have a huge impact on the returns.

Now if you are asking, "Aren't the momentum and sector rotation etfs different because they are actually choosing which to own and which to not own?" That is a fair and true point. However, momentum has been well documented to work over incredibly long timeframes (including out of sample tests) and across several asset classes (bonds, currencies, futures, commodities). Now these strategies are invested 100% of the time. Most issues with market timing involves jumping in and out of the market at the wrong times. This will not have that issue. It will be jumping in and out of sectors/stocks and there is risk there, but to call it market timing is a bit misguided (I would call it both systematic investing and active management but not market timing). If you are questioning whether momentum (or value investing for that matter) actually works then you haven't looked at the research with an open mind. If you don't want to do the research and look for ways to get a slight edge in the market, then that is fine. Your approach is reasonable. However, so is mine.

Furthermore, I didn't say this was "fool proof" (at least that I can find), and I am not saying that these strategies will beat the market every year. Some years they will lag, but momentum has generally outperformed even on a risk adjusted basis (http://blog.alphaarchitect.com/2015/03/26/the-best-way-to-combine-value-and-momentum-investing-strategies/). They are generally more volatile, but they have higher sharpe ratios and sortino ratios than their market cap weighted brethren.

Also, these are ETFs not mutual funds. The tax structure of a mutual fund would render these strategies useless if they were done inside of a mutual fund.

Furthermore, is .15% really that expensive for a strategy that has historically beat the market (over long enough time frames (should I really have to say that, no strategy ever beats the market every year, but if I don't put in this qualifier then people start interpreting it as "fool proof", rant over))?

bdbrooks while I generally agree with what you're saying, the individual stock momentum funds aren't all they are cracked up to be. They are generally too diversified, when only a concentrated fund will have a chance at outsized performance. http://www.dualmomentum.net/2014/11/individual-stock-momentum-that-dog-dont.html
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: bdbrooks on June 25, 2015, 09:48:14 AM
P.S. bdbrooks, can you explain this:
"Buying sectors in a systematic approach in a taxable account is probably a great way to end up paying taxes (depending on your system)
Buying an ETF that will systematically buy or sell sectors is a great way to get around both of those previous points (and certainly leaves you clear from insider trading speculation)."

point #1 is only true if you're selling as part of your systematic approach or if you're buying a high turnover ETF - there's no tax consequences when you buy and hold
point #2 is not true - turnover in ETF generates tax consequences, whether through tax loss or through capital gains (unless you're swapping for like kind ETFs, which wouldn't be the case in a momentum fund) - you end up paying the bill at the end of the year, or, more likely, as a reduction on your actual return

#1 He was talking about buying certain sectors. My interpretation of that he was going to do a sector rotation strategy and not a buy and hold. Part of my assumption was that if you are going to buy and hold the sector for the long haul why not own a broad market index, because there will be sector crashes and if you aren't going to be selling them or rebalancing (selling the winners) then you will get things like real estate in 2006-2009, financials in 2008, and energy in 2014. With his recent comments it seems like he might not be looking at that kind of strategy. However, that is why I put a qualifier in there saying "Depending on your strategy". However, most of the logical strategies to me made this a valid point.

#2 ETFs generally don't pay capital gains distributions. http://finance.yahoo.com/news/etfs-capital-gains-distributions-remain-120000409.html Only 5% of the major ETFs paid capital gains. "And in almost every case, the distributions are very small--much less than 1% of the affected funds' net asset value."
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: bdbrooks on June 25, 2015, 09:54:07 AM
bdbrooks while I generally agree with what you're saying, the individual stock momentum funds aren't all they are cracked up to be. They are generally too diversified, when only a concentrated fund will have a chance at outsized performance. http://www.dualmomentum.net/2014/11/individual-stock-momentum-that-dog-dont.html

I know this is off topic, but how concentrated is concentrated enough? MTUM has about 80% of its assets in 50 stocks. While I do think that they could get more concentrated, I think it is well worth the .15% expense ratio.

I would like to add that I agree that most people don't have the time, interest, and capability to fully vet most investment strategies.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: Scandium on June 25, 2015, 09:58:14 AM
If you are questioning whether momentum (or value investing for that matter) actually works then you haven't looked at the research with an open mind. If you don't want to do the research and look for ways to get a slight edge in the market, then that is fine. Your approach is reasonable. However, so is mine.
Oh believe me I have. The more i read the more convinced I am that small cap, value, momentum or whatever flavor of the month is not worth it and will not perform any better that the index in the future. I read those links and was really convinced Bogle has much love for active management. He just ranked mutual funds, of course some active ones will perform well, duh.

Lay off it with the old "your mind isn't open" argument. Of course I wish I knew a secret to beating the market! Who wouldn't! But then I look into it and due to my nature I can only follow the data and i come away disappointed, again.

Furthermore, is .15% really that expensive for a strategy that has historically beat the market 
No, it wouldn't be to expensive for a strategy that will beat the market. But has and will are two different things. I think this might be Bogle's best speech on the subject. I've read it several times and it really changed the way I think:
http://www.vanguard.com/bogle_site/sp20020626.html
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: Aphalite on June 25, 2015, 10:03:22 AM
People throw this stat around but they don't mention the inverse - what if you missed the 100 worst days? From 1928 to 2010, if you missed the best 1% of all days your return gets crushed from 4.86% down to -7.08% per annum. However, the converse is true, if you miss the worst 1% of returns your returns explode to 19.09% a year. And take special note that if you miss both the best and worst 1% of days your return is higher than buy and hold. Source:

https://drive.google.com/file/d/0BzyyTlvGE-T2WUpTcThDVzlWeEE/view?usp=sharing

True enough hodedofome, but my point is, just like we can't tell when the ups will be, we can't tell when the worst days will be either - any momentum strategy uses a lookback period - by the time your lookback identifies the trend to get out or get in, the worst and best trading days will have already happened

#2 ETFs generally don't pay capital gains distributions. http://finance.yahoo.com/news/etfs-capital-gains-distributions-remain-120000409.html Only 5% of the major ETFs paid capital gains. "And in almost every case, the distributions are very small--much less than 1% of the affected funds' net asset value."

gotcha, that makes sense, thanks for the lesson - it's amazing how much taxes play into investing decisions, if only the US had a better tax system (maybe tax at the individual level?), investors wouldn't have to jump through any hoops - then again, it provides another advantage if you're willing to learn about it
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: hodedofome on June 25, 2015, 10:07:14 AM
True enough hodedofome, but my point is, just like we can't tell when the ups will be, we can't tell when the worst days will be either - any momentum strategy uses a lookback period - by the time your lookback identifies the trend to get out or get in, the worst and best trading days will have already happened


Actually, on Page 6 of the paper I quoted, it shows that 60-80% of the best and worst days occur when the market is below it's 200 day moving average (a very simple technical rule that's been around for decades).
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: Jeremy E. on June 25, 2015, 10:10:56 AM
VGSIX - REIT Index Fund (I actually am investing in this)
VBLTX - Long Term Bond Index (I actually am investing in this)
VGENX - Energy Fund
VGHCX - Health Care Fund
I can't find a 5th Sector specific one that I woud consider investing in.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: Aphalite on June 25, 2015, 10:55:23 AM
True enough hodedofome, but my point is, just like we can't tell when the ups will be, we can't tell when the worst days will be either - any momentum strategy uses a lookback period - by the time your lookback identifies the trend to get out or get in, the worst and best trading days will have already happened


Actually, on Page 6 of the paper I quoted, it shows that 60-80% of the best and worst days occur when the market is below it's 200 day moving average (a very simple technical rule that's been around for decades).

Sorry, don't have access to google apps here - Company is stingy. Question for you on this - you said 60-80% of best AND worst days occur - so is the suggestion to sit out the market when below 200 day moving average? You miss out on both best and worst days tho (not to mention dividends along the way - which is a pretty big factor in determining total returns), I can't read the paper but does it say what your overall return would be if you always sit out when market is below 200 day moving average versus staying in the entire time? Do you think too, that this trend will continue in the future? If you can't tell, then we're back to square one - I have no idea when the market will go up or down, I can only guess that the market will go up in the long run because historically it has and businesses (as opposed to cash) generate the most wealth over the long haul (but I don't know for sure), and I can guess that certain sectors, like tobacco, staples, energy, and healthcare will outperform others (but can't know that for sure either). I don't have anything against quantitative strategies, it just hasn't made sense to me is all (then again, a lot of investor behavior IS divorced from reality, so YMMV)
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: hodedofome on June 25, 2015, 11:03:02 AM
Here's a few screenshots of the paper, it shows that if you missed both the best and the worst, your returns were better than buy and hold. The reason is the best and world days happen in the most volatile markets, and the most volatile markets happen when the market is heading down. I'm not saying everyone should go out and do this, this is mostly in response to the idea that you should always buy and hold because you'll miss the best days. This analysis shows that there's more to the story. And of course the future won't necessarily be like the past.

(http://s7.postimg.org/kd2l8sn6j/10_Best_1.png)

(http://s7.postimg.org/fsgetv3h7/10_Best_2.png)
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: capitalninja on June 25, 2015, 11:48:42 AM
Dunno if you've already made your purchases (thread was tl;dr) but Vanguard is about to declare dividends for most of their funds tomorrow (6.26.2015) so you have the rest of today to get your buys in to benefit from the upcoming dividends/distributions next week.

"Free" shares is always a nice thing imo.

Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: Jeremy E. on June 25, 2015, 11:56:42 AM
Here are some that I've been watching...
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: skyrefuge on June 25, 2015, 12:00:31 PM
Dunno if you've already made your purchases (thread was tl;dr) but Vanguard is about to declare dividends for most of their funds tomorrow (6.26.2015) so you have the rest of today to get your buys in to benefit from the upcoming dividends/distributions next week.

"Free" shares is always a nice thing imo.

This is completely backwards. Purchasing shares shortly before a dividend payment is a bad thing, not a benefit.

When a fund pays a dividend, it's NAV ("share price") drops by the amount of the dividend. So, in the absence of taxation, your total wealth before and after the dividend payment is identical. Your $1000 investment in the fund becomes a $950 investment + a $50 dividend. There are no "free" shares given to you.

And if your funds are not held in a tax shelter (which is the case for the OP), then you are worse off because you must pay taxes on those dividends. If he instead waits until after the dividend payment, then he avoids that taxable event.

Vanguard includes a paragraph giving this same advice (Don't "buy a dividend") on every news quarterly article they publish about upcoming distributions. https://personal.vanguard.com/us/insights/article/june-dividends-062015
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: milesdividendmd on June 25, 2015, 12:03:16 PM
Dunno if you've already made your purchases (thread was tl;dr) but Vanguard is about to declare dividends for most of their funds tomorrow (6.26.2015) so you have the rest of today to get your buys in to benefit from the upcoming dividends/distributions next week.

"Free" shares is always a nice thing imo.

This is completely backwards. Purchasing shares shortly before a dividend payment is a bad thing, not a benefit.

When a fund pays a dividend, it's NAV ("share price") drops by the amount of the dividend. So, in the absence of taxation, your total wealth before and after the dividend payment is identical. Your $1000 investment in the fund becomes a $950 investment + a $50 dividend. There are no "free" shares given to you.

And if your funds are not held in a tax shelter (which is the case for the OP), then you are worse off because you must pay taxes on those dividends. If he instead waits until after the dividend payment, then he avoids that taxable event.

Vanguard includes a paragraph giving this same advice (Don't "buy a dividend") on every news quarterly article they publish about upcoming distributions. https://personal.vanguard.com/us/insights/article/june-dividends-062015

Bingo!  100% correct.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: bdbrooks on June 25, 2015, 12:08:08 PM
Dunno if you've already made your purchases (thread was tl;dr) but Vanguard is about to declare dividends for most of their funds tomorrow (6.26.2015) so you have the rest of today to get your buys in to benefit from the upcoming dividends/distributions next week.

"Free" shares is always a nice thing imo.

As pointed out by others. This is A) a useless strategy in a tax sheltered account and B) a dumb strategy in a taxable account.

I just wish that we could have had someone refute this back on the previous page for the sake of readers that only care enough to read the first page.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: sol on June 25, 2015, 01:06:36 PM
I just wish that we could have had someone refute this back on the previous page for the sake of readers that only care enough to read the first page.

Skyrefuge has been on the HUNT recently, seeking out bad investment advice on the forums and then putting the smack down.

If we had like three more of him around, we could keep this place pretty tidy.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: forummm on June 25, 2015, 05:18:44 PM
Dunno if you've already made your purchases (thread was tl;dr) but Vanguard is about to declare dividends for most of their funds tomorrow (6.26.2015) so you have the rest of today to get your buys in to benefit from the upcoming dividends/distributions next week.

"Free" shares is always a nice thing imo.

Buying the dividend doesn't make any sense. A dividend is just depletion of your capital.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: Jeremy E. on June 25, 2015, 05:23:27 PM
Dunno if you've already made your purchases (thread was tl;dr) but Vanguard is about to declare dividends for most of their funds tomorrow (6.26.2015) so you have the rest of today to get your buys in to benefit from the upcoming dividends/distributions next week.

"Free" shares is always a nice thing imo.

This is completely backwards. Purchasing shares shortly before a dividend payment is a bad thing, not a benefit.

When a fund pays a dividend, it's NAV ("share price") drops by the amount of the dividend. So, in the absence of taxation, your total wealth before and after the dividend payment is identical. Your $1000 investment in the fund becomes a $950 investment + a $50 dividend. There are no "free" shares given to you.

And if your funds are not held in a tax shelter (which is the case for the OP), then you are worse off because you must pay taxes on those dividends. If he instead waits until after the dividend payment, then he avoids that taxable event.

Vanguard includes a paragraph giving this same advice (Don't "buy a dividend") on every news quarterly article they publish about upcoming distributions. https://personal.vanguard.com/us/insights/article/june-dividends-062015
If this was true, wouldn't it make sense to sell today and rebuy after dividends come in and price drops?
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: milesdividendmd on June 25, 2015, 05:37:38 PM
In a taxable account, and in rare circumstances maybe, but then there would be the cost of taking capital gains, the friction of trading costs, etc. which would far outweigh any benefit.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: skyrefuge on June 25, 2015, 05:53:48 PM
If this was true, wouldn't it make sense to sell today and rebuy after dividends come in and price drops?

No. The general principle here is that you want to delay any "selling" for as long as possible, because it's "selling" that triggers taxable events, and to maximize your wealth you generally prefer to pay taxes as late as possible (and ideally, never).

A dividend is a forced form of selling, and as such, it triggers a taxable event whether you want it or not. Thus, if you can easily avoid a dividend payment by buying a couple days later, that's probably a good idea.

On the other hand, selling your already-existing holding in order to avoid a dividend will generally not avoid the taxable event. It will simply replace a dividend tax with a capital-gains tax. If your shares have been held for several years and appreciated significantly, this will be much worse for you than simply holding and paying the dividend tax. And even in the case where the only appreciation you've seen is the bulge in NAV due to the accumulated-but-undistributed dividends since the last dividend payment, the short-term capital gains tax on that bulge you'd pay when selling will likely exceed the dividend tax you'd pay while holding.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: mrpercentage on June 25, 2015, 08:47:45 PM
Dunno if you've already made your purchases (thread was tl;dr) but Vanguard is about to declare dividends for most of their funds tomorrow (6.26.2015) so you have the rest of today to get your buys in to benefit from the upcoming dividends/distributions next week.

"Free" shares is always a nice thing imo.

This is completely backwards. Purchasing shares shortly before a dividend payment is a bad thing, not a benefit.

When a fund pays a dividend, it's NAV ("share price") drops by the amount of the dividend. So, in the absence of taxation, your total wealth before and after the dividend payment is identical. Your $1000 investment in the fund becomes a $950 investment + a $50 dividend. There are no "free" shares given to you.

And if your funds are not held in a tax shelter (which is the case for the OP), then you are worse off because you must pay taxes on those dividends. If he instead waits until after the dividend payment, then he avoids that taxable event.

Vanguard includes a paragraph giving this same advice (Don't "buy a dividend") on every news quarterly article they publish about upcoming distributions. https://personal.vanguard.com/us/insights/article/june-dividends-062015

What funds are you referring to?
When Apple paid me a dividend, it just paid me, the same with Mattel, Ford, and Boeing. AMECX's share price does not drop when it pays me either. In fact the only ones I have seen do that are extremely high yield REIT's. Those drop by about the exact price of the dividend. Of course you would have more value if you could reinvest it, but sometimes that Ford dividend belongs in NM, or BA, or DIS, or whatever the best deal is at the time.

Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: skyrefuge on June 25, 2015, 09:06:43 PM
What funds are you referring to?
When Apple paid me a dividend, it just paid me, the same with Mattel, Ford, and Boeing. AMECX's share price does not drop when it pays me either.

I'm referring to all funds. Including AMECX. Its NAV is most definitely adjusted downward by the amount of the dividend.

Please see for yourself by looking at its price history (http://finance.yahoo.com/q/hp?s=AMECX&a=00&b=2&c=1986&d=05&e=26&f=2015&g=d&z=66&y=66) and see what happens on the dividend dates.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: mrpercentage on June 25, 2015, 11:06:10 PM
interesting.. another reason to pick stocks myself and remove all middlemen and commissions with Robinhood.

although with a little thought all companies are paying them dividends at various times, so they must be holding it (increasing the share price) then universally distributing various dividend dates on the same date for the fund(hence the drop in price)
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: milesdividendmd on June 25, 2015, 11:18:20 PM

Dunno if you've already made your purchases (thread was tl;dr) but Vanguard is about to declare dividends for most of their funds tomorrow (6.26.2015) so you have the rest of today to get your buys in to benefit from the upcoming dividends/distributions next week.

"Free" shares is always a nice thing imo.

This is completely backwards. Purchasing shares shortly before a dividend payment is a bad thing, not a benefit.

When a fund pays a dividend, it's NAV ("share price") drops by the amount of the dividend. So, in the absence of taxation, your total wealth before and after the dividend payment is identical. Your $1000 investment in the fund becomes a $950 investment + a $50 dividend. There are no "free" shares given to you.

And if your funds are not held in a tax shelter (which is the case for the OP), then you are worse off because you must pay taxes on those dividends. If he instead waits until after the dividend payment, then he avoids that taxable event.

Vanguard includes a paragraph giving this same advice (Don't "buy a dividend") on every news quarterly article they publish about upcoming distributions. https://personal.vanguard.com/us/insights/article/june-dividends-062015

What funds are you referring to?
When Apple paid me a dividend, it just paid me, the same with Mattel, Ford, and Boeing. AMECX's share price does not drop when it pays me either. In fact the only ones I have seen do that are extremely high yield REIT's. Those drop by about the exact price of the dividend. Of course you would have more value if you could reinvest it, but sometimes that Ford dividend belongs in NM, or BA, or DIS, or whatever the best deal is at the time.

I'm no stock picker but my guess is that when any of those companies paid you a dividend the price per share was adjusted down by the exact same proportion as the dividend. You may not have noticed it but that is almost certainly the case. There is no difference in the relationship of the NAV to the stock price in an individual stock and an index share. The NAV is decreased in both by the amount of the dividend.

From this article:

http://www.investopedia.com/articles/stocks/07/dividend_implications.asp

"When a dividend is paid, several things can happen. The first of these is changes to the price of the security and various items tied to it. On the ex-dividend date, the stock price is adjusted downward by the amount of the dividend by the exchange on which the stock trades. For most dividends this is usually not observed amidst the up and down movements of a normal day's trading. It becomes easily apparent, however, on the ex-dividend dates for larger dividends, such as the $3 payment made by Microsoft in the fall of 2004, which caused shares to fall from $29.97 to $27.34."



Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: Aphalite on June 26, 2015, 07:31:22 AM
What miles said - no free lunch with dividends, companies can use their cash in a few different ways

1) distribute as a dividend - owners get cash, cash is lost to the company forever
2) buyback stock on the open market - owners get a pop in their share price and a higher share of future profits, cash is lost to company forever
3) reinvest into the company by either paying down debt, building new infrastructure to produce goods, spending on advertising to get more customers and thus more sales - when you invest in a stock, you're hoping that the company is getting a better return on this invested capital than you could if it paid you cash

As you can see, dividends decrease the intrinsic value of a company, because the profit has been distributed to owners, so don't look at dividends as a free handout - there might be instances where companies that pay dividends as a GROUP is better than companies that don't, but that's because most dividend paying companies are mature and profitable (can't fake cash), where non-dividend paying companies are usually newer/startups or have to reinvest heavily into operations to maintain its profit (less free cash flow)
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: sb_NoVA on June 26, 2015, 07:40:28 AM
if you believe the Fama and French academic research that small does better than large, and value does better than growth, following is a list of ETFs recommended by Paul Merriman. 

http://portal.paulmerriman.com/home/mutual-fund-etf-recommendations/

Fund   Symbol   Aggressive   Moderate   Conservative
Schwab U.S. Large Cap   SCHX   11%   6%   4%
Vanguard Value   VTV   11%   7%   5%
Schwab U.S. Small Cap   SCHA   11%   6%   4%
Vanguard Small Cap Value   VBR   12%   7%   5%
Vanguard REIT Index   VNQ   5%   3%   2%
Schwab International Equity   SCHF   9%   5%   3%
iShares MSCI EAFE Value Index   EFV   9%   6%   4%
Vanguard FTSE All‐Wld ex‐US SmCp Idx   VSS   9%   5%   3%
WisdomTree International SmallCap Div   DLS   9%   6%   4%
Schwab Emerging Markets Equity   SCHE   9%   6%   4%
Vanguard Global ex‐US Real Estate   VNQI   5%   3%   2%
iShares Barclays 1‐3 Year Treasury Bond   SHY   0%   12%   18%
iShares Barclays 3‐7 Year Treasury Bond   IEI   0%   20%   30%
iShares Barclays TIPS Bond   TIP   0%   8%   12%
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: bermudasq on June 26, 2015, 08:40:12 AM
Thanks for the comments!
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: skyrefuge on June 26, 2015, 08:40:45 AM
interesting.. another reason to pick stocks myself and remove all middlemen and commissions

No. That's like saying "the high amount of potassium in bananas is another reason for me to reformat my hard drive". One does not follow from the other.

although with a little thought all companies are paying them dividends at various times, so they must be holding it (increasing the share price) then universally distributing various dividend dates on the same date for the fund(hence the drop in price)

Yes, that's correct. And you can think of individual stocks the same way: a company gets cash paid to it at various times as different customers pay their bills, so it holds it (increasing the share price) then universally distributes those various profits to the shareholder on a single date (hence the drop in price).
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: mrpercentage on June 26, 2015, 07:00:21 PM
I'm watching. I will see what happens with NM, JPM, and DIS. I doubt they will drop but I have been wrong before. I do think dividend capture is responsible for some drops. If you watch the ex-date you can see it happen.
I think stocks are different because they pay you. It doesn't get trapped in the fund until a later distribution date.
Share price is increased by demand not company cash. A sell after a dividend capture would drop the price but not the dividend paid. Funds are different as cash is part of the portfolio dropping the total value at payout. I don't see how a stock could be the same unless that stock was like a fund, etf, reit ect

NM's distribution date is today. Its dividend is $0.06 and its share price is up $0.11
I really think the drop in price you refer to is the release of the cash in a portfolio of a fund-- nothing to do with stocks as they are just one part of the total value of the portfolio
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: milesdividendmd on June 26, 2015, 07:37:13 PM

I'm watching. I will see what happens with NM, JPM, and DIS. I doubt they will drop but I have been wrong before. I do think dividend capture is responsible for some drops. If you watch the ex-date you can see it happen.
I think stocks are different because they pay you. It doesn't get trapped in the fund until a later distribution date.
Share price is increased by demand not company cash. A sell after a dividend capture would drop the price but not the dividend paid. Funds are different as cash is part of the portfolio dropping the total value at payout. I don't see how a stock could be the same unless that stock was like a fund, etf, reit ect

Where do you imagine the dividend from a fund comes from?  It is nothing more the cumulative dividends of the companies present within the fund minus the expense ratio.

A share in a company is nothing more than a fractional ownership stake in a company. So when a company distributes its cash to shareholders the cumulative value of the company drops by the total amount of the cash distributed, which means that the value of each share must drop proportionally.

The only possible advantage of owning a share in a company as opposed to a share in an index fund is if the individual company happens to outperform the index and the absence of an expense ratio.

The disadvantage is that 2/3 of individual shares will underperform the broad index (bad odds), increased transaction costs, and the idiosyncratic risk of not being diversified. (Idiosyncratic risk is the type of risk that you do not get paid for when investing.)
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: mrpercentage on June 26, 2015, 08:36:17 PM
There is one problem with that argument. I have seen many stocks with more value in assets than in share price. Based on your argument that should be impossible but it is clearly not. An asset play is one of Peter Lynchs investment strategies.

A fund must also calculate the cash it holds into share price. Stocks do not. That is just a way to tell if they are valued correctly.

A fund might hold ten percent cash so it doesn't have to liquidate every time someone takes a payment. That cash is part of the funds value -only demand is part of a stocks explaining why stocks in the depression were often pennies on the dollar even though the company may have been worth much more. The whole value philosophy proves that stock price is not married to assets. You just recognize that a valuable company is not currently in demand and wait for the demand to return.

So when a fund pays out dividends that it has been holding as cash-- one of its assets (it's cash) just decreased in value but the stocks that paid them just go where demand does. Some up, some down, some dip with traders capturing dividends.
Remember science is repeatable and NM is up today so what does that tell you?
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: skyrefuge on June 26, 2015, 09:10:14 PM
NM is up today so what does that tell you?

It tells me that, if it hadn't paid its $0.06 dividend, it would have been up $0.17 instead of merely up $0.11.

Say I weigh myself in the morning, and then take satisfying 1 lb. shit. Later that night I weigh myself again, and find that I have gained a pound over my morning weigh-in. By your logic, you would say "holy anti-matter shit! His weight went up, so that means he must shit shit with a negative mass!" You'd be digging in my toilet to collect pieces of my magical, physics-defying shit (while everyone else would realize that my shit is perfectly ordinary, and my weight gain came from unrelated factors, like eating 3 lbs. of food that day). Do you really want to become a shit-collector?  If not, please just listen to miles.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: mrpercentage on June 26, 2015, 09:32:15 PM
The cash held by a company is not a fixed anchor point for a stock price. It's does effect a fund price because cash is one of the holdings. They hold the dividends with their cash pool. So they collect January and February driving up one of the funds holdings (cash) and lose what they distribute on March. A stock doesn't work the same way. It pays you sometimes when it can't afford it and cancels paying sometimes when it can. That will piss off share holders and they will effect the price but the payment of dividends does not effect a regular stocks price.

Your shit story didn't sell me. I could be wrong but I just finished reading one up on wallstreet and he talks about running funds-- so I don't think so
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: milesdividendmd on June 26, 2015, 11:23:52 PM
The cash held by a company is not a fixed anchor point for a stock price. It's does effect a fund price because cash is one of the holdings. They hold the dividends with their cash pool. So they collect January and February driving up one of the funds holdings (cash) and lose what they distribute on March. A stock doesn't work the same way. It pays you sometimes when it can't afford it and cancels paying sometimes when it can. That will piss off share holders and they will effect the price but the payment of dividends does not effect a regular stocks price.

Your shit story didn't sell me. I could be wrong but I just finished reading one up on wallstreet and he talks about running funds-- so I don't think so

Since stock prices reflect the discounted cash value of anticipated future earnings it is certainly true that the cap weighted value of a company can rarely drop below it's net current asset value (as in Ben Graham's net/nets.) This does not mean that the stock price is not automatically adjusted down by the amount of the dividend by the exchange.  Dividends are expressed as "dividends per share" and the share price is adjusted down by the exact amount of the dividend.

If you can find a reference otherwise, please share it. I would be interested to learn that my understanding of this was flawed, which is certainly possible, since my investing focus has always been on locost index funds as my investment vehicle of choice.  but I am honestly aware of no instance where your conception of the stock price not being adjusted down by the amount of the dividend is the case.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: sol on June 26, 2015, 11:29:35 PM
A share in a company is nothing more than a fractional ownership stake in a company. So when a company distributes its cash to shareholders the cumulative value of the company drops by the total amount of the cash distributed, which means that the value of each share must drop proportionally.

The unfortunate flaw in this argument is that the price of a share and the value of a share are not necessarily the same.  The market is not perfectly efficient.  The price is whatever the masses say it is, so they might decide that the price should stay the same as the value is depleted by a dividend payment.  In that case, MrP is right and the dividends would be "free money".  It shouldn't happen, but it totally could.

I'm actually kind of surprised to see miles here arguing so strongly in favor of the EMH, given his previous forays into technical trading schemes that rely on violating it.
Title: Re: If you were to buy 5-10 sector-specific ETFs today . . .
Post by: milesdividendmd on June 26, 2015, 11:46:48 PM
A share in a company is nothing more than a fractional ownership stake in a company. So when a company distributes its cash to shareholders the cumulative value of the company drops by the total amount of the cash distributed, which means that the value of each share must drop proportionally.

The unfortunate flaw in this argument is that the price of a share and the value of a share are not necessarily the same.  The market is not perfectly efficient.  The price is whatever the masses say it is, so they might decide that the price should stay the same as the value is depleted by a dividend payment.  In that case, MrP is right and the dividends would be "free money".  It shouldn't happen, but it totally could.

I'm actually kind of surprised to see miles here arguing so strongly in favor of the EMH, given his previous forays into technical trading schemes that rely on violating it.

You should be suprised because I'm not arguing for EMH at all, Sol.  You've misread my statement.

I'm arguing that the exchange upon which a stock is traded automatically adjusts the stock price down by the amount of the dividend.  That's all.  The price can certainly be bid up the next traded second after the price is adjusted.  And this movement can be rational or not.

See above where I said as much:

"it is certainly true that the cap weighted value of a company can rarely drop below it's net current asset value (as in Ben Graham's net/nets.)"

Any instance where a company drops below its liquidation value is an arbitrage opportunity, because your worst case scenario is liquidation.  This happens, and is a perfect example of an inefficient market.  All I'm saying is that if such a company pays a dividend, its price per share will be reduced by the exact amount as the dividend per share.  It's a mechanical argument, not really a philosophical one.