Author Topic: Reduce Exposure to one company in a Fund  (Read 3419 times)

morecoffee

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Reduce Exposure to one company in a Fund
« on: April 11, 2015, 08:44:45 AM »
How can I eliminate the affects of one company that is included in an index fund?  Example: Apple makes up almost 4% of the S&P 500, but I want to reduce expose to this particular company while still holding the rest of the S&P 500 in a low cost index fund.  Preferably an investment that would produce the exact opposite financial affect to my portfolio.

1.  Does something like this exists?  If so:
2.  Does it have a favorable tax treatment (long-term status)?  I assume not.
3.  If I had 4% AAPL in my index funds and bought something to reduce the exposure of the stock does that mean I've caused 8% of portfolio to be not performing for me? : (

patricles

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Re: Reduce Exposure to one company in a Fund
« Reply #1 on: April 11, 2015, 09:25:05 AM »
You'd probably have to find an ETF that tracks the s&p 500 excluding apple, same idea as an index fund that tracks the global stock market excluding US such as VFWIX.  I don't know of any such vehicle, I did a quick google search and didn't find anything.  Maybe another Mustachian will know of one.

But I think the better question is why do you wish to avoid exposure to Apple in particular?  That seems like a form of negative stock picking; rather than loading up on a stock because you think it will soar, you wish to specifically avoid it.  The philosophy of indexing is that no one can reliably predict the performance of individual companies so one might as well cheaply invest in a broad market. 

LordSquidworth

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Re: Reduce Exposure to one company in a Fund
« Reply #2 on: April 11, 2015, 09:49:06 AM »
S&P 500 Equal Weight Index (EWI)

Aphalite

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Re: Reduce Exposure to one company in a Fund
« Reply #3 on: April 11, 2015, 10:02:29 AM »
S&P 500 Equal Weight Index (EWI)

+1, RSP is the standard equal weighted fund, you could probably find others

Indexer had a post where he was able to doctor up an index that equal weighted the sectors - it was a lot of maintenance but looked like it could work

forummm

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Re: Reduce Exposure to one company in a Fund
« Reply #4 on: April 11, 2015, 10:26:22 AM »
S&P 500 Equal Weight Index (EWI)

+1, RSP is the standard equal weighted fund, you could probably find others

Indexer had a post where he was able to doctor up an index that equal weighted the sectors - it was a lot of maintenance but looked like it could work

This fund performs essentially the same as the Vanguard Mid Cap Index Fund. You can just by the  Vanguard fund instead and save money on expense ratios. No, they aren't the same stocks as the RSP. But they perform about the same.

Equal weighting the sectors would decrease your exposure to Apple, but mostly because you'd be owning about 2500 stocks instead of 500, and you'd be underweighting all technology stocks in favor of the other sectors.

If you are wanting to have less exposure to Apple, you could switch from the 500 Index Fund to the Total Stock Index Fund. Both of Vanguard's have the same expense ratio. And the performance will be about the same over the long run (Total Stock may do better). It's still 3.2% of the fund though.

If you want to bet against Apple, you can do that. I don't recommend it though. You can short the stock, or simulate a short using options. You'd need a brokerage account that would let you do this, and some collateral, and be willing to lose a lot of money. And there are costs to shorting or options trading. Even if you are "right" in the long run that the company will be worth only 1/2 its current value 15 years from now, a lot can happen in the mean time. It could go up another 80% before it comes down. If you were betting against it the whole way up, you'd lose a ton of money. The market can stay irrational longer than you can stay solvent.

Apple is one of the most analyzed companies in the world. A lot of people who know a lot more about the company than anyone on this board have put billions of dollars into it. The price is probably pretty reasonable. They make a ton of money and have a ton of cash sitting around. Even with all that cash, their P/E is still reasonable compared to the rest of the market.

morecoffee

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Re: Reduce Exposure to one company in a Fund
« Reply #5 on: April 11, 2015, 12:27:07 PM »
I was hoping there was some magic investment that would be an exact antidote for an individual stock that I was not aware of.  I do have a US total Mkt & World index ex-US so I'm probably below 3% of any one company and do no need a solution right, but was curious if such a thing existed. 

I hadn't noticed EWI type funds before but will be looking into them.  I also am not ready for the level of sophistication to manage a portfolio of shorts.  Thank you for showing me something new with the EWI's.

Thank you all for the responses.

puetzk

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Re: Reduce Exposure to one company in a Fund
« Reply #6 on: April 11, 2015, 12:55:58 PM »
The exact "antidote" would be to short-sell exactly the same number of shares you (indirectly) own through the fund, but don't want to hold. By doing so, you get the money back in your pocket, and if you both sell the index fund and the buy to cover the short at the same time/price, the performance of the combination would be the same as an index that excluded that shorted stock(s).

There are problems with this in practice, though:
1) your index fund position almost certainly contains a fractional number of shares, and it can change if the index changes composition. So you can at best approximate shorting the correct number at the correct time.
2) You're going to take a loss on the extra trading commissions, bid/ask spread, etc.
3) Naked short selling is quite restricted, and only possible very short-term (since the buyer does expect you to deliver the stock!). To hold this position for any length of time, you're going to have to arrange someone willing to loan you the shares, who will want to be paid (over and above the actual trade commissions) for doing so. You could also be forced to close the short position at any time if the lender demands these shares back.
4) To retain the pure "antidote" behavior, covering the short position has to be simultaneous with selling your index shares (to close the corresponding long position). Both have tax consequences, of course. If you just cover the short without selling the index, you'll instead realize whatever gain/loss has occurred on the short up to that point, and be back to owning the company as if you just bought it.
5) You also take on liquidity risk of not being able to buy/sell simultaneously with the index.

Aphalite

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Re: Reduce Exposure to one company in a Fund
« Reply #7 on: April 11, 2015, 03:46:06 PM »
This fund performs essentially the same as the Vanguard Mid Cap Index Fund. You can just by the  Vanguard fund instead and save money on expense ratios. No, they aren't the same stocks as the RSP. But they perform about the same.

Equal weighting the sectors would decrease your exposure to Apple, but mostly because you'd be owning about 2500 stocks instead of 500, and you'd be underweighting all technology stocks in favor of the other sectors.

If you are wanting to have less exposure to Apple, you could switch from the 500 Index Fund to the Total Stock Index Fund. Both of Vanguard's have the same expense ratio. And the performance will be about the same over the long run (Total Stock may do better). It's still 3.2% of the fund though.

If you want to bet against Apple, you can do that. I don't recommend it though. You can short the stock, or simulate a short using options. You'd need a brokerage account that would let you do this, and some collateral, and be willing to lose a lot of money. And there are costs to shorting or options trading. Even if you are "right" in the long run that the company will be worth only 1/2 its current value 15 years from now, a lot can happen in the mean time. It could go up another 80% before it comes down. If you were betting against it the whole way up, you'd lose a ton of money. The market can stay irrational longer than you can stay solvent.

Apple is one of the most analyzed companies in the world. A lot of people who know a lot more about the company than anyone on this board have put billions of dollars into it. The price is probably pretty reasonable. They make a ton of money and have a ton of cash sitting around. Even with all that cash, their P/E is still reasonable compared to the rest of the market.

PERFORMANCE might be the same, exposure definitely is not. Equal weighting is exactly what it sounds like, you have 500,000, you spend 1,000 on each component of the SP500
See:
http://portfolios.morningstar.com/fund/holdings?t=RSP&region=usa&culture=en-US&ownerCountry=USA
vs.
http://portfolios.morningstar.com/fund/holdings?t=VIMSX&region=usa&culture=en-US

I do agree with you that the UNDERLYING reason performance is the same is because both funds hold companies that are smaller, and thus have more ability to compound its earnings, whereas Apple and some of the other top market cap companies are approaching the point where further growth will prove difficult - 3% growth at a 400b company is a lot harder than 15% at a 100m company

On switching from 500 to VTI - Very much different - switching from a 500 fund to a total stock market fund still doesn't change the fact that passive indices weigh by float. Apple will always be top holding for anyone who invests in a passive index with the rules that are currently in place

I agree with you on Apple, strong company, not worth shorting


Indexer

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Re: Reduce Exposure to one company in a Fund
« Reply #8 on: April 11, 2015, 07:35:42 PM »
Indexer had a post where he was able to doctor up an index that equal weighted the sectors - it was a lot of maintenance but looked like it could work

Indexer here.  Sorry but that credit needs to go to someone else.  ;)


Why is having Apple as 3.24% of your domestic stock position such a concern?   If you are 70% total stock, 30% total international now it is only about 2.26%.  If you own any bonds, small cap tilt, etc. anything... then Apple will be an even smaller part of the portfolio.

Lets assume the worst.  Apple tanks.

You might think your portfolio would drop 2.26% if Apple went to zero, but no that doesn't happen.  You own everything!  If Apple goes down Google, Samsung, Microsoft, and LG are likely to take up the market share and grow accordingly.  As big as it is the market would respond to Apple crashing the same way it responded to RIM(Blackberry)... it would be replaced.
« Last Edit: April 11, 2015, 07:37:43 PM by Indexer »

Aphalite

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« Last Edit: April 11, 2015, 07:50:02 PM by aphalite »

morecoffee

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Re: Reduce Exposure to one company in a Fund
« Reply #10 on: April 12, 2015, 08:39:37 AM »
I do think Apple's growth could be limited, but not a major concern.  I see how a EWI could help boost the holding of the bottom half of the S&P 500 at a low cost structure which is what I am considering.

NoT my personal issue, but I could also see some investors wanting mitigate out major petroleum from their holding without going to environmental mutual funds.
« Last Edit: April 12, 2015, 11:49:54 AM by morecoffee »