Why the difference in performance of exchange-traded funds (ETFs) which mirror the S&P 500?

On September 4, 2019, from John G….. Ontario, Canada

Question:

The three Canadian ETF’s which follow, mirror the S&P 500:

  1. BMO S&P 500 INDEX CAD UNT ETF Symbol ZSP (not currency-hedged)
  2. VANGUARD S&P 500 Index ETF, Symbol VSP (currency-hedged)
  3. iShares Core S&P 500 Index ETF, Symbol XSP (currency-hedged)

Over the last decade, as expected, XSP and VSP have appreciated as much as the S&P 500 has — a little over 100%. ZSP has appreciated about 180%.

Please explain the difference.

Thank you.

Monday Morning Millionaire Program Answer:

Currency hedging removes the effect of foreign exchange fluctuations.

For instance, if your ETF was CAD-hedged and the CAD weakened relative to the US dollar by 5% over a certain period during which the S&P500 rose 15%, then your return would be 10% for that period. If the CAD appreciates relative to USD, then the opposite is true, of course.

Non-hedged means you will get the return of the S&P500 in USD terms and you benefit if USD gains strength over the CAD.

Over the last decade, USD has strengthened relative to the CAD, which is why ZSP (non-hedged) has outperformed.

 

 

Rebalancing and asset allocation

On July 29, 2019, from A. W. DDS, Ontario, Canada

Question:

I’ve been rearranging my finances for the last few weeks and have started to invest in RSP and TDB166. I really like your investment formula. I was hoping to get some clarifications from you.

I have downloaded the stock price for RSP from 2012 onwards and tried your method of having 50:50 on RSP and TDB166. Then I would buy more with 1/3 of the cash when the stock price is 10% down from the high. As the price goes down another 10%, I would buy more RSP with the rest of the cash. Then I rebalanced the portfolio to 50/50 when it goes back up to 10% from the previous high as well as when the price goes up 10% each time.

I am not sure if I am missing something or misunderstood something but I got a return that is very good. Much better than any of my investment accounts but It is not equal that of the S&P500. I am not sure if your return is better because you have borrowed as much as you can as you mentioned in your book when the stock price went down more than the 20% or is it because that is the difference from writing the covered calls.

Thank you for your help.

Monday Morning Millionaire Program Answer:

Your backtesting represents a lot of work and your results are revealing. Thank you for sharing with the rest of us.

Your understanding of the process is spot on — you did not miss anything. My return is better because, during much of the period that we are talking about here, I had a more aggressive 70/30 at asset allocation.

I recently switched to the more conservative 50/50% allocation to be more consistent with my age.

Also, rebalancing when the market drops 5% and when it rises 10% will likely give us better results.

Two additional notes

  1. Due to a technical issue, our usual Monday Morning Millionaire Program blog did not go out yesterday (Monday) as scheduled. That problem has been resolved.
  2. We offer a free, half-hour discussion meeting with me.  Contact us if you think that it might be useful for you.

Milan

 

How is Monday Morning Millionaire Program opinion different from free advice from banks?

On July 8, 2019, from G. W……..Ph.D., ON,  Canada

Question:

Most major banks offer educational material to investors at no charge. How is the Monday Morning Millionaire Program different?

Monday Morning Millionaire Program Answer:

Thank you for this great question. The difference is enormous.

Since President Clinton repealed the Glass-Steagall Act which separated commercial banking from investment banking, the investment banking mindset came to dominate bank behavior both in the US and Canada. Investment banking revenue is a major component of banks’ earnings. Banks want:

  1. clients to trade
  2. to pick stocks and
  3. to buy the initial public offerings (IPOs) they underwrite.

More than a decade ago, a study of over 66,000 accounts at large discount broker showed that during the five-year period from 1991 to 1996, the accounts that traded the most frequently earned 11.4 percent. During that period, the market returned 17.9 percent! Concerning IPOs, over 8,000 were launched from 1980 to 2015. People who invested in Facebook, Amazon, Apple, Netflix, Google or Tesla made fortunes. If only….hindsight is flawless! For every spectacularly successful IPO, hundreds fail. Three years after launch, almost none have positive returns.

The Monday Morning Millionaire Program ensures that members earn the market return. Repealing the Glass-Steagall legislation was one of the primary causes of the 2008 crash according to Nobel Laureate Joseph Stiglitz.

The bank/client conflict of interest is unmatched.

Rebalancing a 50/50 market/cash allocation when the market drops 5% or rises 10% or more, allows a high school student to equal or beat the market.

I have personally been with TD Bank since I was a teen. It offers great education and the Monday Morning Millionaire Program often uses TD Bank material for member benefits.

Question about The VectorVest Smart Investor

On June 14, 2019, from Elliot Goldenberg, CEO  Mindware Seminars, CDE credits on dream vacations!

Question:

I have been receiving literature from a company called The VectorVest Smart Investor- who claim to beat the S&P handily for the last 30 years. Have you heard of them? Are their claims valid? They have developed a software package that apparently offers amazing results for regular investors.
 
May we have your comments, please? 

Monday Morning Millionaire Program Answer:

Selling any system that works, immediately makes it less profitable. However, aggressively selling it rather than using it can make money for the vendors. The VectorVest Smart Investor software package might be of some value to people who pick stocks, an approach which the Monday Morning Millionaire Program recommends against. It can take an enormous amount of time and over the course of a decade, more than 90% of portfolios built on stock picking methods fail to equal an exchange-traded fund which mirrors the S&P 500 index. Indexing has impressive third-party validation in academic investment literature. Stock picking systems don’t.

Ideal time to start investing for best results

On May 15, 2019, from A. B…….DDS, NY City, NY

Question:

I am a 65-year-old dentist and was just introduced to MMM by a colleague. I have three sons and I was wondering if it was too late for me to start investing this way. I am certainly interested in advising my children to adopt this formula. I also wanted to know that if I start DIY investing, how do I get my funds from my money manager to ETF’s that I control. Please let me know what you think.

Monday Morning Millionaire Program Answer:

Chicago School of Economics professor Eugene Fama won the Nobel prize in economics for his Efficient Market Hypothesis. The Monday Morning Millionaire Program rests solidly on a foundation of the EMH. Investment scholars universally accept the EMH, although they have different opinions on its details. It is possible but highly unlikely to do better.
 
At age 65, you easily have 20 years or more to earn, save and invest. Of course, your children could not do any better, either. With youth on their side, they might run fun portfolios in which they try to outperform the market. These should be quite apart from their core portfolios.
 
Getting your funds into ETFs which you control can be done online, today. If you have a personal relationship with your money manager simply tell him or her to make the transfer. State that you want to eliminate the management fees but that you would like to communicate from time to time and that you wish to be charged on an hourly basis.
 
You might want to tell your money manager that that I have a $100,000 standing bet open to all money managers, payable by the loser to the winner’s favorite charity if, over the course of a decade, whatever they are recommending, after fees, beats the simple act of holding an exchange-traded fund which mirrors S&P 500 index.

Investing outside tax-advantaged accounts

On May 6, 2019, from T. S….. S….. DDS, Ontario, Canada

Question:

Is your portfolio setup also effective in a non-registered account? That is, one in which the tax advantage has been removed?

Cheers and Thanks

Monday Morning Millionaire Program Answer:

Investing within the framework of the habits of the highly effective investors is the best way to go in any account.

Having said that, please note that all investors should top up all tax-advantaged accounts before investing outside these. Over the course of an investment lifetime, investing in a tax-advantaged account can make a positive difference of hundreds of thousands of dollars compared to investing any other way.

Tax-advantaged accounts generally do not allow selling cash-secured, uncovered puts — a minor shortcoming. Only when all tax-advantaged accounts are fully topped up should investors consider placing money in other types of accounts.

A question about tax-advantaged accounts

On April 27, 2019, from F. B. L….DDS, FAGD, Idaho

Question:

I just signed up for membership today and as I looked through your postings the “core” accounts were tax advantaged. What does that mean?  Does that mean they are in a retirement account?  I am not yet retired but at age 71 am forced to take minimum distributions and they are accumulating outside the retirement account. Is there a better way? Thanks

Monday Morning Millionaire Program Answer:

Broadly speaking, the expression “tax-advantaged” can refer to investments, accounts or plans which offer tax benefits.  These are either exempt from taxation or tax-deferred allowing investors to pay taxes later, sometimes decades later. There are many examples both in the United States and Canada.

Canadian tax-advantaged accounts and US tax-advantaged accounts go by different names but are similar. There is no better place for any investment assuming that the Government allows the particular security in any particular tax-advantaged account. Over an investing lifetime, this can amount to hundreds of thousands of dollars compared to investing outside such an account. We hope that this describes your investing history.

You would need less than one hour of your accountant’s time to focus on the best way for you to proceed. Unless your accountant has many dentist-clients, you might want to buy an hour’s time from an accountant who does in order to confirm your accountant’s suggestions.

It is almost a certainty that their views will be similar.

 

A question about the progress of US market size

On April 22, 2019, from L….. B….. DDS, Cayman Islands

Question:

Interesting to see the relative size of the US economy in your illustration. I was wondering if it has reached a peak at some point during this time or if it has been a continuous rise ?

Thanks.

Monday Morning Millionaire Program Answer:

(Used with permission from Prof. Dimson)

While it is true that predictably, stocks fluctuate (JP Morgan) and empires have 100%   failure rate (history), we don’t have a definite answer to your question.

Probably, the rise was continuous.  It’s end is not in sight.

 

 

Why did you switch from SPY to RSP?

On April 16, 2019, from John G….. Ontario, Canada

Question:

What was your motivation to switch from SPY to RSP? I understand the RSP exchange-traded fund (ETF) rebalances its exposure to less expensive stocks in the S&P 500 and trims stock that has become more expensive. But there is increased volatility and a higher MER.

Thanks.

Monday Morning Millionaire Program Answer:

The above chart shows that over the last decade, RSP, an equal-weighted ETF has outperformed SPY, a cap-weighted ETF. As you state, RSP, an equal-weighted ETF gives each of the 500 stocks an equal 0.02% of the fund and keeps it that way. In a capitalization-weighted ETF, the market price of each of the stocks influences the ETF. The stocks with a greater price have a disproportionate impact on the ETF.

Disregarding of the volatility and the MERs, RSP outperformed SPY. Using history to predict the future is unreliable but it is the best tool which we have. We made the switch based on history alone.

Since we made the switch one month ago, RSP has gone up 4.08%while SPY has gone up 3.65%. That 0.43% difference over the course of such a short time period is meaningless but it does suggest that the switch was a good decision. Both ETFs are a good way to buy the entire American economy and over the long run, both will likely give a good result. Both fit the Monday Morning Millionaire Program philosophy of practicing the habits of highly effective investors. Let us review them again.

Continue reading “Why did you switch from SPY to RSP?”

A question about the entire US market

On March 15, 2019, from J……. C……. DDS, Lincoln, CA

Question:

I’ve really enjoyed reading about the investment strategies your group shares.  I look forward to learning more and trying the straightforward and logical options strategies outlined here.
I haven’t read anywhere on your site or book yet about indices that cover the entire US stock market, like VTI.  Mostly the S&P500.  Is there a reason total market indices are avoided by the Monday Morning Millionaire crowd?
Thanks!

Monday Morning Millionaire Program Answer:

While there are about 4000 publicly traded companies in the US, the S&P 500, consisting of only 500, represents the total market quite well since these companies are the largest ones. An interesting aside here is that the Dow Jones industrial index also represents the entire market quite well even though it is made up of only 30 stocks. They are the shares of well-selected, large companies.

The chart for VTI (Vanguard Total Stock Market exchange-traded fund or ETF) that you mention and the charts of the three ETFs which mirror the S&P 500 and which the Monday Morning Millionaire Program frequently refers to, are identical. In the chart above, we see all four. It looks like one.  All four are cap-weighted ETFs.

The ten-year chart below compares the Invesco S&P 500 Equal Weight ETF (symbol RSP) which is an equal weighted ETF with SPY. We recently started promoting RSP as you can see in my personal portfolio which I reported on March 11 of this year. Spend a minute or two looking over that report.

If you compare RSP with SPY  you will see that RSP is more recent and as a result, a good deal smaller than SPY, the largest ETF which mirrors the S&P 500. The RSP average daily and monthly volumes of trading are smaller and the expense ratio is more than twice as high. These issues concern institutional investors but we can ignore them.

If you are involved in options strategies, note that the SPDR S&P 500 Trust ETF (symbol SPY)  and the iShares Core S&P 500 ETF (symbol IVV) have weekly expiry dates. Weekly expiry dates tend to have higher premiums.

The Vanguard Total Stock Market ETF (symbol VTI), the Vanguard S&P 500 ETF (symbol VOO) and the Invesco S&P 500 Equal Weight ETF (symbol RSP) have monthly expiry dates.

Concerning options strategies, the Monday Morning Millionaire Program recommends that members only sell and never buy puts and calls and that they do so in their fun portfolios only. Investors always make and never lose money selling puts and calls. However, they do give up the opportunity of making even more money if the underlying ETF rises above the selected strike price.

The underlying will fluctuate and investors will lose more money occasionally than the amount of the premium they get, but only in the short run. Investing should be a long run activity. It can be successful if we observe the habits of highly effective investors.

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