Hi B_ten_eighty, Re: indexed Exchange traded funds................
Many years ago (probably 20 now) I modeled with AIM a long term history of the S&P 500 Index. Given a 10 year or longer history, AIM improved the results over Buy/Hold. That was a pleasant surprise in and of itself.
I then refined my effort by dividing the S&P 500 Index into its 9 business sectors. I then applied AIM to each sector. Again, long term, AIM on average did better with the individual sectors than Buy/Hold did with the same data. The surprise came when I then took the sum total of the 9 AIMed Sectors and compared it to AIM's performance with the S&P 500. The nine sectors did better than the combo index.
The reason was that there was no internal cancelling going on. (One sector up and one down for a net zero change) AIMing each sector allowed for opportunistic profit capture that was not available with the SPY as a whole. While not as volatile as individual stocks, the sectors had better frequency and amplitude of price movement than did the composite SPY index.
In recent years I've switched from cap weighted sector ETFs to Equal Weight sectors. This has done about as well as the cap weighted funds and may offer some weight diversification if/when the next market correction comes along. My domestic ETF portfolio contains the S&P 500 sectors plus a tenth position being the S&P Top 50 capitalization stocks and is not equal weight. I figure during bullish times it should match the S&P 500 pretty well and in bad times, being just 10% of the portfolio, it won't do as much cap weighted damage. Of course it has CASH as the extra position that AIM needs for cushion and opportunistic trading. That portfolio year-to-date is up over 6% net while carrying a cash 'anchor' of about 23% on average. The S&P 500 is up about 7.4% in the same period - but is 100% at risk in the market. So, on a risk adjusted basis my ETF portfolio is running about the same as the SPY over the same time.
That domestic ETF portfolio hasn't had much in the way of buying activity since early in 2016. So, it's primarily been a Hold or Sell status since then. It's up about 13.7% over the last 12 months. Again, on a risk adjusted basis it compares okay with the SPY's rise of 15.4% over the same period.
As cash starts to rise in yield, the differentiation between an AIM portfolio and the same holdings on a Buy/Hold basis should narrow a bit more. Part of the reason I came up with measuring AIM's performance on a risk adjusted basis was to see how the base portfolio was performing. It takes the average value at risk over a period of time and uses it as a factor on the performance to get a feel for how the base portfolio is doing and if AIM is enhancing its performance.
Thanks for that link. There's some good food for thought there.
