Home > Markets > ETFs > Replicate expensive ETF yourselves?

Replicate expensive ETF yourselves?

  1. Niche emerging markets ETFs like ECON, GXG or BRAQ have quite high Total Expense Ratio (over 0.75% per year). If you buy and hold these ETFs for many years, the cost will quickly add up.

    I was thinking about buying the underlying stocks themselves rather than the ETFs since most of the underlying stocks are quoted on the US market NYSE and can be bought via a US discount broker.

    Say you want to invest $ 10,000, you use a cheap broker like Lightspeed which charges $ 0.40 / 100 shares, and you decide to buy the 20 underlying stocks that makes up the GXG ETF.
    That will cost you about 20* 0.4 = $ 8.

    Once you've done this, you can hold the 20 stocks for the next 10 years if you choose to do so and that would have cost you only $ 8.

    If you buy the GXG ETF and hold for a year only, that will cost you $ 10,000 * 0.86% = about $ 86. It will cost lot more if you hold for many years, especially if the market is going up and you could end up paying well over $ 1,000 over 10 years to hold the ETF.

    Am I right to say that it's a lot more cost effective to buy the underlying shares making up the ETF, rather than buying the ETF itself, or am I missing something.

    PS: I might only be able to buy say 15-17 of the 20 underlying stocks making up GXG if only 15-17 stocks are tradable on NYSE, but still it will give me the emerging market exposure I am looking for.
    Similarly for the ECON ETF, I might only be able to buy maybe 22-23 of the 27 stocks that make up 97.7% of the ETF if only 22-23 are tradable on Nyse but it does not bother me that much. I am more interested in a cost effective way to get exposure to niche emerging markets.
  2. Correlation is the highest its been since 1987. Right now diversification doesn't mean anything...

    It might mean something once the Market corrects 20-30% though.
  3. Agreed, so it means I don't need to buy ALL of the underlying stocks making up the ETF to track the ETF performance quite closely.

    So you agree, that buying the stocks is a lot more cost effective in the long term, while having a similar performance to the ETF?
  4. There is no problem with futures contracts. They are very simple to understand, and they are in fact backed up by the real assets.


    However, most traders don't want to stay invested in the trade until expiration.
  5. Unless you plan to invest $1 Billion+, it's worthless to try to replicate.
    However you can somewhat improve the ETF by dropping bad companies (funds get a lot of crappy companies in their indices/ETFs to be able to manage more funds), and keep only the good companies.

    Don't expect to outperform the ETFs, though.
    It's only meant to be able to sleep well at night, since you know you don't own troublesome companies stocks.
  6. If you check the ECON etf closer, you'll realize you're able to replicate about 35% of its shares with US-listed shares/ADR's.

    So, how are you going to purchase the remaining 65% of the shares?

    35% is not enough. You need at least 80% of the same shares.

    I do my own indexing & dislike etf's for a variety of reasons but with some foreign jurisdictions, it's expensive to get in/out.

    The same can be said of GXG. Most stocks are only listed in Colombia. Do you have an acct at a Colombia broker?
  7. Hi Risktaker,

    My mistake, you're absolutely right. I read an article a few days ago, it was saying most of the large emerging markets stocks were quoted on US exchanges. This article was awfully wrong! I made a bit of research now, and found that only 2 Colombian stocks are quoted on Nyse, and only 2 also for Peru.

    I need to look at the Brazilian side, there are 33 Brazilian stocks quoted on Nyse, so a better chance to build an diversified porfolio for this country.

    My goal is to build a portfolio of around 15 Brazilian stocks accross a few sectors so it is diversified enough. I will get my inspiration from the EWZ ETF to start with. It will be something simple and non weighted.
  8. shortbleu,

    Have you looked at the broker FOLIOfn? For $290/year, you can create portfolios which may be rebalanced daily.
  9. Brazil is one of the easiest country etf's to replicate, at least with respect to EWZ. There is another Brazil etf (BRF) which has about 60 stocks, however most are not US listed. They're smaller cap than the ones on EWZ.

    Overall though, as long as you have 10-20 stocks in an "index", you can pretty much replicate it with just buying 50-200 shares of each stock depending on its price/market cap. This way, you're not overweight in any one stock and the long term results surprisingly equal most ETF's.

    Good Luck.

    BTW, for non emerging market stuff, the post above on Folio is probably a good idea for long term holdings.
  10. That’s not necessarily true at all. Most ETFs launch with a NAV of $60 and are seeded with two Creation Units of 50k shares each. That’s 100k x $60 = $6million. Each ETF in the entire Direxion Shares ETF complex (the 3x ETFs like FAS & FAZ) were seeded with $6mm each. Mutual funds are much, much lower, even $50k can get a MF started. As for outperforming ETFs, it would depend on your per-share fees/ticket charges. If trading costs are low enough to beat a management fee you could outperform an ETF simply by replicating it 1:1 and paying lower fees.

    If you take a look at most of the levered ETFs you will find that they all have “optimized” baskets. TNA’s stock basket is optimized down to 680 (as of 9/30) from the 1973 members in the RTY – Russell 2000.

    EWZ’s management fee is only 65bps which is fairly low ($650 per $100,000 invested, annually). You are going to have to weigh transaction and rebalance costs of the individual names vs. the management fee and one-time fee of purchasing EWZ. Also, unless you are at a retail broker you can only buy even lots. If that’s the case you will need a substantial position in your stock basket to get your weightings correct. If you are trading retail and thinking about buying odd-lots or individual shares I’d say there is almost no possible way to make your transaction costs lower than outright owning the ETF.

    Also, are you searching for the actual stocks or the ADRs?
  11. "You can somewhat improve the ETF by dropping bad companies...and keep only the good." Uhm, the reason you go the diversification route is because you can't - in most cases - distinguish the bad ones from the good (and you especially can't distinguish which ones will be bad or good in six months or a year). This is a bit like saying "buy the stock when the downtrend is over."
  12. One benefit of ETF's is when you buy a foreign traded ETF listed on other exchanges.

    Say for example you have an account at IB. If you buy stocks in London, you'll be paying their .005 customary stamp duty. If you buy an ETF on the same stocks there is no stamp duty. The same goes for other exchanges like Hong Kong.
  13. Let's say you invest $50,000 in stocks for 35 years at an average annual return of 9%, your investment would have become 50,000*1.09^35 = $1,020,698 after 35 years.

    If you invest $50,000 in ETFs for 35 years with an average expense ratio of 0.65% and an average annual return of 9%, your average annual return after management fees, will be 9% - 0.65% = 8.35% and after 35 years, your investment would have become 50,000*1.0835^35 = $827,908.

    The difference in performance between investing is stocks or ETFs is almost $200K !!! or 23,3% !!!

    Conclusion: over the very long term (several decades) a small difference in the average annual return can have a massive impact on the bottom line P&L figure and therefore it is very important to keep ETFs cost (management fees) to a minimum or purely and simply eliminate the fee by investing in stocks rather than ETFs.

    I've read lots of articles about diversification and I know that if I invest in 20-30 stocks, the unsystematic risk will tend to zero, i.e if I invest in 30 emerging markets stocks, I will have a comparable level of diversification than if I invest in an ETF holding 300 emerging market stocks.

    I've found lots of articles talking about diversification and explaining how to mitigate risk, especially the unsystematic of an individual stock.

    However, I've not found articles comparing the average historic annual return of an index of say 300 stocks, compared against a basket of say 30 stocks randomly picked amongst the 300 stocks part of the index.

    So, I don't know which of the following alternative I should use to invest for the long term:

    1st choice:
    Invest in emerging markets ETFS (combination of several emerging markets ETFs, global, regional and single country) covering Latin America, Asia, Africa etc. and pay on average around 0.6% expense ratio.

    2nd choice:
    Invest in emerging stocks, randomly picking 30-40 stocks spread accross Latin America, Asia, Africa etc. and not paying the management fees.

    I have no idea which one of the two choices will generate the best average annual return over the long term. For sure, using the 2nd choice I get the advantage of not paying the fee, but the performance might be better or worst than a combination of ETFs, I really don't know.

    Can someone provide advice?
  14. any idea anyone?
  15. any idea anyone?
  16. any help please?
  17. any help please
  18. From what I have read, early tracking funds were disappointing in their ability to track. Cointegration and management are needed to find and maintain a portfolio which actually tracks.
    If your goal is simply to buy-and-hold a basket of overseas stocks, then perhaps looking into creating overseas accounts. I don't know the costs involved, but I know of some groups that do such things. There can be asset protection benefits and currency devaluation hedging.
    ETFs are supposed to differ from mutual funds by being super-low fees and liquid. Are you sure that the liquid part doesn't matter to you?
  19. shortbleu,

    You're probably underestimating the cost of holding individual securities.
    There are additional fees associated with holding ADR's. Buying and holding stock on their home exchanges may also incur additional costs. It will certainly involve higher transaction costs.
    While your investment strategy may be passive, you would have to actively monitor for any corporate actions taking place and decide whether or not to participate (more transaction costs).
    There would also be a large amount of paperwork to go through every year.

    EEM currently has holdings in 764 stocks. ie there average exposure to a single security is 0.13%. There largest single exposure (Samsung) is 2.47%.

    A 30 stock portfolio will necessarily be riskier. You will likely either outperform or underperform by margins much greater than 0.7%

    If you don't believe you can beat the market through active stock selection, I would buy the ETF.