Skip to main content
This Board Has Moved

This board has been migrated to our new platform! Check out the new home page at discussion.fool.com or click below to go directly to the new Board on the new site.

Go to the New Site
Message Font: Serif | Sans-Serif
 
No. of Recommendations: 6
A huge negative of the equally weighted index is that they have to re-balance it every Quarter.
That drives portfolio turnover through the roof... so we have to subtract from our returns the
corresponding tax hit. We also have to subtract the slightly higher annual fee...
Obviously the turnover taxes are moot in a tax sheltered account. All else being equal I would
prefer the Equal Weight index but it’s not equal... we have a cost drag to consider.


All true, but in my view worth it.
Except in stretches that very large firms are ourperformers, equal weight products outperform equivalent cap weight products by a meaningful amount. And safer.
For most equal weight funds, the cost of the rebalancing is more than made up for by the extra profit from the rebalancing.
(rebalancing is, in and of itself, very slightly profitable, by trading short term noise.
Not a big number, but hey, it's something).
But more importantly, I'd consider QQQE a viable investment alternative and QQQ not.

As for tax due to churn...I guess.
But remember that your extra cost isn't the tax, but only the time value of the tax.
Most investments do ultimately get sold at some future date.
Sometimes the tax rate is lower in future, sometimes not.
First order effect is the return on the portfolio.
Second order effect is the churn on the portfolio.
Third order effect is the portion of that churn which is net realized profit above realized loss.
Fourth order effect is the tax on that net profit.
Fifth order effect is the time value of that tax.
I'm in an unusually lucky situation tax wise, but I suspect it's rare for a fifth order effect to be a determining factor in investment selection...

Jim
Print the post  

Announcements

When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.