Post New

Background
You can skip this section if you want ...

In the EU, it has become virtually impossible to buy US domiciled ETF's since 2019 when the EU introduced the requirement for the ETF provider to provide EU compliant KID's (Key Information Documents). Generally the position that EU investors found themselves in was that if they already held such an ETF, they could continue to hold it or sell it, but they can't open a new position or add to an existing one.

There are alternative approaches such as:
- Hold a simulated position through the use of futures or options.
- Open positions in all of the underlying stock.
- Buy an EU domiciled ETF of US stocks / indices if a suitable one exists.

Each of these has its own disadvantages:
- Options and futures require a fair bit of management to roll and to ensure position sizes and cash levels are properly maintained. This also leads to extra work at tax time.
- Holding all of the underlying positions also creates a lot of extra work relating to completing tax returns if you rebalance regularly. I would prefer to avoid this.
- For me based in Ireland, I don't find the option of EU domiciled ETF's very attractive from a taxation point of view. More on this below.

I'm not sure exactly when, but in the last few decades, in Ireland, they decided to tax ETF's different to shares. I think the thinking is that if someone holds an ETF, they might not trade very often so the government may have to wait a long time to get their hands on the relevant capital gains tax. So they came up with a complicated tax system that involved "deemed disposal" as a tax event every 8 years whether you sell or not. Also, my understanding is that unlike capital gains tax, you can't offset losses against gains, etc. Bottom line is that I don't want to get involved in figuring this stuff out.
- This definitely applies to Irish domiciled ETF's for an Irish Investor.
- My understanding is that it also applies to all EU domiciled ETF's for an Irish Investor.
- Where is gets grey is in relation to ETF's domiciled in other OECD countries for Irish investors. If they are deemed to be “similar in all material respects” to an Irish domiciled ETF, then it also applies.
- I believe it was in 2015, the Irish Revenue issued a statement that they were willing to accept the position that US domiciled ETF's were not “similar in all material respects” to an Irish domiciled ETF therefore a US ETF could be treated like a share and taxed accordingly with capital gains tax.
- I recently discovered that they retracted this statement in 2022 and now it if up to the investor to prove it.

I already had a position in QQEW and have continued to hold it until now. This leaves me in a position that I am unsure how this position should be treated for tax purposes. I will probably still apply normal capital gains tax on it, but to minimize risk, I think I will close the position in the near future and replace it with something else.

Jim has made the case previously that an equal weight Nasdaq 100 portfolio is probably one of the better index / ETF investments available.

So what am I looking for?
- Something to replace QQEW that is not an ETF.
- Preferably a central expectation of a similar or slightly better return.
- Accept that if it has fewer positions, it is likely to have greater volatility.
- I don't like doing tax returns so fairly infrequent trading - perhaps only every 2 - 3 years.
- I don't like doing tax returns so not too many positions - perhaps 10 to 20 or 25 at a stretch.

Starting ideas
I found two previous posts of Jim's that look to be relatively close to what I am looking for.
https://www.shrewdm.com/MB?pid=776600169

In the period 1997 - June 2023, this bet a simulated Nasdaq 100 by approx. 6%/year when traded every 2 months.

The main steps are:
- Ratio of price to 52-week high, top 50 (crowd source elimination of the ones crashing most at the moment)
- ROE top 30
- 5-year sales growth rate top 20

My guess is that since the first step is a sort of momentum step, it might suffer a lot with longer holds but would be interested to know how it holds up.

The second one is in this post:
https://www.shrewdm.com/MB?pid=3032676
e.g., top 25 of the Nasdaq 100 by ROE beats the whole set, equally weighted in both cases. Around 3.6%-4.0%/year in the last 20-25 years. Didn't save your bacon in the tech crunch, but left it a tiny bit less cooked.
(I used the "Return on Shareholders Equity" field from Value Line)

The hold period is not stated, but I suspect it is longer than two months so this one is probably closer to what I actually want. I would be interested to know how return varies with hold period.

While I really like these two steps:
- both screen like high ROE which is an indicator of a great business.
- one of the screens likes growth (5 year sales growth).

My concern is that there is no factor for how much you pay as in price to any measure of present or future value. This could lead one to buy great businesses that are experiencing a bubble. The normal measures to account for this are:
- shorter holds to get out of such positions faster.
- more positions.

Both of these are counter to the objectives I set at the beginning ...

I suppose the other way is to combine these with some sort of timing (bear catchers?)

Anyway, I would be interested to hear ideas. Is there anything closer to what I am looking for than:
- Start with Nasdaq 100.
- Top 25 by ROE

Then either:
- rebalance / trade every few years or
- only rebalance / trade based on some timing signal - i.e. exit on a sell signal and re-run the screen before reentering.

StevnFool

I run a couple of similar screens. Recast monthly.
The top 25 screen averages about 4 turnovers a month (4 sells & 4 buys).

The top 10 screen averages about 2 a month.

In the top 25 screen -- 25 HTD 30 -- I have noticed that a few stock tend to pop in and out. So one time that are a sell and a few months later they area buy. So them drop out of the top 30 and later are in the top 25. CHDN is one such.

I suspect that you could have a longer hold, maybe 2 or 3 months.

I do these in an IRA, no concern about taxes.

Some random thoughts

- Holding all of the underlying positions also creates a lot of extra work relating to completing tax returns if you rebalance regularly. I would prefer to avoid this.

True, though there is no particular reason you have to rebalance as often as the ETF does (quarterly).
And you might consider some of the offsetting advantages of roll-your-own. I can think of two offhand:
* You might want to skip a few names. For example, last I checked the Nasdaq 100 had 3-8 Chinese firms, which might be of concern for accounting or geopolitical reasons. If there is a firm you consider odious for any reason, you just don't buy it.
* Using a delayed list of index constituents is usually a sure-fire way to beat the index in question. Don't buy new ones right away, don't sell exiting names right away.
This is worth a read, though it is speaking mainly of the S&P 500: https://www.researchaffiliates.com/publications/ar...

My concern is that there is no factor for how much you pay as in price to any measure of present or future value. This could lead one to buy great businesses that are experiencing a bubble. The normal measures to account for this are:
- shorter holds to get out of such positions faster.
- more positions.

One might also take the view that you're basically considering an index alternative. The general concept of being an index-type investor is that you just do the same thing for a very long period, through thick and thin, and eventually do just fine. Bogleheads don't get fancy. Thus, if you're doing pretty well on average over 20+ years, it doesn't really matter all that much that there are some down years. On the surface it seems that this view might be leaving a lot of money on the table, but you have to factor in the near certainty that whatever timing you use is going to fail either a large part of the time, or all of the time, and perhaps overall. The 100% sure way to avoid that is not to do the timing.

That being said, personally I would probably start such a scheme only during the next panic. Like streetcars, there's always another one coming. Omens and valuation levels are not reliable, but my goodness things look statistically dire at the moment. As far as I can tell, it is 100% certain that today's average price for Nasdaq 100 firms is not the lowest price that will ever exist in future. So, that would amount to a one-time dip into the shark infested waters of trying to price the market : )


Anyway, I would be interested to hear ideas. Is there anything closer to what I am looking for than:
- Start with Nasdaq 100.
- Top 25 by ROE
Then either:
- rebalance / trade every few years or
- only rebalance / trade based on some timing signal - i.e. exit on a sell signal and re-run the screen before reentering.

I've seen worse! (of course, I would say that). Though as mentioned I would actually recommend skipping the timing overlay, other than choosing your moment to start the plan.
You could go with more than 25, maybe 40-50, which would reduce company specific risk and the risk that the high ROE group turns out to be a bad idea for some unpleasant length of time.
I would suggest this elaboration: at your rebalance, sell anything that has been out of the index for at least 6-12 months, and buy some of anything that now qualifies for your "top N" and has been in the index for at least 6-12 months.

Jim

Post New

Mechanical Investing FAQ

---

Contact Shrewd'm
Contact the developer of these message boards.