A little while ago I read this article from the WSJ: https://www.wsj.com/articles/buying-just-one-share-of-stock-is-easier-than-ever-but-should-you-11601825871
The article talks about how since trading fees are so low, and it’s easier than ever to own one share, why not buy shares one at a time. It posed the idea of a mini-index fund that you could make just for yourself. Rather than buy SPY, just buy one share of each of its components. I always thought the idea novel when you consider the diseconomies of scale in the asset management industry. So I decided to test out the idea with backtesting.
-I’ll be testing the mini-index fund strategy with Dow Jones Industrial Average Index (DJI)
-I’ll be using DIA as the comparable passive instrument.
-Using QuantConnect as my backtesting environment.
-To simulate round-trip trading costs, I liquidate holdings at end of all backtests.
-To further try to simulate real-world conditions, all backtests will have some excess cash, but not too much as if a real person was funding an investment account to buy something they already thought out. For example, if you want to buy one share of DIA at $286.00 you might deposit $300.00 in your account. Or if you need $4873.00 to buy one share of all the constituents of the DJI, you might round off your deposit at $4900.00.
Limitations/Things I’d try to incorporate if I wanted to explore this more
- All buying happened at the start of the backtesting period. A more realistic scenario to mimic small retail investors would be progressive buying as time goes on.
- Fees are based on the IBKR brokerage model, NOT INCLUDING IBKR LITE. I would like to simulate zero-fee trading, but the trick with that is that I’d have to account for costs associated with the sometimes less than optimal trade execution that is known to occur with “free” brokerages. And those costs are hard to measure.
- I did not use a price-weighting allocation yet. What I would do next is see how an exact copy of the DIA would perform.
- My Backtest period is not that long. Less than a year. It starts 8-31-20 because that is the date when the DJI components last changed and ends on 3-13-21. If I wanted to spend some money on a data source that provides constituent information on indices, I could make the backtest period longer. There are ways to get that info without paying, but I’m only an amateur at python.
- DJA is very limited, I’d rather do this test on the S&P500. Once again, need a clean data source to do that without a whole lot of headaches.
The Results
Backtest 1 (Benchmark) - 1 share of DIA
Here we have the performance of just one share of DIA. I ran a full backtest on the benchmark because I wanted to see the effects of fees and cash drag on performance. Since we dealing with such low quantities a few dollars from either of those would have a meaningful effect. So the number to beat is 12.5%.
Backtest 2 - 100 shares of DIA
For the first backtest I just want to simply see what adding some scale to the portfolio would do. So instead of 1 share of DIA, we have 100. Sure enough, we got more than a whole percentage point in return. Nothing too surprising. The new number to beat: 13.83%.
Backtest 3 - 1 share of each DJI constituent
Now we created a portfolio with simply 1 share of every DJI constituent. Its return is very close to the return from Backtest 1 which was 12.5%. I suspect that if you did this strategy with a zero-commission account you might actually beat the 1-share DIA strategy. By how much, hard to say. However, still would be a losing strategy when compared to 100-shares DIA.
Backtest 4 - 10 shares of each DJI constituent
Same idea with Backtest 2. I want to see how adding a little scale would change things. Sure enough, performs very closely to Backtest 2 – 100 shares of DIA strategy. Doesn’t beat it, but I suspect it might in a zero-fee environment by just a small amount. Of course, this is also the strategy that requires the most capital to implement just to buy all the pieces. So, it wouldn’t be the most practical strategy for most people.
Backtest 5 - 1000 shares of DIA
Since Backtest 2 performed the best, I wanted to see the effect of even adding more scale, this time with 1000 shares. No doubt we have some diminishing returns. We were able to eke out just 1 basis point for an extra 300k of capital.
Conclusions:
Based on what I’m seeing, there doesn’t seem to much of a case for the Mini-Index Fund strategy. You’re still better off with just the proper ETF. Not ready to close the book on this just yet. Given time, I would like to test certain conditions that might have the Mini-Index Fund Strategy win at the end.
Submitted March 13, 2021 at 07:09PM by russel_leffingwell https://ift.tt/3vltZGp
