10-25-2014, 07:04 PM
My wife doesn't want to manage individual stocks, so our portfolios will be transitioning to ETFs for retirement.
The big issue I always had with index funds is that an index fund buys all stocks in the index whether they are overvalued or not. Why can't an index be split into an undervalued bucket and an overvalued bucket? With a "bucket fund", all purchases are made for the undervalued bucket, while sales are made from the overvalued bucket. At the very least, this should improve capital gains.
Stock prices are strongly correlated with the forward price to earnings ratio. Using the median forward price to earnings ratio, an index can be split into the two buckets.
I have started an experiment comparing an index fund versus a bucket fund using the same dividend stocks. I have 20 stocks and assume a starting portfolio value of $200,000 and equal weighting. This provides $10,000 per stock in the index fund and $20.000 per stock in the undervalued bucket. Over time, the dividends will be used for purchases for each fund. The market value and annual dividend for each fund will be compared over time.
Just by splitting the stocks into two value buckets, the initial annual dividend was increased 3%. Not too surprising, but the primary purpose of the bucket fund is to improve capital gains.
The big issue I always had with index funds is that an index fund buys all stocks in the index whether they are overvalued or not. Why can't an index be split into an undervalued bucket and an overvalued bucket? With a "bucket fund", all purchases are made for the undervalued bucket, while sales are made from the overvalued bucket. At the very least, this should improve capital gains.
Stock prices are strongly correlated with the forward price to earnings ratio. Using the median forward price to earnings ratio, an index can be split into the two buckets.
I have started an experiment comparing an index fund versus a bucket fund using the same dividend stocks. I have 20 stocks and assume a starting portfolio value of $200,000 and equal weighting. This provides $10,000 per stock in the index fund and $20.000 per stock in the undervalued bucket. Over time, the dividends will be used for purchases for each fund. The market value and annual dividend for each fund will be compared over time.
Just by splitting the stocks into two value buckets, the initial annual dividend was increased 3%. Not too surprising, but the primary purpose of the bucket fund is to improve capital gains.