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I wish to invest passively, using dollar-cost averaging, in my local stock market, whose market-cap index is composed of only 17 companies. Since the only ETF available has a very high management fee (1.85%), I'm thinking direct indexing is the way to go.

However, there are a few hurdles:

  • I can't buy fractional shares (there is no broker which allows it afaik)
  • in order to minimize the broker commissions, the minimum trade is around 1/4 of my monthly allocated sum; so I can do a maximum of 4 trades a month
  • also because of commissions, only 9 of the 17 companies make it above the minimum trade threshold; fortunately, they cover 90% of the index

Should I use a certain strategy when choosing what companies to buy in a month, or just randomly pick 4 every month and go with that?

I've considered the following filters so far:

  • avoid buying a company in the period close to the ex-dividend date, because the price falls abruptly after that (sometimes more than the dividend)
  • avoid buying if the price falls below a long-term moving average (like 200 days)

What strategy would you use?

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  • it would be interesting to know which stock market we're talking about
    – 0xFEE1DEAD
    Aug 4 at 12:48
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    "I wish to invest [...] in my local stock market, whose market-cap index is composed of only 17 companies." Is there a reason you'd rather do this than invest in a broad-market ETF tracking the S&P 500 or All-World Index? This is generally called home country bias
    – 0xFEE1DEAD
    Aug 4 at 13:01
  • For passive, long-term investing, keep it simple and keep it consistent. Round robin monthly purchases (4/4/4/5) on the same day of the month would be a good plan.
    – RonJohn
    Aug 4 at 13:22
  • @0xFEE1DEAD It's the Bucharest Stock Exchange. I also invest in broad-market ETFs, this is only a smaller part of the portfolio.
    – Claudiu
    Aug 4 at 13:25
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    @Claudiu thanks for the update. As an aside, are you sure your transaction costs throughout the year will be lower than the 1.85% management fee?
    – 0xFEE1DEAD
    Aug 4 at 13:40
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Should I use a certain strategy when choosing what companies to buy in a month, or just randomly pick 4 every month and go with that?

I've considered the following filters so far:

  • avoid buying a company in the period close to the ex-dividend date, because the price falls abruptly after that (sometimes more than the dividend)
  • avoid buying if the price falls below a long-term moving average (like 200 days) What strategy would you use?

This flies in the face of passive indexing.

Also, there's no reason the stock price should fall by more than the dividend amount, so you should be indifferent between buying it ex-dividend or paying for the dividend and receiving it.

However, there are a few hurdles:

  • I can't buy fractional shares (there is no broker which allows it afaik)
  • in order to minimize the broker commissions, the minimum trade is around 1/4 of my monthly allocated sum; so I can do a maximum of 4 trades a month
  • also because of commissions, only 9 of the 17 companies make it above the minimum trade threshold; fortunately, they cover 90% of the index

I would rebalance less often, e.g. monthly or quarterly, and use the same weights as the benchmark, i.e. the ETF you're trying to replicate.

Alternatively, you could use an equal-weight or cap-weighted approach, which may or may not replicate the ETF performance.

Additionally, when you compute the number of shares to buy, you could save the cash from the fractional shares until you have enough saved to buy the minimum number of shares, i.e. 1 share or the minimum trade size required by your broker.

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  • "I would rebalance less often, e.g. monthly or quarterly, and use the same weights as the benchmark, i.e. the ETF you're trying to replicate." Sorry, but I don't understand. Do you mean buying less often so that I can purchase all the companies at once, with their respective weights? If this is the case, I guess I would make only 2 purchases a year, because the last companies in the list have a very small weighting.
    – Claudiu
    Aug 4 at 13:53
  • @Claudiu Not exactly. By rebalancing less often you're more likely to meet the minimum trade size and lower your overall fees. Start with the components that have the highest weight, as they drive most of the ETF's performance. For the remainder, especially the ones with weightings of 1% or lower, you can wait to buy them later, per the last paragraph.
    – 0xFEE1DEAD
    Aug 4 at 14:04
  • "Alternatively, you could use an equal-weight or cap-weighted approach, which may or may not replicate the ETF performance." Isn't cap-weighted the same thing as market cap-weighted? Am I missing something?
    – Claudiu
    Aug 4 at 14:41
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    @Claudiu it is but I didn't want to assume that your ETF is cap-weighted (or equal weighted) as it could use a different, proprietary weighting.
    – 0xFEE1DEAD
    Aug 4 at 16:13
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For this smaller part of your overall portfolio, you are right to focus on minimizing costs rather than perfectly replicating your home-country stock index.

Even 4 stock purchases per month may be too many, paying 4 commission fees.

The goal is to accumulate steadily your home country shares. If seeking a rationale for buying one or two specific stocks each month, you could buy the worst-performers that month. This would seek to benefit from short-term reversal.

Or, as you suggest, you could randomly choose the stocks each month.

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  • Very nice article and website. But I've seen that they simulated going long on stocks that were bad performers in the previous week, not month. When I find the time, maybe I can clone that project and modify it to test week vs month.
    – Claudiu
    Aug 9 at 7:10
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With only 17 stocks in the index and with high commissions, you could build a fairly simple interactive spreadsheet to help track the index (you can modify examples online too).

  1. Fairly recent ETF holdings (available for many ETFs on public websites). Though in this case it appears to be equal weight so you can just calculate this directly.

  2. Your holdings (downloadable from your broker?)

  3. Difference between the two (in % or Leu)

  4. An interactive bit "if you trade X shares of AAA (BBB, CCC, ...) stock what is the new difference and how much money would that purchase cost"

  5. Play with the Xs monthly/quarterly until you are happy with the result

  6. Trade

I used to run a portfolio with a similar plan from a spreadsheet like this. With this you can even trade the 8 stocks that are below the minimum as you can trade more than one share at a time but on a less frequent basis. I would recommend this as with only 17 stocks in the index you want to buy them all of them to track well.

Other people's advice of following a market-cap ETF rather than a equal weight one (I couldn't find a Romanian market-cap ETF but maybe you can find or fake your own), diversifying with non-Romanian stocks and not worrying about technical indicators like 200-day moving average (which are meaningless in most markets) are all good advice as well.

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  • Agree with having a spreadsheet for easily keeping track, but I prefer to have a systematic approach, where I have a set of rules I can follow when making the trades. Otherwise, my emotions might get in the way ("I shouldn't buy this because it's at all-time highs right now", etc.)
    – Claudiu
    Aug 11 at 12:39
  • Sure. It is good to have a plan and stick to it. As you are adding money regularly you should be able to design a simple systematic approach using the spreadsheet like buying the 2-4 stocks that are the most underrepresented in your portfolio that quarter/month. You can ask quant.stackexchange.com for more sophisticated approaches that use stock correlations (I've built a few of these in my life) but those would be very complicated to run and the end result wouldn't be significantly better/different than just buying the underrepresented stocks.
    – rhaskett
    Aug 12 at 13:18
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Direct indexing, while avoiding a management fee, involves trade commissions and a time investment in setting up the process and adjusting for changes. You'd also be subject to the limitations of your brokerage account, meaning some stocks might need to be excluded, or bought at larger weightings than their market cap weight.

I would say that a simpler approach would be to purchase a broad stock index that already includes your local stock market. You will likely be able to find this at a much lower expense ratio than the local ETF you're looking at, and has the added benefit that it helps avoids a home country bias, which is generally a bad idea.

You might even want to check whether any of your existing broad-market ETFs track an index that includes your country.

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  • Unfortunately, I don't have access to any ETFs which include it.
    – Claudiu
    Aug 11 at 12:57

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