I just don’t see the point of Specialized Index Funds

I fully support and encourage general index funds; that is, index tied to a general index. These tend to have very low fees (for instance, 0.05% for the NYSE:VTI or NYSE:AGG, both outstanding index funds) and track whatever they are tracking very well. But I just don’t get the attract of specialized index funds. Maybe if someone wanted to time something out (i.e. get in and out in one month, hoping to crash a bounce), but otherwise, they sound like poor choice.

Someone, who had found my article on Canadian REITs (of which an update is in progress), asked if he could buy TSE:XRE, which is “iShares S&P/TSX Capped REIT Index ETF.” Note that “capped” here means that they will not invest more than a certain percentage, 20%, into a single REIT.

This one is particularly useless because REITs are already, for the most part, diversified. For instance, REF.UN has properties all over Canada. So why would you invest into that? This ought to be the most useless index fund of all times.

I wouldn’t mind if the fees were low, but these guys charge an absurd 0.61% annual fee. This is simply outrageous. While it may seem low, when compared to 0.05%, this is simply obscene. Twelve times higher and that’s money taken from your pocket, year in, year out.

At $1.25B dollars in value, that’s $7.6M taken year after year. And to do what exactly? It’s absolutely impossible that trading commissions add to more than $10,000 per month, ever. Let’s multiple this amount by ten and you get $1.2M in fees per year, which would still be very high, but more reasonable. Where does the other $6.4M go? What is it used for? This fund has nothing to do but enter a couple trades per monthand print a new prospectus every three months! It is literally the easiest job in the world, there is NO work involved here as they are not trying to beat any index, but simply replicate it.

I wouldn’t bitch as much if at least what they did make sense. Look at their holdings:

50% of their portfolio is invested in five companies. So why would you not invest in those companies yourself? Why pay someone $7M+ per year to put half the money in five companies? Just buy those companies directly and save the fees!

And look at their top 5! Those are the five most secure, safest REITs in Canada. It requires literally zero effort to invest in those, there is absolutely no work required. Everyone knows those five are essentially the blue chips of Canadian REITs. It takes literally five seconds to find out.

Have money in XRE? Sell and buy the companies listed above yourself. Hell, save yourself the trouble and put 100% in TSE:REF.UN if you want, it’s by itself quite diversified anyway.

But but but rebalancing!

Rebalancing is an outdated and useless word. There’s that logic that supposedly, if a stock goes up too much, you should sell some because it might represent too much of your portfolio. And, if it crashes, it could hurt more. But why? If a stock did very well in the past, why would it necessarily crash in the future? What’s this got to do with anything? Look at Berkshire Hathaway, do you think people in 1990 thought “I guess it went up too much, I must sell.” Makes no sense.

TSE:XRE pays a 5.2% dividend. But if you calculate the fair dividend they should pay, by multiplying each % of the REITs they own by the distribution rate, you come to the figure of 5.6%. By investing in this worthless junk, you are sacrificing 0.4% every month in return. Oh, and you cannot join the different DRIPs of the REIT neither! And if you want to sell one particular REIT for whatever reason, you can’t!

But if I want to sell 10% of my money invested in REIT, it’s easier if I invest in an index

Why would you want to sell 10% of your money invested in REITs? This is like the last category of assets you should ever liquidate.

And even if you desperately needed cash, nothing prevents you from selling your shares directly.

But blah blah blah my classes in finance blah blah blah index funds are good!

TSE:XRE is a piece of garbage and I’m shocked people put their money there. Put it in the SPY instead. Or buy your own damn REITs yourself.

Specialized index funds are completely useless

Liked it? Take a second to support F.S. Comeau on Patreon!

, , , ,

No comments yet.

Leave a Reply