# Create own ETF (Alternatives to ETFs)



## sparkdev (14 Dec 2021)

Due to the tax reasons, I am searching for alternate options to ETFs. I am thinking of creating my own ETF of diversified portfolio of world index companies (with equal weight) using Trading212 as it allows to own fractional shares and low fees (0.15% FX fees). Anyone tried this option here? Any suggestions on this are highly appreciated.


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## Jim2007 (14 Dec 2021)

You can’t own fractions of shares and it is extremely unlikely that you have sufficient funds to replicate and ETF of any significance.  The fact that you think that you can……

Stick to some kind of investment trust as an alternative.


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## sparkdev (14 Dec 2021)

Thanks for your reply. Do you know why I can't own fractional shares in Trading212 platform? or Revolut? Did you use them before because I am using them now, and I found that I can buy/own fractional shares. Is there any catch I am missing, if so, kindly elaborate please.


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## Steven Barrett (15 Dec 2021)

sparkdev said:


> Due to the tax reasons, I am searching for alternate options to ETFs. I am thinking of creating my own ETF of diversified portfolio of world index companies *(with equal weight)* using Trading212 as it allows to own fractional shares and low fees (0.15% FX fees). Anyone tried this option here? Any suggestions on this are highly appreciated.


How are you going to rebalance this to maintain the equal weight? There are currently 1,555 in the MSCI World Index. Amazon is trading at $3,381.83. If you want equal weight you will need $5,258,745.60 for your ETF. If you have that amount of money, there are better choices available to you...


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## sparkdev (15 Dec 2021)

Why do I need $5,258,745.60, if I can buy fractional shares? not full share of each of the companies.


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## jpd (15 Dec 2021)

You will get increased efficiency (ie higher return for lower risk) by diversifying ad including more shares - but any shares added above 20 or 30 does not improve the efficency of your portfolio much. Sure you could buy shares in a 100 or even 100s of companies, but that is really a bit pointless


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## Sarenco (15 Dec 2021)

jpd said:


> You will get increased efficiency (ie higher return for lower risk) by diversifying ad including more shares - but any shares added above 20 or 30 does not improve the efficency of your portfolio much. Sure you could buy shares in a 100 or even 100s of companies, but that is really a bit pointless


I wouldn’t fully agree with that analysis - only a tiny number of stocks account for the overwhelming majority of market gains -

https://www.irishtimes.com/business...stocks-account-for-all-market-gains-1.3973200

What if your portfolio of 20 shares missed out on the small number of big winners?

Having said that, the idea of trying to administer a portfolio of 1,000 plus individual stocks would be my idea of hell.


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## Jim2007 (15 Dec 2021)

sparkdev said:


> Thanks for your reply. Do you know why I can't own fractional shares in Trading212 platform? or Revolut? Did you use them before because I am using them now, and I found that I can buy/own fractional shares. Is there any catch I am missing, if so, kindly elaborate please.


Because no company sells its shares in fractions…. Read all of the information supplied by your broker and try to understand exactly what you actually own.


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## jpd (15 Dec 2021)

Sarenco said:


> I wouldn’t fully agree with that analysis - only a tiny number of stocks account for the overwhelming majority of market gains -
> 
> https://www.irishtimes.com/business...stocks-account-for-all-market-gains-1.3973200
> 
> What if your portfolio of 20 shares missed out on the small number of big winners?


Very true, but no one can identify which one, two or three shares will provide that


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## Steven Barrett (16 Dec 2021)

Jim2007 said:


> Because no company sells its shares in fractions…. Read all of the information supplied by your broker and try to understand exactly what you actually own.


You can buy fractional shares Jim through a lot of online brokers. 

Trying to cover an index of 1,555 different companies through fractional shares is a lot of work though and the rebalancing of it would be near on impossible and create a lot of work regarding CGT calculations.


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## Jim2007 (16 Dec 2021)

Steven Barrett said:


> You can buy fractional shares Jim through a lot of online brokers.
> 
> Trying to cover an index of 1,555 different companies through fractional shares is a lot of work though and the rebalancing of it would be near on impossible and create a lot of work regarding CGT calculations.


Nope you can't.  Read the T&Cs what you end up with is not actually ownership of a share.


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## Steven Barrett (16 Dec 2021)

Jim2007 said:


> Nope you can't.  Read the T&Cs what you end up with is not actually ownership of a share.


I'd imagine that they have unitised the share so they can divide it up. For the purpose of what the OP wants to do, some online brokers will allow fractional shares. Without boring myself with reading the t&c, I believe you in that there would be something in there about who ownership.


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## sparkdev (17 Dec 2021)

I agree that we might not be owning the shares technically by buying fractional shares, just like owning an ETF doesn't mean I own full share of each of the company in that ETF. But for the purpose of this discussion, I think it is valid to assume that one can hold fractional shares and it is relatively easy to make an investment group (pie) in trading212 with the shares we want and then instruct to autoinvest a certain amount into these groups everymonth. I would like to know if anyone has done that or what are pitfalls of my strategy except the tedious work of setting it up and quarterly re-balancing?


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## interested21 (18 Dec 2021)

This sounds incredibly tedious, would it not be much more straightforward to put the money in an Investment Trust and achieve the same goal of diversification?


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## Jim2007 (18 Dec 2021)

Steven Barrett said:


> I'd imagine that they have unitised the share so they can divide it up. For the purpose of what the OP wants to do, some online brokers will allow fractional shares. Without boring myself with reading the t&c, I believe you in that there would be something in there about who ownership.


And since you don't own the shares you are a general creditor of the firm and since they also do instrument lending..... There is no such thing as a free lunch.


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## Gordon Gekko (19 Dec 2021)

Jim2007 said:


> And since you don't own the shares you are a general creditor of the firm and since they also do instrument lending..... There is no such thing as a free lunch.


Are you even that?

I would have thought a fractional shareholder in a company actually owns some sort of instrument that’s meaningless in the context of the company.


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## sparkdev (19 Dec 2021)

interested21 said:


> This sounds incredibly tedious, would it not be much more straightforward to put the money in an Investment Trust and achieve the same goal of diversification?



I have read a bit of Investment trusts, but couldn't feel confident after knowing the cons mentioned in the below link.









						Investment Trusts in Ireland Blog 159 - Informed Decisions
					

Before you invest in Investment Trusts in Ireland it is important to be aware of the aspects that could determine if it's the right decision or not for you.




					informeddecisions.ie
				




Are there any investment trusts that just hold the low-cost ETFs?


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## Gordon Gekko (19 Dec 2021)

Why’s he talking about outflows?

The whole point of an IT is that it’s a closed pool of capital that’s then listed.


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## ryaner (19 Dec 2021)

Trading 212 has investment pies with which you can sort of replicate large cap etfs. Last I looked they were limited to around 100 shares per pie, so something like the S&P500 is out, and adding/removing companies would be manual to.
The pies do have an add only rebalance function, meaning money in goes towards rebalancing instead of selling to rebalance. This is the only real option in Ireland. If you actually rebalancing via selling, the pattern and number of trades would likely cripple anyone from the calculations required for tax and Revenue might also decide you are trading enough to be classed as a professional trader.


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## interested21 (19 Dec 2021)

sparkdev said:


> I have read a bit of Investment trusts, but couldn't feel confident after knowing the cons mentioned in the below link.
> 
> 
> 
> ...


Which particular cons concern you?


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## Jim2007 (19 Dec 2021)

Gordon Gekko said:


> Why’s he talking about outflows?
> 
> The whole point of an IT is that it’s a closed pool of capital that’s then listed.


That blog would concern me if I was a client as it shows a few gaping holes in the knowledge.


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## sparkdev (21 Dec 2021)

interested21 said:


> Which particular cons concern you?


1. Ever changing tax rules and UK UCITs might come under 41% rule same as Irish domiciled ETFs
 2. Performance of the funds is in the hands of the active manager
3. High fees
4. Currency exchange risk
5. Protection of investment if the unit trust goes out of the business


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## sparkdev (21 Dec 2021)

ryaner said:


> Trading 212 has investment pies with which you can sort of replicate large cap etfs. Last I looked they were limited to around 100 shares per pie, so something like the S&P500 is out, and adding/removing companies would be manual to.
> The pies do have an add only rebalance function, meaning money in goes towards rebalancing instead of selling to rebalance. This is the only real option in Ireland. If you actually rebalancing via selling, the pattern and number of trades would likely cripple anyone from the calculations required for tax and Revenue might also decide you are trading enough to be classed as a professional trader.


Thanks for your valuable inputs. The Pies are limited to 50 shares per pie, so that is a bit of an issue. Nested Pies is a new feature that they are trying to bring soon. I would like to balance through buying only, not selling.


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## interested21 (21 Dec 2021)

sparkdev said:


> 1. Ever changing tax rules and UK UCITs might come under 41% rule same as Irish domiciled ETFs
> 2. Performance of the funds is in the hands of the active manager
> 3. High fees
> 4. Currency exchange risk
> 5. Protection of investment if the unit trust goes out of the business


I'm far from an expert on this compared to others on this forum, but here's my take on those points:

True, but isn't this the case to an extent with any investment? Tax rules can change all the time and all we can do is play the game we're currently presented with. There's no guarantee the CGT rules will stay the same forever for single-share picks either
A fair assessment, however this can go both ways. Managers can outperform the index too (and if you read their materials, most claim that they do). I found this article comparing the Polar Capital Technology Trust with the Allianz Technology Trust. One reason it states for the relative underperformance of the former is that it is more wedded to the index
Hard to argue with this. I would imagine you'd rack up a fair few fees maintaining your own "ETF" as well though?
Unless you're buying shares in companies that operate in Euros only, you're always going to have this
 This feels like a fairly remote possibility. Some of these funds have been around 150 years


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## Sarenco (21 Dec 2021)

sparkdev said:


> 1. Ever changing tax rules and UK UCITs might come under 41% rule same as Irish domiciled ETFs


UK-domiciled investment trusts are not UCITS.

If they were domiciled in Ireland, they would never be authorised as UCITS.  For that matter, they would never be authorised as investment companies here.

Structurally investment trusts are completely different to open-ended funds.


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## Jim2007 (22 Dec 2021)

sparkdev said:


> 1. Ever changing tax rules and UK UCITs might come under 41% rule same as Irish domiciled ETFs
> 2. Performance of the funds is in the hands of the active manager
> 3. High fees
> 4. Currency exchange risk
> 5. Protection of investment if the unit trust goes out of the business



- Investment Trusts and UCITS are two different things 
- Fees and an active manager is no bad thing if you are getting a good return.  My main fund has an annualised return of 18%, does it make sense to pay an extra 0.25% if fees to get that return?  
- When you invest in any multinational there are all kinds of FX risks built in, some you clearly don't even know about
- If you are concerned about safe guarding your investment, then why would go buying fractional shares which you don't own and have the underlying instruments lend out by the broker?  It just does not make any sense.

Like hundreds before you, I know you will do this no matter how much advice you are given.  So go with it, if you are lucky you'll end up with the money you put in or many be a little more, if not you'll have learned an expensive lesson.


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## sparkdev (22 Dec 2021)

Jim2007 said:


> - Investment Trusts and UCITS are two different things
> - Fees and an active manager is no bad thing if you are getting a good return.  My main fund has an annualised return of 18%, does it make sense to pay an extra 0.25% if fees to get that return?
> - When you invest in any multinational there are all kinds of FX risks built in, some you clearly don't even know about
> - If you are concerned about safe guarding your investment, then why would go buying fractional shares which you don't own and have the underlying instruments lend out by the broker?  It just does not make any sense.
> ...


Thanks for your suggestions Jim. I agree with you. May I know which investment trust do you use? Any guide on choosing the good trust with diversified portfolios? Thanks again for your time.


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## sparkdev (22 Dec 2021)

interested21 said:


> I'm far from an expert on this compared to others on this forum, but here's my take on those points:
> 
> True, but isn't this the case to an extent with any investment? Tax rules can change all the time and all we can do is play the game we're currently presented with. There's no guarantee the CGT rules will stay the same forever for single-share picks either
> A fair assessment, however this can go both ways. Managers can outperform the index too (and if you read their materials, most claim that they do). I found this article comparing the Polar Capital Technology Trust with the Allianz Technology Trust. One reason it states for the relative underperformance of the former is that it is more wedded to the index
> ...


I agree with all your points. Regarding point 5) if any of these investment trusts go bust like Lehman Brothers, is there any minimum protection to the investment? like 100k??


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## Sarenco (22 Dec 2021)

sparkdev said:


> Regarding point 5) if any of these investment trusts go bust like Lehman Brothers, is there any minimum protection to the investment?


Eh, no.


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## sparkdev (22 Dec 2021)

Sarenco said:


> Eh, no.


Okay. I am reading that trading 212 has some money protection as written in the below link. Do you think it is of any better protection than investment trusts offer. It might be a dumb question, but I am new to all of these.









						Learn. Trade. Invest. - Trading 212
					

Invest in Stocks and ETFs with zero commission. Trade Gold, Oil, Currencies and more. Trusted and secure, FCA regulated.




					www.trading212.com


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## Sarenco (22 Dec 2021)

Your broker may be covered by a compensation scheme (ie if the broker itself goes bust) but the investment trust won’t be covered.

Similarly, if you invest directly in the stock of any other company that goes bust you won’t be covered by any compensation scheme.


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## Jim2007 (22 Dec 2021)

sparkdev said:


> Thanks for your suggestions Jim. I agree with you. May I know which investment trust do you use? Any guide on choosing the good trust with diversified portfolios? Thanks again for your time.


We are not allowed to discuss individual instruments here.  But if you do some research you should be able to find some interesting ones.


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## sparkdev (22 Dec 2021)

Sarenco said:


> Your broker may be covered by a compensation scheme (ie if the broker itself goes bust) but the investment trust won’t be covered.
> 
> Similarly, if you invest directly in the stock of any other company that goes bust you won’t be covered by any compensation scheme.


Here, in the case of investment trusts working similar to ETFs (i.e. holding the stocks of other companies). In that situation, if they go bust, I expect there should be some mechanism to protect the investor, isn't it? Like if Vanguard goes out of business, there should be some protection right? or am I wrong with my assumptions?


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## Jim2007 (22 Dec 2021)

sparkdev said:


> I agree with all your points. Regarding point 5) if any of these investment trusts go bust like Lehman Brothers, is there any minimum protection to the investment? like 100k??


Lehmans and an investment trust are completely different things.  An investment trust, an ETF or similar financial instrument can't go bust  in the same sense as the likes of Lehmans.  But it can suffer a serious loss due to it's investment strategy, leverage, synthetic instruments and a who series of other issues.

At this point base on you postings.  My advice would be to push the pause button and spend the next 18 months or so learning all about investing.


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