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How would one go about creating a stock market index or ETF?


berkshire101
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Hello,

 

I've been a long-term lurker and decided to finally join the club.  It's nice to meet everyone. =)

 

I've been thinking about this for a while, but has anyone thought about creating your own index or ETF?  I was inspired by the magic formula and came up with my own version.  The back testing showed satisfactory results so I was wondering if you could create an index/ETF and have your broker make a massive purchase of all those stocks at once, but with limited commission fees.

 

Some folks have kindly suggest taking a look at https://www.motifinvesting.com/ and http://www.exchangetradedconcepts.com/. 

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There was a value book floating around a year or two ago by Wes Gray and Toby Carlisle.  Wes Gray runs some sort of quant shop and recently started his own ETF.  I read in either an interview, or on his twitter stream that startup costs for an ETF are in the $250k range.  So this isn't for the faint of heart.

 

That said, if you can front the $250k and have a compelling strategy and a way to gather assets managing an ETF is a heck of an annuity.

 

Best of luck!  My guess is you're going to need to contact a securities lawyer for next steps.

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There was a value book floating around a year or two ago by Wes Gray and Toby Carlisle.  Wes Gray runs some sort of quant shop and recently started his own ETF.  I read in either an interview, or on his twitter stream that startup costs for an ETF are in the $250k range.  So this isn't for the faint of heart.

 

That said, if you can front the $250k and have a compelling strategy and a way to gather assets managing an ETF is a heck of an annuity.

 

Best of luck!  My guess is you're going to need to contact a securities lawyer for next steps.

 

Thanks oddball.  Is this the book you were referring to?

 

http://www.amazon.com/Quantitative-Value-Web-Site-Practitioners/dp/1118328078/ref=sr_1_1?s=books&ie=UTF8&qid=1417930711&sr=1-1&keywords=wes+gray

 

And no, I don't have $250k to front.  Maybe one day, but not yet. =(

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Rob Arnott of Research Affiliates created the fundamental weighted index.  They are currently distributed through PowerShares.  I really like the concept as it addresses the main problem with market cap weighted indexes (the heaviest weightings tend to be toward the most expensive stocks).

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Rob Arnott of Research Affiliates created the fundamental weighted index.  They are currently distributed through PowerShares.  I really like the concept as it addresses the main problem with market cap weighted indexes (the heaviest weightings tend to be toward the most expensive stocks).

 

Can you explain the concept behind fundamental weighted index?  I was thinking about trying an equal or price weighted approach. 

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Rob Arnott of Research Affiliates created the fundamental weighted index.  They are currently distributed through PowerShares.  I really like the concept as it addresses the main problem with market cap weighted indexes (the heaviest weightings tend to be toward the most expensive stocks).

 

Can you explain the concept behind fundamental weighted index?  I was thinking about trying an equal or price weighted approach.

 

Instead of using market cap determining the weights in an index, they use sales, cash flow, dividends and book value.

 

Rob Arnott and his firm Research Affiliates have created an alternative. They were recently awarded the patent for “fundamental index” methodology. It replaces market value with 4 fundamental financial measures. Instead of stock price, the companies are valued on sales, cash flow, dividends and book value.

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