FLEX-10 Index

Canadian Investors, There’s More Than One Way to Skin a Cat

By Charles Sizemore  |  June 24, 2019

I have Canada on my mind today, and not just because it’s hot in Texas.

I actually already escaped the Texas heat by flying south to Lima, Peru, where it’s currently 60 degrees. So, I got that covered.

It also has nothing to do with the Toronto Raptors winning the NBA championship earlier this month. Though here’s a belated congratulations to the team that knocked the mighty Golden State Warriors off their pedestal.

No, I’ve been giving a lot of thought to Canada this morning because I received a stack of mail over the weekend from our neighbors to the north. As you know, I launched my “FLEX-10 Index” last week and showed readers how they could follow the index via Motif Investing.

As my Canadian readers pointed out, Motif is currently only open to investors with a U.S. address and Social Security number and not international investors. But the good news is that there’s more than one way to replicate an index.

“FLEX-10” Includes International Investors

Take the S&P 500 for example. You could replicate that famous index by buying each of its 500 stocks at the current weights. The S&P makes this data readily available. Of course, there’s absolutely no reason to go to that trouble if you can buy a cheap S&P 500 Index fund.

Trading 500 stocks to stay in sync with the S&P 500 would be exhausting. But trading just 10 stocks at a time would be ridiculously easy.

So, if you liked what I had to say about the “FLEX-10 Index” last week but think that following it via the motif isn’t doable, that’s no problem. You can follow my instructions in Peak Profits and place the trades yourself.

This brings up a couple points….

One of the biggest drags on an investor’s portfolio can be trading expenses. Trading commissions today are a fraction of what they were 20 years ago or even 10 years ago. But they quickly add up.

Playing With The Numbers

A typical retail price for a trade these days might be $10-$12, or $20-$24 for a round trip, buying and selling. Five to 10 round trip trades per month could set you back anywhere from $1,200 to $2,880 over the course of a year. On a large portfolio, these frictional expenses might be negligible relative to the size of the account. But on a $100,000 portfolio, that’s getting close to 3% of the value of the account being lost to trading expenses.

Now, let’s say you went with a cheaper broker who charged only $1 per trade. They’re out there, trust me… At $1 per trade, you’re talking about a $2 round trip, or no more than $240 per year. That’s a lot more tolerable.

Another issue to consider is taxation. The components of the “FLEX-10 Index” can remain in the index for months or even years. But as a practical matter, they don’t. The typical stock stays in the index for a month or two before being replaced. Either they rise in value to the point that they are too expensive to make the cut, or they naturally lose momentum over time.

There’s nothing wrong with that. In fact, that’s one of the index’s main selling points. Every month it rotates into the 10 best value and momentum stocks at that immediate point in time based on my model.

But this does mean that virtually 100% of the strategy’s returns will be short-term capital gains. That is, of course, unless you run the strategy in a tax-advantaged account such as an IRA.

The consensus of industry “wisdom” is that long-term buy-and-hold investments, such as an S&P 500 index fund, belong in your IRA. Whereas more aggressive trading strategies should be left for your taxable brokerage account.

To me, that’s backwards…

It makes more sense to put tax-inefficient trading strategies in your IRA, where they won’t rack up a major tax bill for you, and leave the buy-and-hold stuff in your taxable account.

Place Trades On Your Own

This brings me back to the “FLEX-10 Index.” If you want to invest in the index but don’t have access to Motif, no problem.

You can simply place the trades on your own, following my guidelines in Peak Profits . Most months, the trading is limited to 5-10 round-trip trades on a single day. I estimate it will take most investors no more than about 20 minutes per month.

In order to keep costs down, choose a low-cost broker that takes clients from your country. I can’t specifically recommend brokers, but I can say that Interactive Brokers are one of the cheapest options among major online competitors. And they accept clients from virtually every country in the world. If you are an experienced trader, they also have nice re-balancing tools that make implementing the FLEX-10 strategy easy.

I can’t tell you for sure where the market goes from here. But I can tell you this… After 10 years of surging higher, the current bull market — which is dominated by large-cap tech stocks — is looking long in the tooth. Now more than ever, diversifying into alternative strategies makes sense.

And the “FLEX-10 Index” just makes that much more sense in these conditions given its ability to hedge.

So, to find out more about the “FLEX-10 Index,” just click here. It’s that easy.

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Charles Sizemore

Income and Retirement Strategist, Charles Sizemore, CFA specializes on dividend-focused portfolios and building alternative allocations by finding value opportunities outside of the mainstream stock market.

Charles is the executive editor and portfolio manager for Dent Research's premium newsletters, Peak Income and Peak Profits.

He is also a frequent guest on CNBC, Bloomberg TV, Fox Business News and Straight Talk Money Radio, and has been quoted in Barron’s Magazine, The Wall Street Journal, and The Washington Post. He is a frequent contributor to Forbes, GuruFocus, MarketWatch and InvestorPlace.com.

Charles holds a master’s degree in Finance and Accounting from the London School of Economics in the United Kingdom and a Bachelor of Business Administration in Finance with an International Emphasis from Texas Christian University in Fort Worth, Texas, where he graduated Magna Cum Laude and as a Phi Beta Kappa scholar. MORE FROM AUTHOR