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Index tracking strategy


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I want to create a spread bet that basically just replicates a buy and hold strategy to follow an index, the plan being to just keep the position open for several years. However, it isn't possible to edit the stake on an existing position, so "adding" to my trade on a monthly basis would just result hundreds of new separates trades over a period of years right?

I don't know if I can use Smart Portfolios because I'm based in Ireland and I think you have to be resident in the UK to access the Smart Portfolios.

Is there an easy way to mimick regular monthly investing but via a spreadbet?

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@TrendFollower raises a good question, and @daxhad better do the math and understand exactly what he's trying to achieve.

However, there is a valid argument for a long-term hold strategy using daily funded bets, it simply behaves like buying stocks in a margin account with the consequent leveraging of returns and losses we know so well. I'm not advocating a leveraged long-term trade, simply showing the math.

Let's take a worked example - for simplicity a single investment rather than the recurring investment, but the principle is the same.

The FTSE is currently at 7178. Let's assume in 1 year's time it is trading at ~7900 for a ~10% annual return.

Now let's assume our investor has £12,000 to invest.

If he invests in buy/hold via an ETF invested in the FTSE, unleveraged, he earns 10% or £1200. Simple. Maybe with dividends included total return is 14% in the year.

But let's say he puts the £12k in a spread bet account and opens a DFB on the FTSE100. Let's say he decides to gear his position 6:1, so he takes out a £10 bet giving the trade a notional value of £71,780. Margin is about £3.5k, but not all that relevant since he's not maxing out his leverage.

Let's assume the overnight rate is going to be about 5.5% (LIBOR +IG's fee) / 365 which means his overnight charge is going to be £10.82 when he opens the position, and rise to £11.90 a year later due to the higher index value. Long story short, the overnight charges for holding the position for a year amount to £4,136.

So - where does that leave him? The position is up 7900 - 7178 = 722 points, or £ 7,220. Deducting the funding costs he has made £7220 - £4136 = £3,084, which is a return of over 25% on the £12,000 he allocated to the trade. Way more than the 14% from putting the £12k into an unleveraged buy/hold strategy. . 

Obviously if the market went down 722 points by year end (-10%), he would be deeply under water with a loss of - £-3,081 + £-4,136 = £-7,217, leaving him with a return on his £12k of -60%.

If the trader can access a ~£70k loan for less than the 5.5% rate, then obviously  he would do better to borrow from that source and invest into an unleveraged ETF or similar, and not establish the position via a spread bet.

Would be great if someone double-checked my logic and math on the above :)

@dax Buying every month will mean you will accumulate multiple trades, but so what? The user interface shows them aggregated against the instrument in any case.

Ian

 

 

 

 

 

Edited by Ian_944
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13 minutes ago, Caseynotes said:

@dax, @Ian_944 & @TrendFollower, nice work Ian, just to point out that holding a spread bet or cfd long term and adding to along the way is perfectly viable but you would be looking to use a futures contract which is designed for just such a purpose rather than a dfb. There is no overnight funding to pay just the increased spread re-paid every 3 months on rollover.

I've done the math on that before, and the spread on the futures instruments is so wide (it incorporates the overnight charge) that there is minimal advantage to the future over holding the DFB, and you lose all the flexibility offered by the narrow spread of the DFB.

Edited by Ian_944
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Thanks for the worked example Ian, very interesting. My plan was to trade the longest futures contract available, I didn't think the rollover cost would be that significant but it's probably more than I thought.

In answer to TrendFollower, the reason I'm looking at this is because I live in Ireland and there is pretty much no way to avoid the punitive taxes we get charged here for investing. There is a measly 1,270 CGT tax free allowance per year. Other than that, there is no tax free or tax efficient investment vehicle like the ISA in the UK.

I'm not sure what the situation is with the Smart Portfolios, Im not resident in UK but I think I can still open a separate GBP account and setup a Smart Portfolio. Just worried about running into problems down the line with that since I'm not UK resident and therefore probably not technically allowed to trade that product even though it seems IG will let me setup the account.

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10 hours ago, Caseynotes said:

@dax, @Ian_944 & @TrendFollower, nice work Ian, just to point out that holding a spread bet or cfd long term and adding to along the way is perfectly viable but you would be looking to use a futures contract which is designed for just such a purpose rather than a dfb. There is no overnight funding to pay just the increased spread re-paid every 3 months on rollover.

The futures market is specially designed for holding a position for the longer term over a daily funded bet and you avoid the overnight charge.

The Ftse dfb spread is £1/point while the futures spread is £4/point so the difference is £3/point or £30 on a £10/point bet. The futures contracts are 3 monthly so to hold for over a year you need to rollover 4 times where you pay the spread again though IG has a discount for rollovers so you are not paying the full £40 each time.

 

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I was planning on the S&P so spread should remain consistently tight. In terms of whether I get uptrends or sideways action, this isn't really a concern for me in theory just as it wouldn't be a concern if pumping money into a buy and hold every month over a 20yr period because even taking recessions into account, over the long term, you should still achieve an effective return of at least 5%-6% a year. For example if you started a buy and hold in '99 and rode out the dot com crash and the '08 crash you would still have over a 6% return annualised.

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