How do you create an index fund

Your own index fund: the do-it-yourself index

With Obermatt, you can manage a passive equity portfolio with little effort. The advantages of a passive equity portfolio compared to an index fund are:

  • Transparency: You know your shares very well and you made a conscious decision in favor of them
  • No hidden fees: In the case of funds, not all fees have to be shown in the Total Expense Ratio (TER). According to the Swiss regulator FINMA, trading costs, which amount to around 1.6% on average, are not included in the TER, which is shown in fund prospectuses. With your own portfolio of stocks, you avoid such hidden fees.
  • No overweighting of expensive stocks: An index overweighted expensive stocks by definition, because the more expensive the stock, the larger its proportion in the index. That means you have more expensive stocks than cheap stocks. That depresses your index return.
  • No overweighting of large stocks: With your own portfolio, you know exactly which stocks you own. There is therefore no overweighting of large stocks, as can be the case with index funds. So they are always well diversified.
  • No conflict of interest: Obermatt is independent of your money. This means that the analysis and management of your money is not carried out from one source.
  • No counterparty risk: You own your shares and are independent of financial products such as funds or ETFs, which often take counterparty risks themselves in order to save costs or hide additional fees.
  • Lower fees: Obermatt allows you to separate your stock valuation and stock purchase. You no longer have to obtain everything from a single source. With a discount broker (comparison: Switzerland, Germany) you are invested much cheaper in the long term. In the third pillar, the saved fees can amount to up to 90,000 francs.

We call this do-it-yourself indexing. The big advantage: You control where you invest.

Why an index fund?

Index funds and exchange traded funds (ETFs) are widely used investment products that typically include a portfolio of stocks that share common characteristics. Such characteristics are, for example, the geographic region, the size of the shares or the industry. Index funds and ETFs, for example, map stock market indices such as the Standard & Poor's 500 Index in the United States or the DAX in Germany.

With these investment products, self-investors benefit from low administration costs and great diversification, which ensures an optimal retirement pension, which is why Warren Buffet warmly recommends them to his wife.

Why a personal, own do-it-yourself index?

A personal or do-it-yourself index is similar to a normal index fund. It is a portfolio of stocks that have been selected based on common characteristics. In contrast to a standard index, which is based on definitions from third parties, the personal index uses its own, self-selected criteria.

This gives you the advantage that stocks you don't like won't be in your personal index either. The do-it-yourself index leaves the choice of stocks up to you. At the same time, you benefit from the benefits of diversification and the low costs. Strictly speaking, the costs are even lower than with an index fund because there are no index management fees.

The Obermatt share filter helps you to create your own personal share index. You enter your investment strategy and filter out the industries, company sizes and regions in which you want to invest.

Risk lower with do-it-yourself

You can buy an index fund or an index ETF from a bank or a bank-like company. These finance companies are considered to be very safe. But there is always a company between you and the company in which you have invested. So you have a residual risk with the "counterparty", a so-called counterparty risk. Only the future will know whether that will happen to you one day. With a broadly diversified do-it-yourself equity investment, this risk is completely eliminated and you invest your money more safely (always diversify).

Pension higher for do-it-yourself

If you hold a broadly diversified portfolio yourself, then you are not making a big mistake that all index funds make by definition: You do not generally hold more expensive stocks and less cheap stocks.

An index fund does exactly that: stocks that are rather expensive are held by index funds to a greater extent than stocks that are rather cheap. In the long term, it could therefore give you a return advantage if you do not compose your portfolio according to the company valuation (as with an index), but instead, for example, equally weighted or from stocks with good value.

In a back-test, so-called backtesting, we were able to determine that such an excess return with the Obermatt Top 10 stocks in 50 stock markets measured over three years, i.e. in more than 150 investment years, was possible to the extent of an impressive 8% (further research on this topic at the Ben Graham Center). The current top 10 returns are tracked at Obermatt so that you can always check how well the individual investment strategies are currently working.

But don't let backtesting blind you. A few years are not enough for statistically sound statements. An investment strategy would have to prove itself in dozens of economic crises before it could be statistically proven that it is better than pure chance. And even then it is likely that the investment strategy will not work for several years and will yield a lower return until it returns to a phase in which it generates excess returns. So we will not be able to prove that the return with the Obermatt Method is higher than that of a typical stock index and it may also be that it is in fact lower than the return of other stock indices over longer periods of time. So you have to decide for yourself which return expectations you believe in - entirely in the sense of do-it-yourself.

Something else speaks in favor of a higher retirement capital in the do-it-yourself index. Although the commissions for index investments are small, over the years only 0.3% management fees accumulate to an amount that corresponds to a pretty mid-range car. When you retire, you'd rather have this car in your own garage than in the asset manager's garage. And that is the case with the do-it-yourself index, because there are no administration costs.

Sample calculation for lower costs with do-it-yourself indexing

Typical index funds charge management fees of 0.2% to 0.8% on the assets under management. This means that with annual savings of 10,000 (€, $, £, etc.) and an investment horizon of 30 years, you will spend 69,000 on index management (with 0.3% commission and 8.0% average stock return). A nice middle class car. Calculate your costs yourself with the Administration Fees Calculator.

This amount is still much smaller than with a traditional asset manager or your pension fund, which will happily deduct 383,000 from your retirement assets (at 2.0% administration and insurance costs; all other assumptions as above). So buy an index fund rather than give the money to someone else.

And maybe even better for you: Your own do-it-yourself index, because then the 69,000 of the index fund administration will not be incurred and you can retire with over a million savings (based on the assumptions in this example ).