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The Cambridge Index Strategy ® (CIS) is a tax-efficient low-cost large cap direct indexing momentum strategy
OUR SYSTEM
FOR ADVISORS
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For Clients
Find out what the Cambridge Index Strategy is, how it works and the steps taken to achieve success.
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Presentation
Cambridge Index Strategy overview for financial advisors.
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HOW ADVISORS CAN UTILIZE THIS STRATEGY
To summarize the CIS strategy, it is a large-cap direct indexing momentum strategy designed to harness the short-term random market behavior of well-known large cap stocks for higher net worth clients in search of a way to preserve and/or give away parts of their wealth in a tax-efficient way. Its direct indexing element consists of 50 large cap stocks (the 30 DJIA stocks plus the top ten S&P 500 stocks plus the top ten NASDAQ stocks – no overlaps) purchased in equal amounts on or about December 1. Dividends are invested in SCHX, Schwab’s low cost large-cap ETF.
On or about October 21 of the following year, stocks that have lost value exclusive of dividends (”Losers”) are sold to capture short-term capital losses – the tax-loss harvesting component of the strategy. As with dividends, proceeds are invested in SCHX. On or about Nov. 25, any remaining stocks that have gained 10% or more (“Gainers”) are transferred to a separate “Greenhouse” account to preserve their long-term gains (these are the stocks that bloomed over the year). This is the momentum component of the strategy.
Stocks that neither lost nor gained 10% (“Runts”) are then rolled over into the next fiscal year. If the account, including the Runts and cash, contain less than the minimum, the difference must be made up by the addition of new funds from the client if they wish to continue.
Returns for the initial year’s holding have matched the returns of the major indexes, as would be expected since it consists of 60 percent Dow, 20% S&P 500, and 20% NASDAQ. The average CAGR over the past 15 years (2006-2020) was about 10.6% (Dow was 10.0%, S&P 9.8%, NASDAQ 11.00%).
Stocks that are in the Greenhouse account are held for long-term investing, donations, gifting, or any other purpose the client wishes. It has done quite well over the past few years, capturing all of the FAANG stocks and their spectacular returns. (In fact, one account – Bert Whitehead’s account, which he was willing to share at the 2021 ACP conference in Atlanta – enjoyed a remarkable CAGR of 35.9% over the previous five years, 2016-2020. This compared to 13.9% CAGR for the S&P 500 over the same period.)
Feel free to contact Asset Dedication if you believe you have clients who could benefit from the CIS approach: info@assetdedication.com
WHAT IS THE CAMBRIDGE INDEX STRATEGY?
The Cambridge Index Strategy ® (CIS) is a tax-efficient low-cost Large Cap Index strategy. CIS uses strategy years, as opposed to calendar years, beginning on December 1st and ending by November 30 of the following year.
Two accounts must be opened: a “Strategy” account and a “Greenhouse” account. The “Strategy” account, as its name implies, is used to implement the strategy. The “Greenhouse” account is used to house and preserve gains achieved by the individual holdings (from stocks that have “bloomed” during the year by growing 10% or more) and is no longer part of the implementation portion of the CIS strategy. These holdings may be used for any purpose, including gifting to donor-advised funds, charities, family, etc.
CIS has a minimum investment of $100,000, which is required to initiate the strategy per strategy year. If investing in this strategy, it is strongly encouraged to abide by a minimum one year holding period rule; otherwise, it may create unnecessary transaction fees in addition to the tax consequences the strategy specifically seeks to avoid.
While the strategy can be initiated on a quarterly basis on an exception basis (i.e., after the advisor and client have a thorough understanding of the limitations of implementing the strategy on an off-quarter basis), quarterly implementation is not recommended for a variety of reasons. It is a long term strategy.
Contact your advisor to learn more.
Strategy is Initiated
- Fifty stocks are purchased in equal dollar amounts as follows:
- purchase the 30 individual Dow Jones Industrial Average stocks.
- purchase the 10 largest stocks in the S&P 500 Index (by market capitalization weighting) which are not included in the Dow.
- purchase the 10 largest positions in the Nasdaq 100 (by market capitalization weighting) except those already purchased in the Dow or S&P index.
FOLLOWING YEAR
Losers
- "Losers" are sold on or about this date to harvest short term capital losses.
- This classification includes any position with a price loss since its purchase into the Strategy account.
- Proceeds from the sales are used to purchase SCHX or equivalent.
Gainers
- "Gainers" are transferred on or about this date to the "Greenhouse" account to preserve long-term capital gains.
- This classification includes any position with a price gain greater than 10% over its purchase price.
- The "Greenhouse" is monitored on an ongoing basis and any stock that has a 5% or more decline from its cost basis in two consecutive quarters is sold with proceeds invested in SCHX.
Remaining Positions
- Any remaining positions, referred to as "Runts," that remain in the Strategy account are rolled over.
- These positions will have been held for a period of one year longer but if sold at a loss, they will not be included in the Strategy account for the following year.
- The overall strategy is then re-initiated for the next year, by adding funds as needed to bring the holding to a minimum of $100,000, assuming the client chooses to continue with the strategy.
Maintenance
- Dividends and any cash build up in the CIS and/or Greenhouse account are monitored monthly.
- Cash target for CIS and Greenhouse accounts is approximately 1.0% each.
- When cash in the account exceeds 2.0%, excess cash is invested in SCHX (Schwab's no-transaction-fee low-cost large cap domestic ETF) or a similar fund if necessary.
Strategy Presentation
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