Vanguard small cap index vs. small cap value

[alewisdvm]

Hello,
This site is awesome. Excellent advice from many of you.
It was recently pointed out to me, that I happened to have small cap value as part of my asset allocation, and that I should consider converting it to the small cap index.
But, I also keep reading a lot about many investors choosing a bit of a "value" tilt instead.

I'm just wondering how much of a difference does it really make. Not as much history to evaluate the small cap value. I do see it has a slight higher expense ratio, has a higher SEC yield, but can't really compare it for the long-term.

Assuming everything else in AA is comparable, any particular reason why a vanguard small cap "value" can't represent 10-15% of allocation versus the index?

[Beat The Street]

Vanguard's small value fund isn't very good if you're looking for exposure to that asset class. It isn't small enough or valuey enough. I like the Guggenheim S&P 600 small cap pure value ETF for that space. In the long run small value should outperform the small cap index.

[alewisdvm]

In that case, and if preferring to keep funds within vanguard (for simplicity), would you simply stick with the small cap index and leave that asset class alone?
Or, any other suggestions, within vanguard, to complement small cap index?

[stlutz]

Smallcap value makes a better complement to a total market fund. In the past, sometimes small-value has dramatically outperformed in periods when the overall market hasn't done that well. Of course, just the opposite can occur as well. The overall small fund will be more highly correlated to the overall market.

Just keep your tilt relatively modest (i.e. 40% of your portfolio should not be small value).

[Jordana]

I have VBR, IWN, and IWC. I tend to use Ameritrade's commission free funds. I also tend to have more slices in my categories. Morningstar does not like the microcap funds but it has done well and can capture those companies that most indexes will not get.

[Dandy]

Equity value tilting has some positive reserach supporting its benefits. I think you have to decide whether you want to have a relatively simple portfolio or have a more complex portfolio. There are many investors that hold slices (large, middle, small cap)of the US and International equity markets rather than the Total Stock Mkt or Total Int'l Stk Mkt. You can further slice them into growth, value, tax advantaged and slice the International into Europe, Asia, and Emerging Markets. Value tilting and slicing and dicing have their fans.

On the equity side I only hold a large cap value index fund. I probably will consolidate that into Total Stock Market so that I eventually only own that and Total Int'l and some REIT Index. It will make monitoring and rebalancing easier and I don't think it will make a huge difference in overall return.

[ofcmetz]

If you are trying to tilt towards value and small then you are where you want to be with Vanguard Small Cap Value.

If you are trying to replicate a total market index and maybe hold a S&P 500 fund, then maybe the Vanguard Small Cap Index is where you would rather be.

Difference is the tilt of the two funds.

[alewisdvm]

Hello,
Thank you all.
I would hold a total stock market index, but have large limitations with my 401K. Not good options with many having expense ratios over 1.1-1.4%

So, utilizing the dryden S&P500 within the 401k is primary since it has a expense ratio more like vanguard.

You can see more about the allocation I am trying to do and what I am working with in 401K options here:
viewtopic.php?f=1&t=109928

[nisiprius]

If the PROBLEM is:

"I want to hold the total market, but the only good fund choice in my 401(k) is an S&P 500 fund. What can I add, outside of my 401(k), to make up the difference between the S&P 500 and the total market?"

then one SOLUTION is:

"Use an 'extended index' or 'completion index' mutual fund, that tracks a specific kind of index, called a 'completion index,' that represents a total market index with the S&P 500 companies removed." One example of such a fund would be the Vanguard S&P 500 Completion Index fund, VEXMX, and it's described further in the wiki at Extended Market Index Fund.

Notice that this is a precise solution to the stated problem. Last time I looked, the appropriate mix was about 80% S&P 500 to 20% extended index fund. That is,

80% S&P 500 fund + 20% extended market index fund = total stock market.

Extended market index funds are often included in 401(k)s, by the way.

There is some mild difference of opinion on how suitable an extended market index fund is a good choice if you want to overweight midcaps and/or small-caps; see the Wiki article.

[alewisdvm]

Wow. Very interesting. I will investigate it further. Of course, if I were to incorporate it, than I would imagine my 15% allocation to "small cap index" or "small cap value" should be decreased some?

[retiredjg]

I think you don't have a very good understanding yet of how stocks are categorized. Here's a quickie explanation.

There is a scale, used to describe stocks, that runs from something called "value" to "growth". The middle is called "blend" or "core". The total stock market is about 1/3 value, 1/3 blend (of value and growth) and 1/3 growth.

There is also a scale used to describe stocks based on size - large, mid, and small. So you can have something that is large and value, or large and blend, or small and growth, etc. - for a total of 9 different options that are usually displayed in 9 boxes. Those are the boxes you see in that link (in the other thread) called "Approximating Total Stock Market".

You can't get total stock market in your 401k, but you can use 83% 500 Index and 17% Small Cap Index (in spouse's IRA if I remember right) to approximate total stock market. Or you could use 80% 500 Index and 20% Extended Market (the index that completes the 500 Index). You can do the same using the small cap value you currently have, but the result is not quite total stock market, but something leaning more toward the value side of the scale rather than the middle.

Historically, small cap stocks and value stocks have done a little better than the stock market as a whole. It is not known if this will continue but some people believe it will and that's why some people use some extra small cap value stocks in their portfolios. Some use a lot of extra value and extra small cap. This is advanced investing and not something you should do without knowing what you are doing.

I hope that helps.

[alewisdvm]

Hello,
You all have been very helpful. Yes, I was reviewing the extended market, I was wondering what extra benefit i would really get since I already have 15% in small cap value fund. Perhaps some extra mid-cap, but based on performance when breaking all these stocks down, I don't think it would really help me that much to add extended market. I've already got the small cap value, so I think I will either just stick with that or change to small cap index.

My impression would be to simply keep funding that Dryden S&P500, and continue to make contributions to either small cap value or blend and be done with it. Of course, will still work on increasing funds within international, and have already made 401k adjustments to improve bond exposure a bit through that core enhanced fund.

The extended market fund did sound interesting, but I don't think I really need even more small cap exposure.

Sound about right?

[retiredjg]

The extended market fund did sound interesting, but I don't think I really need even more small cap exposure.

Sound about right?

People are suggesting one or the other, not both. Either use the extended market to finish your 500 index or use small cap blend to finish your 500 index. My feeling is that extended market is a perfect fit and small cap blend is good enough to not worry about it. So use whichever you like best.

[alewisdvm]

Okay.
So, in that case, you would suggest changing the small cap value to the small cap index if I am not going to bother with extended market right now?

[retiredjg]

I don't really have a suggestion. It depends on what you want.

If you want something close to total stock market, you should use either small cap index or extended market index instead of small cap value index. Either one will get what you want if used in the right ratios.

[alewisdvm]

Understood
I guess got a little confused by the classification of extended market appearing as more of a mid-cap blend. It states that it includes small caps, but really it what percentage?

[retiredjg]

A "mid cap blend" mutual fund simply averages out to mid cap blend. This does not mean that is all it contains. Just like the total stock market averages out to "large cap blend" although it contains all the other 8 boxes as well.

By definition (with a little leeway thrown in), the Extended Market Index is simply the part of the total stock market that is not included in the 500 Index.

So I don't know what percentage of small cap is in there. And if you are simply trying to make something that approximates total stock market, it does not matter what percentage is in there.

Think of if this way. If there are 3500 stocks in the US, the 500 Index represents the largest 500 and the extended market index represents the other 3000. Together they make the total. Again, this is a generalization and not precisely accurate, but that's how it works.

If you really want to know the percentage of small caps in the extended market fund, go to http://www.morningstar.com and enter the ticker (or the name) in a little quote box at the top center of the page. Once your fund info comes up, click on the "portfolio" tab and find the 9 style box and add up the 3 numbers on the bottom row. You'll also see the fund even contains a few percentage points in the large cap category.

[YDNAL]

It was recently pointed out to me, that I happened to have small cap value as part of my asset allocation, and that I should consider converting it to the small cap index.

Some people believe that Small Cap Growth is garbage - thus they prefer Small Cap Value. Then....

• Vanguard Small-Cap Growth Index Fund Investor Shares (VISGX) -- 11.02% avg annual (each year) return for 10 years ending 12/31/12.
• Vanguard Small-Cap Value Index Fund (VISVX) -- 9.61% avg annual (each year) return for 10 years ending 12/31/12.
  - or all Small Caps -
• Vanguard Small-Cap Index Fund Investor Shares (NAESX) -- 10.83% avg annual (each year) return for 10 years ending 12/31/12

You just never know, do you?

I would hold a total stock market index, but have large limitations with my 401K. Not good options with many having expense ratios over 1.1-1.4%

So, utilizing the dryden S&P500 within the 401k is primary since it has a expense ratio more like vanguard.

If you "would hold a total stock market index" if available in your 401k, then just complete Dreyden S&P500 with Extended Markets at 80/20 split.
https://personal.vanguard.com/us/funds/ ... statistics

[EDN]

Hello,
This site is awesome. Excellent advice from many of you.
It was recently pointed out to me, that I happened to have small cap value as part of my asset allocation, and that I should consider converting it to the small cap index.
But, I also keep reading a lot about many investors choosing a bit of a "value" tilt instead.

I'm just wondering how much of a difference does it really make. Not as much history to evaluate the small cap value. I do see it has a slight higher expense ratio, has a higher SEC yield, but can't really compare it for the long-term.

Assuming everything else in AA is comparable, any particular reason why a vanguard small cap "value" can't represent 10-15% of allocation versus the index?

While this is changing with Vanguard's transition to the CRSP indexes, what we can say about the current small cap indexes based on the MSCI indexes is the following:

Over the longest period available (6/92), the small cap index (MSCI 1750) had a market exposure ("beta") of 1.06, a size exposure of 0.60 and a value exposure of 0.27. The small value index (MSCI 1750 Value) had a market exposure of only 0.97, a size exposure of 0.43, and a value exposure of 0.71.

If we assume the market premium is 5%, the size premium is 2%, and the value premium is 4% (approximately their 1927-2012 average), then the expected returns on these two indexes is:

Small Index - +2.6% more than the market
Small Value - +3.6% more than the market

In reality (because the actual factors didn't do exactly as history would have predicted), the small index beat the market by +2.4% and the small value index beat the market by +2.8%. The reason for the less-than-expected return on the SV index was due to a 25% smaller value premium (3% instead of 4%) and some negative 3F alpha.

Use SV, and use enough to make it count. That's my advice.

Eric

[bogleblitz]

Either works but make sure you stick with it for atleast 5+ years.

Do not jump back and forth between small value and small index based on last 5 year performance.