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.