International SCV just got cheaper

[grap0013]

http://finance.yahoo.com/news/powershar ... 53599.html

"•The PowerShares FTSE RAFI Developed Markets ex-U.S. Small-Mid Portfolio (PDN) now costs 0.49 percent, 34.6 percent less than its previous cost of 0.75 percent. The $60 million fund came to market five years ago. "

To compare:

PDN: ER 0.49
DLS: ER 0.58

I guess you could go VSS, but you have to decide if ~21 basis points of expenses are worth adding a value tilt over a blend fund.

[grabiner]

I guess you could go VSS, but you have to decide if ~21 basis points of expenses are worth adding a value tilt over a blend fund.

VSS doesn't give value, but it gives emerging markets; PDN is only developed markets, so you would have to add DGS to get emerging.

I would also avoid PDN in a taxable account; fundamental weighting leads to higher dividend yields, and some of the dividend income will be non-qualified. But in a tax-deferred account, it might be attractive.

[STC]

It's not just the 21 basis points.... If your figures are correct, and that fund has only $60m in assets, you are going to get dinged hard on the bid/ask spread. VSS has $1b in assets... Much more liquid.

[grok87]

meh.
the other issue with these fundamentally weighted index funds (spindexes) is the turnover. PDN has 75% turnover
http://www.invescopowershares.com/pdf/P-PS-AR-8.pdf
boy you really have to dig to get these figures- its not like their advertising it on their website.
high turnover in international small cap is particularly deadly as the transaction costs are high for those sorts of stocks
cheers,

[Sammy_M]

Good to know. To date I've used Schwab's SFILX (in tax advantaged), mainly due to the lower 0.55% ER. I may use PDN going forward (using careful limit orders). IIRC, Robert T prefers(ed) PDN over the Schwab fund even despite the higher ER, I believe because of his guess that PowerShares would be better at execution...

Appears that has been the case according to this chart. http://quote.morningstar.com/fund/chart ... %2C0%22%7D

For anyone who missed it, this was a great discussion on the RAFI options.

[grap0013]

meh.
the other issue with these fundamentally weighted index funds (spindexes) is the turnover. PDN has 75% turnover
http://www.invescopowershares.com/pdf/P-PS-AR-8.pdf
boy you really have to dig to get these figures- its not like their advertising it on their website.
high turnover in international small cap is particularly deadly as the transaction costs are high for those sorts of stocks
cheers,

Grok,

I think you need to dig into the actual figures as evidenced by tracking error relative to index and tax cost ratios.

In PDN's 5+ years of inception, the fund's NAV has trailed it's index by 0.97. With 0.75 due to its previous expense ratio, it only lost 0.22 due to likely turnover and frictional costs. That's not bad at all, especially in this asset class. On the other hand, VSS has trailed its index by almost exactly its expense ratio.

Here are 3 year tax cost ratios:
VSS: 0.68
PDN: 0.93
DLS: 1.25

Here's the final breakdown if you compare VSS to PDN for expected returns in tax advantaged:

PDN has additional +0.21 (ER) + 0.22 (turnover) = 0.43 less than VSS. However, how much do you assign to the value premium?

Taxable is another animal because you'd have to add another 0.25 to PDN's expenses for tax drag plus with only 60M AUM you have concerns for fund longevity and being stuck with a big tax bill someday. Also, you might have some concerns about bid/ask spreads if doing frequent tax loss harvesting. However, in tax advantaged, much of these concerns should be mitigated. PDN looks like a very good choice to me in that setting.

[grap0013]

Good to know. To date I've used Schwab's SFILX (in tax advantaged), mainly due to the lower 0.55% ER. I may use PDN going forward (using careful limit orders). IIRC, Robert T prefers(ed) PDN over the Schwab fund even despite the higher ER, I believe because of his guess that PowerShares would be better at execution...

Appears that has been the case according to this chart. http://quote.morningstar.com/fund/chart ... %2C0%22%7D

For anyone who missed it, this was a great discussion on the RAFI options.

Sammy,

Just FYI, when I compare mutual funds to ETFs using morningstar's website, frequently the dividend is not included in the returns for mutual funds. This could skew the numbers in favor of the ETF. This doesn't happen when comparing ETFs to ETFs or mutual funds to mutual funds. I'm not sure if there is a work around on their website for this problem.

[vesalius]

Good to know. To date I've used Schwab's SFILX (in tax advantaged), mainly due to the lower 0.55% ER. I may use PDN going forward (using careful limit orders). IIRC, Robert T prefers(ed) PDN over the Schwab fund even despite the higher ER, I believe because of his guess that PowerShares would be better at execution...

Appears that has been the case according to this chart. http://quote.morningstar.com/fund/chart ... %2C0%22%7D

For anyone who missed it, this was a great discussion on the RAFI options.

Comparing PDN versus SFILX may no longer be an apples to apples proposition. As of October 19, 2012 Schwab has changed to the to the Russell Fundamental Developed ex-U.S. Small Company Index from the FTSE RAFI Developed ex US Mid Small 1500 Index, which PDN still uses.

Not sure yet if the russell version of the index will end up being more small company given its name does not include "Mid" in it.

It appears that the russell rafi index will also reconstitute annually, but as opposed to FTSE will implement those changes quarterly, as described in section 3 of this PDF. Russell Fundamental Index Construction and Methodology

[Sammy_M]

Sammy,

Just FYI, when I compare mutual funds to ETFs using morningstar's website, frequently the dividend is not included in the returns for mutual funds. This could skew the numbers in favor of the ETF. This doesn't happen when comparing ETFs to ETFs or mutual funds to mutual funds. I'm not sure if there is a work around on their website for this problem.

Good to note. I did cross-checked Fidelity's site as well. Don't know if they have the same issue though.

[pauliec84]

On the subject of PDN being not great...

PDN
Size: 1.703B
Price/Book: 0.94
Price/Earning: 11.64

VSS
Size: 1.242
Price/Book: 1.09
Price/Earning: 11.99

So slightly more value exposure, less small exposure.
One day there will be a real international small value out there

[Doc]

Just FYI, when I compare mutual funds to ETFs using morningstar's website, frequently the dividend is not included in the returns for mutual funds.

Are you certain you are looking at a growth chart or total return numbers. If you put an ETF in a chart and then add a fund you get price data. If you put the fund in first you get growth data.

[grok87]

On the subject of PDN being not great...

PDN
Size: 1.703B
Price/Book: 0.94
Price/Earning: 11.64

VSS
Size: 1.242
Price/Book: 1.09
Price/Earning: 11.99

So slightly more value exposure, less small exposure.
One day there will be a real international small value out there

how about turnover
PDN 75%,
VSS 17%
cheers,

[Sammy_M]

For those that include an allocation to Intl Value, PXF at 0.45% deserves another look as well. 17% turnover is pretty good.

Code: Select all

Symbol Expense P/B    P/S    P/CF   MktCp   TrnOv Hldgs  Fund
DFIVX   0.45   0.77   0.52   2.45   21,063    9%   546   DFA International Value I
SFNNX   0.35   0.91   0.48   2.73   23,874   35%   995   Schwab Fdmtl Intl Lg Co Idx
  PXF   0.45   0.94   0.53   2.86   24,936   17%   997   PowerShares FTSE RAFI Developed Markets
  EFV   0.40   0.93   0.62   2.70   33,138   27%   486   iShares MSCI EAFE Value Index (ETF)
VTRIX   0.41   1.18   0.77   3.82   26,340   39%   199   Vanguard International Value Inv

--all data from morningstar.com

[nisiprius]

Just FYI, when I compare mutual funds to ETFs using morningstar's website, frequently the dividend is not included in the returns for mutual funds.

Are you certain you are looking at a growth chart or total return numbers. If you put an ETF in a chart and then add a fund you get price data. If you put the fund in first you get growth data.

And, it appears as if you need to put in the fund first in order to get growth data at all. If you put in a fund first you get "growth" but can choose "price." If you put in the ETF first, "growth" is not offered as an option at all.

(The default chart for a mutual fund is a ten-year chart that includes dividends. For an ETF, it's a five-day chart that does not include dividends. This has to say something about ETF investors).

[Sammy_M]

Data for small cap options

Code: Select all

Symbol Expense P/B    P/S    P/CF   MktCp  TrnOv  Hldgs   Fund
DISVX   0.70   0.58   0.30   2.49    869    16%   2,136   DFA International Small Cap Value I
SFILX   0.55   0.90   0.42   4.49   1,580   63%   1,426   Schwab Fdmtl Intl Sm Co Idx
  PDN   0.49   0.94   0.45   4.40   1,703   75%   1,412   PowerShares FTSE RAFI Developed Market
  DLS   0.58   0.95   0.45   3.80    977    52%     656   WisdomTree Intl. SmallCap Div Fd.

  VSS   0.28   1.09   0.58   4.19   1,242   37%   3,035   Vanguard FTSE All Wld Ex US Sml Cap
SCHC    0.20   1.19   0.63   4.73   1,574   25%   1,028   Schwab Intl Small Cap Equity
  SCZ   0.40   1.02   0.50   3.99   1,366   16%   1,355   iShares MSCI EAFE Small Cap

[grap0013]

how about turnover
PDN 75%,
VSS 17%
cheers,

Those are indirect concerns. VSS trails its index by about ~0.3%. PDN used to trail its index by about ~1%. With the ER reduction it should only trail it's index by ~0.7%. Difference ~0.4% between VSS and PDN. Let's say PDN's value factor load is 0.35 (which I think is resonable) and assume value premium is 4. Small they are pretty close.

0.35 (factor load) X 4 (value premium) = 1.4

1.4 - 0.4 (extra PDN fees/turnover) = 1

PDN has a ~1% expected higher return than VSS (for the developed international component of VSS).

[grap0013]

Just FYI, when I compare mutual funds to ETFs using morningstar's website, frequently the dividend is not included in the returns for mutual funds.

Are you certain you are looking at a growth chart or total return numbers. If you put an ETF in a chart and then add a fund you get price data. If you put the fund in first you get growth data.

And, it appears as if you need to put in the fund first in order to get growth data at all. If you put in a fund first you get "growth" but can choose "price." If you put in the ETF first, "growth" is not offered as an option at all.

(The default chart for a mutual fund is a ten-year chart that includes dividends. For an ETF, it's a five-day chart that does not include dividends. This has to say something about ETF investors).

So if I put in a fund first and then an ETF it should be growth with dividends for both?

[grap0013]

Sammy,

Just FYI, when I compare mutual funds to ETFs using morningstar's website, frequently the dividend is not included in the returns for mutual funds. This could skew the numbers in favor of the ETF. This doesn't happen when comparing ETFs to ETFs or mutual funds to mutual funds. I'm not sure if there is a work around on their website for this problem.

Good to note. I did cross-checked Fidelity's site as well. Don't know if they have the same issue though.

I just plugged in a 3 year morningstar growth of 10K chart and the difference was $0.59 between the two. Maybe SFILX lost a little that first year as it was adding holdings because it was a new fund?

[Sammy_M]

Those are indirect concerns. VSS trails its index by about ~0.3%. PDN used to trail its index by about ~1%. With the ER reduction it should only trail it's index by ~0.7%. Difference ~0.4% between VSS and PDN. Let's say PDN's value factor load is 0.35 (which I think is resonable) and assume value premium is 4. Small they are pretty close.

0.35 (factor load) X 4 (value premium) = 1.4

1.4 - 0.4 (extra PDN fees/turnover) = 1

PDN has a ~1% expected higher return than VSS (for the developed international component of VSS).

That assumes no value load on VSS. I recall Robert T estimated a 0.2 value load on SCZ, which has similar M* style boxes as VSS.

I also wonder if 4% value premium is too high given lower expected returns on equities in general. PDN would actually have lower expected returns than VSS if one assumes 0.15 difference in value load and 2% value premium going forward.

[pauliec84]

grap0013 wrote:
Those are indirect concerns. VSS trails its index by about ~0.3%. PDN used to trail its index by about ~1%. With the ER reduction it should only trail it's index by ~0.7%. Difference ~0.4% between VSS and PDN. Let's say PDN's value factor load is 0.35 (which I think is resonable) and assume value premium is 4. Small they are pretty close.

0.35 (factor load) X 4 (value premium) = 1.4

1.4 - 0.4 (extra PDN fees/turnover) = 1

PDN has a ~1% expected higher return than VSS (for the developed international component of VSS).

That assumes no value load on VSS. I recall Robert T estimated a 0.2 value load on SCZ, which has similar M* style boxes as VSS.

I also wonder if 4% value premium is too high given lower expected returns on equities in general. PDN would actually have lower expected returns than VSS if one assumes 0.15 difference in value load and 2% value premium going forward.

Lets not forget PDN also have a smaller SMB (small) load. The difference between VSS and PDN in SMB, is larger than the difference between them with value. So it is a probably a was with expeceted return.

It is also misguided to just look at factor loadings and chose the fund with highest loads. Factor loads are not arbitrage, they are measures of risk. Forming a portfolio, our goal is not to get the highest return, it is to get the highest risk adjusted return.

[BlueEars]

I was all set on SFILX but then saw it has 35% in Japan: http://portfolios.morningstar.com/fund/summary?t=SFILX&region=USA&culture=en-US This is just too extreme for me.

VSS turns me off because of (1) the bid-ask spread, (2) the large swings in premiums/discounts. I always look at round trip costs but others may think they don't care about this factor.

So I'm leaning toward VINEX International Explorer (ER=0.42). I know it's not an index but for this asset class I may make an exception. Changes that could make it more interesting for others is that they've dropped the minimum investment and removed the redemption fee (I think it was for holding it < 2 months).

[Doc]

Regarding Growth vs. Price charts.

(The default chart for a mutual fund is a ten-year chart that includes dividends. For an ETF, it's a five-day chart that does not include dividends. This has to say something about ETF investors).

Nah. It says nothing about ETF investors. It says that both ETFs and stocks are traded on exchanges and stocks historically have price charts.

It may however say something about mutual fund investors that get so enamored by dividends and total returns that they can't recognized a price chart when they see one.

Hey if you are going to "stay the course" you don't need to be looking at prices anyway. Right?

To be honest it took me quite a while to recognize that there was a difference in the default charts for ETFs and funds.

[gt4715b]

I just wanted to mention another option for International SCV, the FlexShares Morningstar Developed Market ex-US Factor Tilt Index Fund (TLTD). It's designed to be more of a core holding rather than a SCV component but it has small and value tilts. The ER is 0.42% which is competitive with other offerings. The main issue right now is that it's new so there are still serious liquidity issues.

http://www.flexshares.com/exchange-traded-funds/morningstar-developed-markets-ex-us-factor-tilt-index