Which Vanguard Small Cap Fund

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OldSport
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Which Vanguard Small Cap Fund

Post by OldSport » Sat Jan 13, 2018 10:21 am

I'd like to tilt my portfolio to small cap. I am trying to decide between VSMAX or VTMSX, or possibly half and half.

What are the major differences between VSMAX and VTMSX? This would be for a taxable account. Would the recommendation be different in a tax advantaged account?

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jhfenton
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Re: Which Vanguard Small Cap Fund

Post by jhfenton » Sat Jan 13, 2018 1:44 pm

Main difference: Different indices.

VTMSX applies a tax-management overlay to the S&P 600 Small Cap Index. The S&P 600 is an index of very small companies selected to be representative of the small-cap market by a committee at S&P. There is a profitability requirement, so the portfolio has a quality tilt. The tax-management mandate allows them to deviate from the index slightly where following the index would result in a tax hit. Maybe they overweight low dividend payers a bit. Maybe they hold on to some low-basis shares of a company dropped from the index in order to avoid distributing capital gains. Or maybe they tax-lost harvest some shares--thereby underweighting something else slightly--to offset the gains. VTMSX costs 9 bp.

VSMAX follows a CRSP index that covers all companies between the 85th and 98th percentiles in size. They are all small companies, but it stretches more into mid-cap territory. VSMAX has an ETF share class VB, so it can rid itself of capital gains through the ETF share class. VSMAX costs 6 bp.

If you look at M* data: VTMSX = Median Market Cap 1.83 billion, VSMAX 3.94 billion.

I would choose VTMSX in taxable. I like the composition a bit better, and the yield is a bit lower. But both would be pretty good in taxable.

It's kind of a trick question for me, though, because I wouldn't buy either of these funds. I actually own VSIAX (Vanguard Small Cap Value Index Admiral), the value cousin of VSMAX, in tax-advantaged, and VIOV (Vanguard S&P 600 Small Cap Value ETF), the ETF value cousin of VTMSX, in taxable.

I just prefer tilting to value in my small caps.

livesoft
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Re: Which Vanguard Small Cap Fund

Post by livesoft » Sat Jan 13, 2018 1:52 pm

I expect the differences are mostly historical back before ETFs were invented and tax-managed funds had a 5-year back-end early redemption fee.

You can look for yourself at
a. Expense ratios.
b. One has an ETF share class (helps with tax-efficiency and transfer to a non-Vanguard broker) and one doesn't.
c. Percentage of dividends that are non-qualified.
d. Maybe compare recent M* "growth-of" charts.

If any of these features are important to you, then maybe they will help with your decision.
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jhfenton
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Re: Which Vanguard Small Cap Fund

Post by jhfenton » Sat Jan 13, 2018 3:09 pm

livesoft wrote:
Sat Jan 13, 2018 1:52 pm
(helps with...transfer to a non-Vanguard broker)
That is a very good point. Where possible I try to use ETFs or ETF-convertible equity funds in taxable. It gives me the option to move the account or holding to another broker without worrying about taxes.

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stevewolfe
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Re: Which Vanguard Small Cap Fund

Post by stevewolfe » Sat Jan 13, 2018 3:18 pm

Transfer in kind accomplishes the same thing between brokerages. We did this a few years ago.

MotoTrojan
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Re: Which Vanguard Small Cap Fund

Post by MotoTrojan » Sat Jan 13, 2018 3:24 pm

Smaller median cap is nice. The regular small cap fund is more 50/50 mid/small. Like above poster I too choose to tilt small-VALUE via VIOV (same index as IJS) in taxable and Roth. But that’s only available as an ETF.

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