What is the best fund to tilt to small value stocks?

[Momus]

I only have an account at Vanguard unfortunately, so no DFA for me... is Small-Cap Value Index Admiral (VSIAX) good enough?

[wwross]

Sounds good. What about the ETF, VBR? Same thing?

[yobria]

Depends on your reason for owning this fund. If the reason is: "I hope to capture the small value premium that shows up in the FF data, while avoiding the poor performance of small growth in that data", then no, it's not good enough, see: http://www.bogleheads.org/forum/viewtop ... 10&t=95065 .

[BornInCA]

Guggenheim S&P SmallCap 600 Pure Value ETF (RZV) is the best according to Altruist FA. http://www.altruistfa.com/USsmallcapvaluefunds.htm

Ferri's blog also has some insight into this: http://www.rickferri.com/blog/strategy/ ... ue-stocks/

[Momus]

So everyone pretty much agree that RZV is the best fund to try to capture small cap value premium, more so than DFA and Vanguard?

[livesoft]

"everyone"? Isn't that a case of extrapolating too much?

RZV has a reported average trading volume of about 9,000 or $315K a day. That's less than the allocation to small-cap value in many portfolios reported on this forum, so it is ridiculously low. I would not own it for that reason alone.

[tludwig23]

Everyone doesn't even agree that the value and small risk premiums exist any more. Also, if you plot RZV and VBR over the last 5 years, they are pretty similar, despite RZV being smaller and more "valuey". Given that, I'd go for the 40% lower ER (0.21 vs. 0.35, I believe) of VBR.

[FinanceFun]

IJS is another good one. Tracks a small value index.

[rkhusky]

Bit of apples/oranges comparison. RZV has 80% microcaps, 147 stocks, turnover of 76%. IJS has 37% micro, 453 stocks, 30% turnover. VBR has 20% micro, 60% small, 20% mid, 1000 stocks, turnover of 30%. The RZV index is not market-cap based.

[rustymutt]

If you want a real tilt towards small and value, then RZV is a good choice. I have 5% of my tax advantaged holdings in this ETF.

[yobria]

RZV has a 5 year standard deviation of 40%/year, vs 19% for the S&P. I owned RZV once, but decided I didn't need to take that kind of risk. Will you be compensated for it ultimately? It's certainly risk that can be diversified away.

[livesoft]

One of the reasons to invest in SCV is that the standard deviation is so high. One must be prepared to buy when it drops and sell when it goes up. That's called rebalancing. If you cannot steel yourself to do that, then you are practicing "buy & hold" and not "buy, hold, & rebalance."

[Taylor Larimore]

I only have an account at Vanguard unfortunately, so no DFA for me... is Small-Cap Value Index Admiral (VSIAX) good enough?

Yes. Hopefully you can put this fund in a tax-advantaged account. Also, it greatly simplifies investing by holding all one's funds with one good company like Vanguard.

Best wishes.
Taylor

[Default User BR]

IJS is another good one. Tracks a small value index.

Although it's a different index from VBR, the performance of the two has been very similar. The ER is slightly higher, but close. For these reasons, many like it as a TLH partner for VBR.


Brian

[yobria]

One of the reasons to invest in SCV is that the standard deviation is so high. One must be prepared to buy when it drops and sell when it goes up. That's called rebalancing. If you cannot steel yourself to do that, then you are practicing "buy & hold" and not "buy, hold, & rebalance."

1) That may or may not be true, depending on investment strategy. For example, you're about to retire with $500K RZV/ $500K bonds. RZV drops 80%. If losing more money means you can't pay the rent, it may not be prudent to rebalance.

2) Personally I realized when RZV dropped 80% that I really had no interest in dumping more $ into it. I have plenty of savings, and have no need to take that kind of risk.

3) Rebalancing a risky security may or may not work out over your time horizon. There's absolutely no guarantee that Japanese stocks will leap back to their 1989 prices just because you've been rebalancing into them for 20 years.

4) That high risk may not be compensated if it can be traded away, which it most certainly can be in this case.

[scone]

I own FSEMX, Fidelity Spartan Extended Market Index. The Morningstar style is small blend, the ER is .10%, and the minimum initial investment is 10k. The Fidelity Spartan series, and the higher minimum Spartan Advantage series, are definitely worth a look.

[Average Investor]

I only have an account at Vanguard unfortunately, so no DFA for me... is Small-Cap Value Index Admiral (VSIAX) good enough?

Yes. Hopefully you can put this fund in a tax-advantaged account.
Taylor

Why not taxable here as with other equity holdings (TLH potential)?

[JRA]

I own FSEMX, Fidelity Spartan Extended Market Index. The Morningstar style is small blend, the ER is .10%, and the minimum initial investment is 10k. The Fidelity Spartan series, and the higher minimum Spartan Advantage series, are definitely worth a look.

This fund is certainly an excellent one, and I hold it to complement my Spartan S & P 500 fund in my 403B account (no total market fund available). It, however, is not really a value but a blend fund with a strong tilt toward growth. While it holds the value component of mid and small cap stocks in the index, they are overshadowed by the growth stocks.

[Taylor Larimore]

I only have an account at Vanguard unfortunately, so no DFA for me... is Small-Cap Value Index Admiral (VSIAX) good enough?

Yes. Hopefully you can put this fund in a tax-advantaged account.
Taylor

Why not taxable here as with other equity holdings (TLH potential)?

Hi Dan:

Small-Cap Value (VISVX) has a Morningstar 10-year Tax Cost Ratio of .41. Total Stock Market (VTSMX) which holds Small-Cap Value stocks has a TCR of .30. The difference is .11% more lost to taxes. Also, placing SCV in a taxable account probably means more rebalancing with resulting capital gain taxes.

Best wishes.
Taylor

[Momus]

2) Personally I realized when RZV dropped 80% that I really had no interest in dumping more $ into it. I have plenty of savings, and have no need to take that kind of risk.

This was March 09? Now, I am scared also looking at the chart >_> What fund do you use to get small value premium since you seem to discredit Vanguard Small Value in your numerous posts?

[livesoft]

momus, I suppose you have read this thread about yobria's "capture" of the small/value premiums:
http://www.bogleheads.org/forum/viewtop ... 10&t=96441

ps: thanks for edit

[grap0013]

So everyone pretty much agree that RZV is the best fund to try to capture small cap value premium, more so than DFA and Vanguard?

No, but most people don't agree with me. I like PXSV.

http://www.bogleheads.org/forum/viewtop ... 10&t=91257

I also have some PRFZ in taxable. If PXSV picks up some more AUM and higher trading volumes, I will likely purchase some in taxable with new money.
Check out this shocker:

5 year tax cost ratio:

VTI (total market): 0.34
PRFZ (small cap value): 0.33

PRFZ is more tax efficient than a total market fund!

[Average Investor]

Hi Dan:

Small-Cap Value (VISVX) has a Morningstar 10-year Tax Cost Ratio of .41. Total Stock Market (VTSMX) which holds Small-Cap Value stocks has a TCR of .30. The difference is .11% more lost to taxes. Also, placing SCV in a taxable account probably means more rebalancing with resulting capital gain taxes.

Best wishes.
Taylor

Thanks for explaining this.

Is there a commonly accepted cutoff point where it makes sense to put in tax-deferred if space is available? Something like VTIAX should logically also be in tax deferred as well? Morningstar shows a TCR for 1 year as 1.06.

Thanks.

[Taylor Larimore]

Hi Dan:

Small-Cap Value (VISVX) has a Morningstar 10-year Tax Cost Ratio of .41. Total Stock Market (VTSMX) which holds Small-Cap Value stocks has a TCR of .30. The difference is .11% more lost to taxes. Also, placing SCV in a taxable account probably means more rebalancing with resulting capital gain taxes.

Best wishes.
Taylor

Thanks for explaining this.

Is there a commonly accepted cutoff point where it makes sense to put in tax-deferred if space is available? Something like VTIAX should logically also be in tax deferred as well? Morningstar shows a TCR for 1 year as 1.06.

Thanks.

Hi Dan:
There is really no "cutoff" point. It is more a matter of relativity. We put our most tax-efficient funds (like total market index funds) in our taxable account and our least tax-efficient funds (especially taxable bonds) in our tax-deferred accounts. This wiki link explains:

http://www.bogleheads.org/wiki/Principl ... _Placement

Best wishes.
Taylor

[scone]

This fund ( FSEMX, Fidelity Spartan Extended Market Index) is certainly an excellent one, and I hold it to complement my Spartan S & P 500 fund in my 403B account (no total market fund available). It, however, is not really a value but a blend fund with a strong tilt toward growth. While it holds the value component of mid and small cap stocks in the index, they are overshadowed by the growth stocks.

Agreed! I pair it with VIIIX at .02% ER to get a pretty good exposure to the market at a very good price. And even though it's more growth than value as you say, the expense ratio is so nice I couldn't help but suggest it.

[grap0013]

momus, I suppose you have read this thread about yobria's "capture" of the small/value premiums:
http://www.bogleheads.org/forum/viewtop ... 10&t=96441

ps: thanks for edit

Thanks for posting that link Livesoft. It was the funniest and informative thread I have ever read!

As a frequent visitor to Bogleheads.org I couldn't believe that I had missed it previously. I had to go back and look at the dates. I was gone for just over 1 week in May, I was out of the country with no internet and that whole thread was up, locked, and had likely moved down too far on the list by the time I had returned.

[caklim00]

momus, I suppose you have read this thread about yobria's "capture" of the small/value premiums:
http://www.bogleheads.org/forum/viewtop ... 10&t=96441

ps: thanks for edit

Thanks for posting that link Livesoft. It was the funniest and informative thread I have ever read!

As a frequent visitor to Bogleheads.org I couldn't believe that I had missed it previously. I had to go back and look at the dates. I was gone for just over 1 week in May, I was out of the country with no internet and that whole thread was up, locked, and had likely moved down too far on the list by the time I had returned.

+1

Can't believe I missed that post as well and I feel like such a dork since I was able to completely follow it

Ohh, to the original question. Funds I use/have used VBR, IJS/VIOV, RZV, and DFFVX. I'm avoiding adding onto RZV since I'd be uncomfortable having to TLH out of it. VBR and IJS/VIOV are natural TLH partners. Unfortunately the spread on VIOV recently has diverged from IJS (still not sure unless there is some change inherent in the tracking of the index between the 2).

[Momus]

What's the optimal percentage of having small value stocks? 70 TSM/30 SCV? less or more than that?

[tludwig23]

What's the optimal percentage of having small value stocks? 70 TSM/30 SCV? less or more than that?

The answer to this question is unknowable, except in retrospect.

[livesoft]

What's the optimal percentage of having small value stocks? 70 TSM/30 SCV? less or more than that?

If you run a M* X-ray on a proposed portfolio, then I think you would want the large-cap row sum to somewhere between 45% and 50%. Try it with the numerous small-cap and value-tilted portfolios that you see proposed in books or on the web. From those exercises, you can figure out a percentage, but what's your definition of "optimal"?

[HongKonger]

What about SLYV - S&P 600 SCV? 0.25ER.

[Taylor Larimore]

What's the optimal percentage of having small value stocks? 70 TSM/30 SCV? less or more than that?

The answer to this question is unknowable, except in retrospect.

Momus: I agree with tludwig:

According to Morningstar, for the 12 months ending 7/31/2012 Total Stock Market gained 7.32% vs. 2.30% for Small-Cap Value. Conclusion = 100% Total Stock Market was the "optimal percentage."

According to Morningstar, for the 10 years ending 7/31/2012 Total Stock Market annualized gain was 7.00% vs 8.24% for Small-Cap Value. Conclusion: 100% Small-Cap Value was the "optimal percentage."

The answer is also muddled by the fact that TSM includes the market weight in small-cap value stocks and the Small-Cap Value fund includes mid-cap growth stocks. And, most important, there is this:

Past performance does not guarantee future performance.

My suggestion: If you value simplicity use the The Three Fund Portfolio as a goal. If you think you can beat the market by adding Small-Cap Value, then add 10 to 30% of equity.

Best wishes.
Taylor

[nonnie]

I only have an account at Vanguard unfortunately, so no DFA for me... is Small-Cap Value Index Admiral (VSIAX) good enough?

Just to clarify/nitpick?-- Vanguard is one fund family, DFA-- Dimensional Fund Advisors is another fund family--never the twain shall meet- that can only be bought through financial advisers. You cannot purchase DFA at Vanguard or without an adviser of some sort.

Nonnie

[yobria]

What's the optimal percentage of having small value stocks? 70 TSM/30 SCV? less or more than that?

According to market participants (which collectively have millions of times more information than anyone on this board), the optimal percentage of SV is that which is found naturally in TSM -- otherwise the market would have weighted SV stocks differently.

It's easy to say you can pick stock weightings that will outperform TSM, just like it's easy to say you can beat Michael Phelps in a swim race.

[tludwig23]

It's easy to say you can pick stock weightings that will outperform TSM, just like it's easy to say you can beat Michael Phelps in a swim race.

Actually it is nothing like that. I could pick ten individual stocks and I bet one (at least) will easily beat the TSM. Same with factor weighed funds or with sector funds. I just don't know which will outperform in advance. Phelps is not like an index fund, he is an outlier.

[am]

0% small cap value is optimal for most investors. Perhaps there is a premium, but we may not see it during our investment lifetimes. But more likely, we will not stick with our plan after many years of potential underperformance.

[Khanmots]

What's the optimal percentage of having small value stocks? 70 TSM/30 SCV? less or more than that?

According to market participants (which collectively have millions of times more information than anyone on this board), the optimal percentage of SV is that which is found naturally in TSM -- otherwise the market would have weighted SV stocks differently.

So you hold a market weight of bonds?

Tilting to small and value is simply another way to adjust ones risk/return profile.

[grap0013]

0% small cap value is optimal for most investors. Perhaps there is a premium, but we may not see it during our investment lifetimes. But more likely, we will not stick with our plan after many years of potential underperformance.

Next your gonna tell me I can't stick with my workout regimen or eating brussel sprouts. I'm going to full tilt for the next 30 years just because some anonymous internet people said I couldn't do it!

Besides, I only know of 1 person who abandoned a SCV tilt. Hint: he/she has posted in this thread.

[livesoft]

Besides, I only know of 1 person who abandoned a SCV tilt. Hint: he/she has posted in this thread.

I think the sin was abandoning at the wrong moment in time.

[yobria]

It's easy to say you can pick stock weightings that will outperform TSM, just like it's easy to say you can beat Michael Phelps in a swim race.

Actually it is nothing like that. I could pick ten individual stocks and I bet one (at least) will easily beat the TSM. Same with factor weighed funds or with sector funds. I just don't know which will outperform in advance. Phelps is not like an index fund, he is an outlier.

But when overweighting small value, you don't need only 1 in 10 winners to outperform. Your weighting needs to outperform the market.

[yobria]

0% small cap value is optimal for most investors. Perhaps there is a premium, but we may not see it during our investment lifetimes. But more likely, we will not stick with our plan after many years of potential underperformance.

Next your gonna tell me I can't stick with my workout regimen or eating brussel sprouts. I'm going to full tilt for the next 30 years just because some anonymous internet people said I couldn't do it!

Besides, I only know of 1 person who abandoned a SCV tilt. Hint: he/she has posted in this thread.

Yeah, I figured I'd look kind of silly overweighting value if growth had a run. Which, of course it proceeded to do .

[yobria]

What's the optimal percentage of having small value stocks? 70 TSM/30 SCV? less or more than that?

According to market participants (which collectively have millions of times more information than anyone on this board), the optimal percentage of SV is that which is found naturally in TSM -- otherwise the market would have weighted SV stocks differently.

So you hold a market weight of bonds?

Like most posters on this thread, you haven't quite grasped the concepts. In this case, the concept is: There's only a need to diversify away risk when there's risk to begin with. Nothing wrong with holding all treasuries or CDs in durations that meet your goals. But stock diversification is a free lunch, so you should capture as much as you can.

[Khanmots]

What's the optimal percentage of having small value stocks? 70 TSM/30 SCV? less or more than that?

According to market participants (which collectively have millions of times more information than anyone on this board), the optimal percentage of SV is that which is found naturally in TSM -- otherwise the market would have weighted SV stocks differently.

So you hold a market weight of bonds?

Like most posters on this thread, you haven't quite grasped the concepts. In this case, the concept is: There's only a need to diversify away risk when there's risk to begin with. Nothing wrong with holding all treasuries or CDs in durations that meet your goals. But stock diversification is a free lunch, so you should capture as much as you can.

So you're saying that with the bond/equity split that market weighting isn't the optimal ratio?

[tludwig23]

It's easy to say you can pick stock weightings that will outperform TSM, just like it's easy to say you can beat Michael Phelps in a swim race.

Actually it is nothing like that. I could pick ten individual stocks and I bet one (at least) will easily beat the TSM. Same with factor weighed funds or with sector funds. I just don't know which will outperform in advance. Phelps is not like an index fund, he is an outlier.

But when overweighting small value, you don't need only 1 in 10 winners to outperform. Your weighting needs to outperform the market.

I'm not sure I understand your point. SCV often outperforms the market. Look at http://fa.smithbarney.com/public/projec ... d7a3bf.pdf. SCV outperforms both LCV and LCG in 11 of the 20 years studied. Also, if you believe the Fama & French paper, it is likely that SCV will outperform TSM over the long run.

Also, you state that the risk involved in SCV value, "can be diversified away". I don't think that is true. If the risk (and the increased long-term return) is due to the presence of the factor itself, getting rid of the factor is not diversifying it away. A SCV tilt is fundamentally different from betting on a sector to outperform the TSM, or picking individual stocks. Sector/individual stock risks are idiosyncratic and can be diversified away. SCV tilt risk is not, and cannot.

[caklim00]

momus, I suppose you have read this thread about yobria's "capture" of the small/value premiums:
http://www.bogleheads.org/forum/viewtop ... 10&t=96441

ps: thanks for edit

Thanks for posting that link Livesoft. It was the funniest and informative thread I have ever read!

As a frequent visitor to Bogleheads.org I couldn't believe that I had missed it previously. I had to go back and look at the dates. I was gone for just over 1 week in May, I was out of the country with no internet and that whole thread was up, locked, and had likely moved down too far on the list by the time I had returned.

+1

Can't believe I missed that post as well and I feel like such a dork since I was able to completely follow it

Ohh, to the original question. Funds I use/have used VBR, IJS/VIOV, RZV, and DFFVX. I'm avoiding adding onto RZV since I'd be uncomfortable having to TLH out of it. VBR and IJS/VIOV are natural TLH partners. Unfortunately the spread on VIOV recently has diverged from IJS (still not sure unless there is some change inherent in the tracking of the index between the 2).

Spread on VIOV is now back to about the same as IJS. I'm guesssing it was due to the issue with the market maker last week?

[yobria]

It's easy to say you can pick stock weightings that will outperform TSM, just like it's easy to say you can beat Michael Phelps in a swim race.

Actually it is nothing like that. I could pick ten individual stocks and I bet one (at least) will easily beat the TSM. Same with factor weighed funds or with sector funds. I just don't know which will outperform in advance. Phelps is not like an index fund, he is an outlier.

But when overweighting small value, you don't need only 1 in 10 winners to outperform. Your weighting needs to outperform the market.

I'm not sure I understand your point. SCV often outperforms the market. Look at http://fa.smithbarney.com/public/projec ... d7a3bf.pdf. SCV outperforms both LCV and LCG in 11 of the 20 years studied. Also, if you believe the Fama & French paper, it is likely that SCV will outperform TSM over the long run.

Also, you state that the risk involved in SCV value, "can be diversified away". I don't think that is true. If the risk (and the increased long-term return) is due to the presence of the factor itself, getting rid of the factor is not diversifying it away. A SCV tilt is fundamentally different from betting on a sector to outperform the TSM, or picking individual stocks. Sector/individual stock risks are idiosyncratic and can be diversified away. SCV tilt risk is not, and cannot.

I think you're going to find that there's a big gap between a backtested theory in an academic data set and an easy free lunch the market has been kind enough not to trade away. Note what happened when Fama and French went looking for a free lunch the backtests in their academic data had turned up:

History provides a cautionary tale. Another anomaly that was all the rage among academics was the January effect. Small stocks tend to have high returns in January and lower return in other months. Interestingly, this anomaly seems to be weak in the live returns of small cap mutual funds, raising the possibility that there is something weird in the quoted prices for small stocks around the turn of the year on major databases.

See: http://www.bogleheads.org/forum/viewtop ... 83&start=0

And while SV has outperformed SG by over 7% per year in the academic data, SG has actually outperformed using Vanguard funds, see http://www.bogleheads.org/forum/viewtop ... 5&start=50 . It's one thing for the alchemist to say he can turn your base metals into gold. It's another to hand him a chunck of iron and walk away with a gold nugget. Appealing theory, harsh reality.

In terms of a risk factor not being able to be traded away, first every proponent of SV I know suggests it's not just risk, but at least partially a free lunch. But looking at risk alone, yes, small stocks have been riskier than large. But that doesn't mean you should expect to be compensated for this risk, if it can be diversified away by owning TSM. I can see no tangible difference in risk between value and growth stocks. Some academuc studies have speculated about "hidden risks" in value stocks, but those are nothing more than guesses.

[Default User BR]

0% small cap value is optimal for most investors. Perhaps there is a premium, but we may not see it during our investment lifetimes.

You can say the same thing about stocks in general.


Brian

[matjen]

Another vote for iShares S&P SmallCap 600 Value Index - IJS

[tludwig23]

I owned RZV once, but decided I didn't need to take that kind of risk. Will you be compensated for it ultimately? It's certainly risk that can be diversified away.

In terms of a risk factor not being able to be traded away, first every proponent of SV I know suggests it's not just risk, but at least partially a free lunch. But looking at risk alone, yes, small stocks have been riskier than large. But that doesn't mean you should expect to be compensated for this risk, if it can be diversified away by owning TSM. I can see no tangible difference in risk between value and growth stocks. Some academuc studies have speculated about "hidden risks" in value stocks, but those are nothing more than guesses.

Yobria,
Note you first said that the risk of SV can be diversified away, not "traded away". Perhaps you can use terms that have more precise definitions? I can trade away all SV risk, in fact, all equity risk by buying a risk-free asset (T-bills).

I have no idea what you mean by, "it's not just risk, but at least partially a free lunch", perhaps you can explain.

Again you seem to not be grasping a central concept of the F&F 3 factor model. You state, "small stocks have been riskier than large. But that doesn't mean you should expect to be compensated for this risk, if it can be diversified away by owning TSM." This is simply not true. Small stocks contain an additional risk factor (SMB) which is by definition uncorrelated with general equity risk (Beta). If you own TSM you choose to only exposure yourself to a small amount of this risk factor (SMB). If you own the S&P 500, you are not exposed to SMB at all. Not exposing yourself SMB is not the same as "diversifying it away", anymore than buying T-bills is "diversifying away" your equity risk.