Which small-cap value index is better?

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kiddoc
Posts: 423
Joined: Mon Aug 24, 2015 10:52 pm

Which small-cap value index is better?

Post by kiddoc » Tue Apr 18, 2017 1:22 am

For US investments tilted to small-cap value, I mainly use IJS (S&P small-cap 600 value index) because it invests in somewhat small and value stocks and is "good enough" for a DIY investor who doesn't have access to DFA funds and cares about cost/ tax-efficiency.

Which index would be a good tax-loss harvesting partner for it in a taxable account and why? The two options I see available:

- CRSP US Small Cap Value Index: example- Vanguard's VBR ETF and corresponding mutual fund
- Russell 2000 Value Index: example- Vanguard's VTWV ETF.

Preferred characteristics:

1) Keeps the small/ value tilt intact and doesn't become a lowish mid-cap value fund
2) Low-cost and tax efficient in a 35% marginal tax rate
3) Ability to hold outside Vanguard's brokerage window (too many accounting errors there and I lost faith in them for any tax-loss harvesting). Prefer Fidelity followed by TD Ameritrade but looking at Schwab as well.
"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

stlutz
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Re: Which small-cap value index is better?

Post by stlutz » Tue Apr 18, 2017 2:13 am

I would question whether you want to TLH this position at all:

--the other alternatives are notably less tax efficient
--the return variations (positive or negative) from changing indexes will overwhelm the impact of the TLH.
--how much does IJS have to go down from here to even have the opportunity to TLH?

If IJS is what you want to hold, I would only use an alternative as a temporary 30-60 day holding place (depending on when dividends are paid) after which I'd switch back to IJS. In that case, I would choose the one that is cheapest to trade, which would either be IWN or VBR.

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oldcomputerguy
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Re: Which small-cap value index is better?

Post by oldcomputerguy » Tue Apr 18, 2017 5:40 am

kiddoc wrote:For US investments tilted to small-cap value, I mainly use IJS (S&P small-cap 600 value index) because it invests in somewhat small and value stocks and is "good enough" for a DIY investor who doesn't have access to DFA funds and cares about cost/ tax-efficiency.

Which index would be a good tax-loss harvesting partner for it in a taxable account and why? The two options I see available:

- CRSP US Small Cap Value Index: example- Vanguard's VBR ETF and corresponding mutual fund
- Russell 2000 Value Index: example- Vanguard's VTWV ETF.

Preferred characteristics:

1) Keeps the small/ value tilt intact and doesn't become a lowish mid-cap value fund
2) Low-cost and tax efficient in a 35% marginal tax rate
3) Ability to hold outside Vanguard's brokerage window (too many accounting errors there and I lost faith in them for any tax-loss harvesting). Prefer Fidelity followed by TD Ameritrade but looking at Schwab as well.


VBR has 40% mid-cap, so it misses on point (1). VTWV has about 90% small-cap, and a lower ER than you're currently paying (0.20% vs 0.25%), but buying it at Fidelity will incur Fidelity's normal trading fees.

You might consider JKL, iShares Morningstar Small-Cap Value ETF. It's not commission-free at Fidelity like IJS is, and it has a slightly higher ER (0.30% vs your current 0.25%), but it is 65% SCV, a higher percentage than just about anything else out there.
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kiddoc
Posts: 423
Joined: Mon Aug 24, 2015 10:52 pm

Re: Which small-cap value index is better?

Post by kiddoc » Tue Apr 18, 2017 8:47 am

stlutz wrote:--the other alternatives are notably less tax efficient

Thanks, I didn't know that
stlutz wrote:--the return variations (positive or negative) from changing indexes will overwhelm the impact of the TLH.

Thanks for making me look for this. The differences in returns since inception (although only a few years) between the 3 vanguard etfs on mroningstar are huge: upto 23% loss of return :shock:
stlutz wrote:--how much does IJS have to go down from here to even have the opportunity to TLH?

According to my IPS, I tax-loss harvest if a holding goes down by $2000 or more. I felt $700 or more tax savings were worth it.
stlutz wrote:If IJS is what you want to hold, I would only use an alternative as a temporary 30-60 day holding place (depending on when dividends are paid) after which I'd switch back to IJS. In that case, I would choose the one that is cheapest to trade, which would either be IWN or VBR.

I suspect this is what I am going to end up doing. Although I have had instances where the market rose and I have had to hold such a substitute investment forever.
"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

kiddoc
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Re: Which small-cap value index is better?

Post by kiddoc » Tue Apr 18, 2017 8:53 am

oldcomputerguy wrote:VBR has 40% mid-cap, so it misses on point (1). VTWV has about 90% small-cap, and a lower ER than you're currently paying (0.20% vs 0.25%), but buying it at Fidelity will incur Fidelity's normal trading fees.

You might consider JKL, iShares Morningstar Small-Cap Value ETF. It's not commission-free at Fidelity like IJS is, and it has a slightly higher ER (0.30% vs your current 0.25%), but it is 65% SCV, a higher percentage than just about anything else out there.


Thanks, JKL seems to be a better substitute looking at long term performance. I will have to look at transaction costs though.
"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

ZenInvestor
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Re: Which small-cap value index is better?

Post by ZenInvestor » Tue Apr 18, 2017 8:57 am

Wisdom tree seems to be a good pair. 60-month 5 factor regression:

Image

kiddoc
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Re: Which small-cap value index is better?

Post by kiddoc » Thu Apr 20, 2017 6:57 am

ZenInvestor wrote:Wisdom tree seems to be a good pair. 60-month 5 factor regression:


Interesting. I had never heard of the WisdomTree Dividend Index they claim to follow. Looks like it was established in 2006. I will have to read more about this index I guess.
"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

NYC_Guy
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Location: New York

Re: Which small-cap value index is better?

Post by NYC_Guy » Thu Apr 20, 2017 8:03 am

kiddoc wrote:For US investments tilted to small-cap value, I mainly use IJS (S&P small-cap 600 value index) because it invests in somewhat small and value stocks and is "good enough" for a DIY investor who doesn't have access to DFA funds and cares about cost/ tax-efficiency.

Which index would be a good tax-loss harvesting partner for it in a taxable account and why? The two options I see available:

- CRSP US Small Cap Value Index: example- Vanguard's VBR ETF and corresponding mutual fund
- Russell 2000 Value Index: example- Vanguard's VTWV ETF.

Preferred characteristics:

1) Keeps the small/ value tilt intact and doesn't become a lowish mid-cap value fund
2) Low-cost and tax efficient in a 35% marginal tax rate
3) Ability to hold outside Vanguard's brokerage window (too many accounting errors there and I lost faith in them for any tax-loss harvesting). Prefer Fidelity followed by TD Ameritrade but looking at Schwab as well.


I use VBR. But I then sell and reenter IJS asap. You won't really see much tracking error over a short period of time.

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