SP500, Russel 2000 and mid caps?

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TX_Man
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SP500, Russel 2000 and mid caps?

Postby TX_Man » Thu Apr 20, 2017 3:42 pm

If someone wasn't going to use a total market fund, how much of the market would they cover with a SP500 index and Russel 2000 index fund? Would a rather large portion of mid caps be cut out of the mix, or would only a trivially small percentage be left out?

retiredjg
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Re: SP500, Russel 2000 and mid caps?

Postby retiredjg » Thu Apr 20, 2017 4:04 pm

This Wiki page thinks it is about 85% and 15%. Looks like a tiny bit of mid cap is left out, but this is certainly good enough.

https://www.bogleheads.org/wiki/Approxi ... ock_market

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Duckie
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Re: SP500, Russel 2000 and mid caps?

Postby Duckie » Thu Apr 20, 2017 4:16 pm

TX_Man wrote:Would a rather large portion of mid caps be cut out of the mix, or would only a trivially small percentage be left out?

Only a small percentage would be left out.

If you type in 88% VFINX and 12% VRTIX into the free Morningstar Instant X-Ray calculator you get:
25 25 25
05 05 03
03 04 04

If you type in 100% VTSMX you get:
24 24 24
06 06 07
03 03 03

There's not that much difference, certainly not enough to fuss about.

TX_Man
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Re: SP500, Russel 2000 and mid caps?

Postby TX_Man » Thu Apr 20, 2017 4:41 pm

This forum is awesome. Everyone is able to get access to the information needed for answers so quickly and with hyperlinks! Thanks!

jalbert
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Re: SP500, Russel 2000 and mid caps?

Postby jalbert » Thu Apr 20, 2017 4:51 pm

Thr Russell 1000 is completed by the Russell 2000 to make the Russell 3000, which is a total market index, but with more stringent liquidity/investability screens than the CRSP or S&P total market indices, hence it has only 3000 stocks in it.

By replacing the Russell 1000 by the S&P500 you are missing 500 stocks. I think the S&P500 is roughly the largest 80% of the market, and the Russell 1000 is roughly the largest 90%.

Any reason not to use a Russell 1000 fund like VONE or VTCLX instead of the S&P500 or, alternatively, an S&P completion index fund (like VXF) instead of the Russell 2000 fund?
Risk is not a guarantor of return.

retiredjg
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Re: SP500, Russel 2000 and mid caps?

Postby retiredjg » Thu Apr 20, 2017 5:19 pm

jalbert wrote:Any reason not to use a Russell 1000 fund like VONE or VTCLX instead of the S&P500 or, alternatively, an S&P completion index fund (like VXF) instead of the Russell 2000 fund?

The most common reason is that the "best" building block pairs may not be available in one's work plan. So you do the best you can do considering what you have to work with.

Anything half way close to total stock is going to act like total stock. Investing is not very precise even though we expect it to be.

On the other hand, if this poster has an extended market index (completion index) fund available, that would be closer to the real thing. I doubt one could see much difference in performance though.

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JoMoney
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Re: SP500, Russel 2000 and mid caps?

Postby JoMoney » Thu Apr 20, 2017 8:07 pm

jalbert wrote:Thr Russell 1000 is completed by the Russell 2000 to make the Russell 3000, which is a total market index, but with more stringent liquidity/investability screens than the CRSP or S&P total market indices, hence it has only 3000 stocks in it.

By replacing the Russell 1000 by the S&P500 you are missing 500 stocks. I think the S&P500 is roughly the largest 80% of the market, and the Russell 1000 is roughly the largest 90%.

Any reason not to use a Russell 1000 fund like VONE or VTCLX instead of the S&P500 or, alternatively, an S&P completion index fund (like VXF) instead of the Russell 2000 fund?


If a S&P 500 fund is what's available, why not just take that as "good enough" ?
Morningstar Growth Chart Russell 1000, 2000, 3000, & S&P 500
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jalbert
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Re: SP500, Russel 2000 and mid caps?

Postby jalbert » Thu Apr 20, 2017 9:58 pm

The OP asked if the SP500 + R2000 was a substitute for the total market index, and I asked for clarification of why those two indices were being considered. It is not a bad thing to hold them together or just to hold the SP500, but not necessarily optimal either. The R2000 has been the index most susceptible to front running in the past.

Incidentally, not sure how to interpret the M* chart as the Russell indices were created in 1984.
Risk is not a guarantor of return.

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JoMoney
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Re: SP500, Russel 2000 and mid caps?

Postby JoMoney » Fri Apr 21, 2017 3:07 am

jalbert wrote:...
Incidentally, not sure how to interpret the M* chart as the Russell indices were created in 1984.

That's correct, the company and indexes weren't released until 1984 but their data goes back to 1978.... Even in 1984, and for quite a long period after, Russell indexes weren't initially designed to be 'investable', that is, you couldn't buy an index fund tracking it, and some of the stocks in the fund may not have had adequate liquidity for someone trying to reproduce the index. They've had to make several adjustments to how the index is constituted over time, including trying to make adjustments to counter the 'front-running'.

FWIW, there's also the Wilshire 5000 Index going back to 1970, and again, nothing to mention as far as having performance any different than the S&P 500. Morningstar Chart of Wilshire 5000 & S&P 500
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

MotoTrojan
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Re: SP500, Russel 2000 and mid caps?

Postby MotoTrojan » Fri Apr 21, 2017 3:35 am

jalbert wrote:Thr Russell 1000 is completed by the Russell 2000 to make the Russell 3000, which is a total market index, but with more stringent liquidity/investability screens than the CRSP or S&P total market indices, hence it has only 3000 stocks in it.

By replacing the Russell 1000 by the S&P500 you are missing 500 stocks. I think the S&P500 is roughly the largest 80% of the market, and the Russell 1000 is roughly the largest 90%.

Any reason not to use a Russell 1000 fund like VONE or VTCLX instead of the S&P500 or, alternatively, an S&P completion index fund (like VXF) instead of the Russell 2000 fund?


Interesting, consider the main difference between S&P 600 & Russell 2000 that I have heard about is the S&Ps quality/earnings-record requirement; would've assumed S&P to be smaller/more-stringent.

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JoMoney
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Re: SP500, Russel 2000 and mid caps?

Postby JoMoney » Fri Apr 21, 2017 4:01 am

MotoTrojan wrote:...
Interesting, consider the main difference between S&P 600 & Russell 2000 that I have heard about is the S&Ps quality/earnings-record requirement; would've assumed S&P to be smaller/more-stringent.

The S&P Composite 1500 (which is made up of the S&P 500 + 400 Mid Cap + 600 Small Cap) is a different index than the "S&P Total Market Index"
https://us.spindices.com/documents/meth ... ndices.pdf

There are 3,809 stocks/constituents in the S&P Total Market Index (Mean Market Cap 6,954.76)
https://us.spindices.com/indices/equity ... -index-tmi
1506 stocks/constituents in the S&P Composite 1500 (Mean Market Cap 15,802.61)
https://us.spindices.com/indices/equity ... osite-1500
3300 stocks/constituents in the S&P Completion (Mean Market Cap 1,568.60)
https://us.spindices.com/indices/equity ... n-index-ci
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

selters
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Re: SP500, Russel 2000 and mid caps?

Postby selters » Fri Apr 21, 2017 4:43 am

retiredjg wrote:The most common reason is that the "best" building block pairs may not be available in one's work plan.


The most common illogical combination to be offered seems to be

Vanguard S&P 500 index fund + Vanguard Mid Cap index fund + Vanguard Small Cap index fund.

The logical combinations are

Vanguard S&P 500 index fund + Vanguard Extended Market index fund

and

Vanguard Large Cap index fund + Vanguard Small Cap index fund.

TX_Man
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Re: SP500, Russel 2000 and mid caps?

Postby TX_Man » Fri Apr 21, 2017 5:24 am

jalbert wrote:The OP asked if the SP500 + R2000 was a substitute for the total market index, and I asked for clarification of why those two indices were being considered. It is not a bad thing to hold them together or just to hold the SP500, but not necessarily optimal either. The R2000 has been the index most susceptible to front running in the past.

Incidentally, not sure how to interpret the M* chart as the Russell indices were created in 1984.


They appear to be among the most commonly cited indices. Individuals often talk about incorporating a tilt in their portfolio and unless the SP500 and Russel 2000 cover the entire market it seems like there would be a "built in" tilt by holding those two funds. Maybe towards large caps?

retiredjg
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Re: SP500, Russel 2000 and mid caps?

Postby retiredjg » Fri Apr 21, 2017 6:05 am

The S&P 500 and the Russell 2000 pretty much do cover the entire market. A tilt to one direction or the other would depend on the ratio of the two funds together. One ratio would tilt to large cap, another would tilt to mid/small cap.

MotoTrojan
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Re: SP500, Russel 2000 and mid caps?

Postby MotoTrojan » Fri Apr 21, 2017 9:26 am

retiredjg wrote:The S&P 500 and the Russell 2000 pretty much do cover the entire market. A tilt to one direction or the other would depend on the ratio of the two funds together. One ratio would tilt to large cap, another would tilt to mid/small cap.


It is my understanding that the Russell 2000 is too small, and S&P 500 too large, to truly capture the mid-cap range. The Vanguard CRSP Small-cap on the other hand is twice as large, and does do a better job of capturing the mid-cap. Not to say that mathematically the returns may not be distinguishable, but you could argue the same thing about TSM vs. Large-cap over long enough periods ($10K/yr from 1972-Now was a CAGR delta of 0.01%).

retiredjg
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Re: SP500, Russel 2000 and mid caps?

Postby retiredjg » Fri Apr 21, 2017 9:41 am

You may be correct, but that is not what the morningstar instant x-ray shows (as posted above by Duckie).

Since every index and every financial website use different cutoffs for what is large, mid, and small, it's all relative and what you are saying may be correct according to the definitions you use.

While I would prefer to use puzzle pieces that actually are built to fit together, I would not be opposed to using 500 index and Russell 2000 if I needed to.

MotoTrojan
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Re: SP500, Russel 2000 and mid caps?

Postby MotoTrojan » Fri Apr 21, 2017 9:53 am

retiredjg wrote:You may be correct, but that is not what the morningstar instant x-ray shows (as posted above by Duckie).


Duckie is showing 46% (correction: 32% whoops) of TSM mid-cap, according to M*, being missing from that 88/12 split.
Last edited by MotoTrojan on Fri Apr 21, 2017 10:56 am, edited 1 time in total.

retiredjg
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Re: SP500, Russel 2000 and mid caps?

Postby retiredjg » Fri Apr 21, 2017 10:24 am

Hmmm, I get a different number..... :happy

But either way, I simply do not believe that investing needs to be that precise. Anywhere in the ball park is good enough in my book. In fact, if a person chooses to use only a 500 index, they are going to end up at essentially the same place.

MotoTrojan
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Re: SP500, Russel 2000 and mid caps?

Postby MotoTrojan » Fri Apr 21, 2017 10:55 am

retiredjg wrote:Hmmm, I get a different number..... :happy

But either way, I simply do not believe that investing needs to be that precise. Anywhere in the ball park is good enough in my book. In fact, if a person chooses to use only a 500 index, they are going to end up at essentially the same place.


Morning-wake math may not be my brightest idea :sharebeer . (5+5+3)/(6+6+7) = 68.4%; so you are missing almost a third of the mid-cap representation still, which is significant if you are trying to match TSM, but I agree, not significant in terms of returns (S&P500 is close enough to TSM).

jalbert
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Re: SP500, Russel 2000 and mid caps?

Postby jalbert » Fri Apr 21, 2017 1:12 pm

They appear to be among the most commonly cited indices. Individuals often talk about incorporating a tilt in their portfolio and unless the SP500 and Russel 2000 cover the entire market it seems like there would be a "built in" tilt by holding those two funds. Maybe towards large caps?

While not mandatory, you are better off, if possible, not mixing indices from different providers which slice the market up at different points, leading to overlap or gaps. While it will only have a minor effect on return, it is a source of tracking error if you are trying to replicate a total market index. If the goal is a tilt, then it is less relevant.

Also, while Russell has updated their process for making index changes tocaddreas problems with front-running the changes, it is unclear if the problem is fully resolved. Vanguard moved their small-cap index fund away from the R2000 becsuse front-running of index changes was reducing returns of R2000 funds.
Risk is not a guarantor of return.

MotoTrojan
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Re: SP500, Russel 2000 and mid caps?

Postby MotoTrojan » Fri Apr 21, 2017 2:22 pm

jalbert wrote:
They appear to be among the most commonly cited indices. Individuals often talk about incorporating a tilt in their portfolio and unless the SP500 and Russel 2000 cover the entire market it seems like there would be a "built in" tilt by holding those two funds. Maybe towards large caps?

While not mandatory, you are better off, if possible, not mixing indices from different providers which slice the market up at different points, leading to overlap or gaps. While it will only have a minor effect on return, it is a source of tracking error if you are trying to replicate a total market index. If the goal is a tilt, then it is less relevant.

Also, while Russell has updated their process for making index changes tocaddreas problems with front-running the changes, it is unclear if the problem is fully resolved. Vanguard moved their small-cap index fund away from the R2000 becsuse front-running of index changes was reducing returns of R2000 funds.


Any more info on front running changes? Why go to CRSP over S&P600? Would've been a less intense change (market cap wise at least).

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JoMoney
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Re: SP500, Russel 2000 and mid caps?

Postby JoMoney » Fri Apr 21, 2017 2:45 pm

MotoTrojan wrote:...
Any more info on front running changes? Why go to CRSP over S&P600? Would've been a less intense change (market cap wise at least).

http://www.ftserussell.com/blog/russell ... r-turnover
...While the Russell recon effectively keeps our indexes in line with their stated objectives, some observers fear that it could lead to unnecessary losses to passive investors from opportunistic “front-running” by traders during the reconstitution process. Over the 2003-2007 period Russell implemented several changes to its transparent reconstitution process in order to reduce unnecessary trading and to achieve a better balance between liquidity supply and demand. Russell 2000 numbers demonstrate these measures have been successful in reducing index turnover.


As to why CRSP, Licensing fees
http://www.cnbc.com/id/100137167
Vanguard negotiated lower-rate, long-term deals with the University of Chicago's Center for Research in Security Prices and index provider FTSE.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

S17C
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Re: SP500, Russel 2000 and mid caps?

Postby S17C » Fri Apr 21, 2017 3:03 pm

Interesting thread. Learning from the posts!

retiredjg
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Re: SP500, Russel 2000 and mid caps?

Postby retiredjg » Fri Apr 21, 2017 4:32 pm

Tx-Man, it might be helpful to know what you are asking the question. What are you trying to accomplish?

TX_Man
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Re: SP500, Russel 2000 and mid caps?

Postby TX_Man » Fri Apr 21, 2017 6:31 pm

retiredjg wrote:Tx-Man, it might be helpful to know what you are asking the question. What are you trying to accomplish?


I'm just trying to learn more. I have no current goal in reallocation or anything.


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