Are you investing in Emerging Market small caps?

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Lauretta
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Are you investing in Emerging Market small caps?

Post by Lauretta » Wed Oct 04, 2017 5:34 am

I've talked to a few money managers in Europe whilst building my AA and learning about finance. One of them suggests having a significant allocation in EM small caps (besides EM large caps) in her model portfolios - her motivation being that the sectors contribution in EM large and EM small are quite different (I checked the MSCI data and indeed there are e.g. much more financials in EM large). For her aggressive AA, she suggests having as much as 10% of the portfolio in a Small cap EM fund. It's the one managed by JP Morgan in case you want to have a look at her suggestion:
https://mes-placements.fr/guides-outils/packs
I am of course using Etfs and having an AA much closer to global market cap than the one suggested in the link, but I was wondering whether Bogleheads thought that a small allocation to an EM small cap ETF is worth it, perhaps for diversification benefits? BTW I recently read this interesting piece by Mr Swedroe, arguing that even though EM are thought to be less efficient, the data confirm that passive investing beats active managers in that area too. I thought I'd share it here:
https://www.cbsnews.com/news/passive-ma ... t-markets/
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rkhusky
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Re: Are you investing in Emerging Market small caps?

Post by rkhusky » Wed Oct 04, 2017 6:59 am

I get my small cap EM in Vanguard's Emerging Markets fund, which has large and small caps at market weight.

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Re: Are you investing in Emerging Market small caps?

Post by deltaneutral83 » Wed Oct 04, 2017 8:03 am

If that's included in VSS, then yes I am as I use 90/10 VEU/VSS to build VXUS.

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Re: Are you investing in Emerging Market small caps?

Post by TinkerPDX » Wed Oct 04, 2017 8:28 am

I do; but it's hard to get good ETFs for this. Within my international allocation, I have 10% emerging (VWO and SCHE), 10% emerging small (EWX, higher fee than anything else I own) and 10% emerging value (or the best approximation available to me, FNDE).

Not certain it's perfect or right, but it's the AA I've chosen. I find Swedroe's (?) idea of increasing risk within equities (more small, value, emerging) while keeping total equity AA limited to maintain expected return while minimizing tail risk persuasive.

Can't wait for VG or Schwab to offer emerging small and emerging value index options someday...

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Re: Are you investing in Emerging Market small caps?

Post by retiredjg » Wed Oct 04, 2017 8:29 am

I'm sure I hold a little bit in my international funds. I would not put a significant portion of my portfolio into the tiniest and most risky of the world's stock offerings. That is one of those "could go really well or really badly" ideas.

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Re: Are you investing in Emerging Market small caps?

Post by Lauretta » Wed Oct 04, 2017 8:29 am

deltaneutral83 wrote:
Wed Oct 04, 2017 8:03 am
If that's included in VSS, then yes I am as I use 90/10 VEU/VSS to build VXUS.
Yes, it looks like it has 20% EM small caps, so that the VXUS you built has 2% in them. That's quite interesting because a quick check to world small cap ETFs available in Europe, like the SPDR, shows that they have much less exposure to EM than VSS in proportion (since VSS has 20% but it excludes the US, a world small cap ETF should have of the order of 10% in EM, but the one from SPDR has more like 1%...).
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Re: Are you investing in Emerging Market small caps?

Post by Lauretta » Wed Oct 04, 2017 8:35 am

TinkerPDX wrote:
Wed Oct 04, 2017 8:28 am
I find Swedroe's (?) idea of increasing risk within equities (more small, value, emerging) while keeping total equity AA limited to maintain expected return while minimizing tail risk persuasive.
I like that idea a lot too, it really resonates with me. Did Swedroe write on this? If you've got a reference that would be appreciated! :happy I think Taleb wrote about this sort of thing too - have a kind of barbel portfolio with some very safe assets and some very risky but which can produce high returns -rather than being somewhere in between.
Last edited by Lauretta on Wed Oct 04, 2017 8:40 am, edited 1 time in total.
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Re: Are you investing in Emerging Market small caps?

Post by livesoft » Wed Oct 04, 2017 8:39 am

Definitely yes and for a long time now. I have used EWX and DGS, but currently only hold DGS. I must say that EM small-caps have been pretty bad until the past 15 months.

If you had invested equal amounts of money into Total US Bond (VBTLX) and DGS at the end of 2007 about 10 years go and reinvested all distributions, then you would have done better with VBTLX the bond fund with less drops downward.

Most of the gains for DGS came since the beginning of 2016, so if you have folks recommending EM-small-cap to you now, then that sounds like Performance Chasing with a capital P and a capital C.

Personally, I think it is time to cut back on my holdings in DGS. I would certainly not overweight emerging markets in my portfolio.

I do own VSS/VFSVX (my largest single holding), so I will still have EM-small if I sell a couple thousand shares of DGS.

Let me also add that EM-small is volatile, so that it is NOT buy-and-hold. One has to sell shares when it goes up and buy shares when it goes down and really stinks. That's the only way to make money in this asset class. Right now, the shares have certainly gone up, but I cannot predict the future, so I do not know if they will continue to go up or not. It doesn't matter to me, because I am overweight in DGS (because of a recent purchase) and must sell.
Last edited by livesoft on Wed Oct 04, 2017 8:44 am, edited 1 time in total.
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Re: Are you investing in Emerging Market small caps?

Post by Lauretta » Wed Oct 04, 2017 8:41 am

livesoft wrote:
Wed Oct 04, 2017 8:39 am
Definitely yes and for a long time now. I have used EWX and DGS, but currently only hold DGS. I must say that EM small-caps have been pretty bad until the past 15 months.

If you had invested equal amounts of money into Total US Bond (VBTLX) and DGS at the end of 2007 about 10 years go and reinvested all distributions, then you would have done better with VBTLX the bond fund with less drops downward.

Most of the gains for DGS came since the beginning of 2016, so if you have folks recommending EM-small-cap to you now, then that sounds like Performance Chasing with a capital P and a capital C.

Personally, I think it is time to cut back on my holdings in DGS. I would certainly not overweight emerging markets in my portfolio.

I do own VSS/VFSVX (my largest single holding), so I will still have EM-small if I sell a couple thousand shares of DGS.
some people think the rally has just begun, see e.g.:
https://www.bloomberg.com/view/articles ... r-comeback
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Re: Are you investing in Emerging Market small caps?

Post by livesoft » Wed Oct 04, 2017 8:46 am

Lauretta wrote:
Wed Oct 04, 2017 8:41 am
some people think the rally has just begun, see e.g.:
https://www.bloomberg.com/view/articles ... r-comeback
So that was published on 9/22. Do you know that DGS dropped almost 3% intraday on 9/25 and it was not related to going ex-dividend the next day?

This looks like a sell-on-the-news story. I think "some people" are trying to manipulate prices higher so that they can sell there shares. :twisted:

But no one can predict the future.
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Re: Are you investing in Emerging Market small caps?

Post by Lauretta » Wed Oct 04, 2017 8:51 am

livesoft wrote:
Wed Oct 04, 2017 8:46 am
Lauretta wrote:
Wed Oct 04, 2017 8:41 am
some people think the rally has just begun, see e.g.:
https://www.bloomberg.com/view/articles ... r-comeback
So that was published on 9/22. Do you know that DGS dropped almost 3% on 9/25 and it was not related to going ex-dividend the next day?

This looks like a sell-on-the-news story. I think "some people" are trying to manipulate prices higher so that they can sell there shares. :twisted:

But no one can predict the future.
oh, I hadn't thought of this! :o
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Re: Are you investing in Emerging Market small caps?

Post by nisiprius » Wed Oct 04, 2017 8:54 am

Lauretta, I would caution against what could be called "icing on the icing on the cake." That is to say...

Emerging markets... but why not
Emerging markets small-caps? But why not
Emerging markets small-cap value?? But why not
Emerging markets small-cap value with quality, profitability, momentum, and albedo screens? But why not
Emerging markets plus "frontier markets" small-cap value with quality, profitability, momentum, and albedo screens? But why not...
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Re: Are you investing in Emerging Market small caps?

Post by livesoft » Wed Oct 04, 2017 9:17 am

Since I am selling shares of DGS this week, I should post that EVERYBODY should be buying shares of EM small caps and LOTS of them. :)
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Re: Are you investing in Emerging Market small caps?

Post by Lauretta » Wed Oct 04, 2017 9:33 am

nisiprius wrote:
Wed Oct 04, 2017 8:54 am
Lauretta, I would caution against what could be called "icing on the icing on the cake." That is to says...

Emerging markets... but why not
Emerging markets small-caps? But why not
Emerging markets small-cap value?? But why not
Emerging markets small-cap value with quality, profitability, momentum, and albedo screens? But why not
Emerging markets plus "frontier markets" small-cap value with quality, profitability, momentum, and albedo screens? But why not...
Yes frontier market is another class I was wondering about... Haven't gotten around to looking into it yet ;-) :D More seriously, I see your point. Thanks for your input :happy
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Re: Are you investing in Emerging Market small caps?

Post by Lauretta » Wed Oct 04, 2017 9:43 am

livesoft wrote:
Wed Oct 04, 2017 9:17 am
Since I am selling shares of DGS this week, I should post that EVERYBODY should be buying shares of EM small caps and LOTS of them. :)
:D :D lol. Thinking of it I realise that I should perhaps be less naive when reading about the markets. One of the articles that I found most convincing on EM was by Research Affiliates. I now realise that perhaps that article wasn't totally disinterested, because it 'inspired me' to invest some money in an Etf tracking the FTSE RAFI Emerging Markets Index (luckily not much - since whereas my market cap weighted EM ETF has gone up, the FTSE RAFI one is down :x ).
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Re: Are you investing in Emerging Market small caps?

Post by ruralavalon » Wed Oct 04, 2017 10:06 am

We have emerging markets small-cap only in Vanguard Total International Stock Index Fund Admiral Shares (VTIAX). That's enough for me.
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Re: Are you investing in Emerging Market small caps?

Post by remomnyc » Wed Oct 04, 2017 10:15 am

I have some leftover DFCEX (DF emerging markets core equity portfolio) that I haven't sold due to capital gains. I would've sold it otherwise. I have moved what I could to a 3-fund portfolio with the international exposure in Vanguard international stock (either VXUS or VTIAX).

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Re: Are you investing in Emerging Market small caps?

Post by Wagnerjb » Wed Oct 04, 2017 11:23 am

Lauretta wrote:
Wed Oct 04, 2017 8:35 am
TinkerPDX wrote:
Wed Oct 04, 2017 8:28 am
I find Swedroe's (?) idea of increasing risk within equities (more small, value, emerging) while keeping total equity AA limited to maintain expected return while minimizing tail risk persuasive.
I like that idea a lot too, it really resonates with me. Did Swedroe write on this? If you've got a reference that would be appreciated! :happy I think Taleb wrote about this sort of thing too - have a kind of barbel portfolio with some very safe assets and some very risky but which can produce high returns -rather than being somewhere in between.
I use the barbell strategy too.

Like Livesoft, I used to use EWX for EM small and I was disappointed in the tracking error. I bought DGS instead. I also inherited shares in two Dimensional Funds - DEMSX (EM Small cap) and DFEVX (EM Value) that I use to overweight value and small in EM.

Best wishes.
Andy

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Re: Are you investing in Emerging Market small caps?

Post by Valuethinker » Wed Oct 04, 2017 12:05 pm

nisiprius wrote:
Wed Oct 04, 2017 8:54 am
Lauretta, I would caution against what could be called "icing on the icing on the cake." That is to says...

Emerging markets... but why not
Emerging markets small-caps? But why not
Emerging markets small-cap value?? But why not
Emerging markets small-cap value with quality, profitability, momentum, and albedo screens? But why not
Emerging markets plus "frontier markets" small-cap value with quality, profitability, momentum, and albedo screens? But why not...
A lot of research has shown that albedo is a key portfolio success factor.

High albedo portfolios really shine. Or is that just a reflected glow of another factor (like small value momentum inversion? Or atomic fusion? What about black body radiation?).

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Re: Are you investing in Emerging Market small caps?

Post by CnC » Wed Oct 04, 2017 2:53 pm

I recently purchased FTIPX. It is a mutual fund not an etf.

But it has .1% exp ratio and 22% emerging markets as well as total world ex us so it seems like a nice alternative to Europe heavy funds.

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Re: Are you investing in Emerging Market small caps?

Post by kazper » Wed Oct 04, 2017 7:14 pm

Lauretta wrote:
Wed Oct 04, 2017 5:34 am
I've talked to a few money managers in Europe whilst building my AA and learning about finance. One of them suggests having a significant allocation in EM small caps (besides EM large caps) in her model portfolios - her motivation being that the sectors contribution in EM large and EM small are quite different (I checked the MSCI data and indeed there are e.g. much more financials in EM large). For her aggressive AA, she suggests having as much as 10% of the portfolio in a Small cap EM fund. It's the one managed by JP Morgan in case you want to have a look at her suggestion:
https://mes-placements.fr/guides-outils/packs
I am of course using Etfs and having an AA much closer to global market cap than the one suggested in the link, but I was wondering whether Bogleheads thought that a small allocation to an EM small cap ETF is worth it, perhaps for diversification benefits? BTW I recently read this interesting piece by Mr Swedroe, arguing that even though EM are thought to be less efficient, the data confirm that passive investing beats active managers in that area too. I thought I'd share it here:
https://www.cbsnews.com/news/passive-ma ... t-markets/
This reminds me of when i was a noob to this forum. I asked about small cap growth (or value, i forget which) and was almost laughed off the forum. You are talking about some of the riskiest of risky stocks/indexes you can bet on. One day we might all say, "man, that was a great move" or it could easily,and more likely, end up as "sorry for him, but glad it wasnt me." Whatever you decide, good luck!

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Re: Are you investing in Emerging Market small caps?

Post by grabiner » Wed Oct 04, 2017 8:57 pm

I would like to hold EM small-cap for the diversification benefit, but it isn't worth the cost of holding a separate fund. I get some EM small-cap from Vanguard Emerging Markets Index, and Vanguard FTSE All-World Ex-US Small-Cap Index.

But the lowest cost EM small-cap ETF is DGS, at 0.63% expenses, and its dividend weighting makes it inferior for a taxable account. The next lowest cost, EWX, at 0.65%, has been tax-inefficient; it is one of the few stock ETFs to distribute capital gains other than just after getting started. Even without tax issues, I don't think this is worth the price given the low costs of the rest of my international holdings.

I used to hold EWX, then gave up on it for tax reasons and switched to EEMS (0.67% expense then, 0.71% now), and finally gave up on EEMS when Vanguard added small-caps to its emerging markets index.
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Re: Are you investing in Emerging Market small caps?

Post by Lauretta » Thu Oct 05, 2017 1:28 am

kazper wrote:
Wed Oct 04, 2017 7:14 pm
Lauretta wrote:
Wed Oct 04, 2017 5:34 am
I've talked to a few money managers in Europe whilst building my AA and learning about finance. One of them suggests having a significant allocation in EM small caps (besides EM large caps) in her model portfolios - her motivation being that the sectors contribution in EM large and EM small are quite different (I checked the MSCI data and indeed there are e.g. much more financials in EM large). For her aggressive AA, she suggests having as much as 10% of the portfolio in a Small cap EM fund. It's the one managed by JP Morgan in case you want to have a look at her suggestion:
https://mes-placements.fr/guides-outils/packs
I am of course using Etfs and having an AA much closer to global market cap than the one suggested in the link, but I was wondering whether Bogleheads thought that a small allocation to an EM small cap ETF is worth it, perhaps for diversification benefits? BTW I recently read this interesting piece by Mr Swedroe, arguing that even though EM are thought to be less efficient, the data confirm that passive investing beats active managers in that area too. I thought I'd share it here:
https://www.cbsnews.com/news/passive-ma ... t-markets/
This reminds me of when i was a noob to this forum. I asked about small cap growth (or value, i forget which) and was almost laughed off the forum. You are talking about some of the riskiest of risky stocks/indexes you can bet on. One day we might all say, "man, that was a great move" or it could easily,and more likely, end up as "sorry for him, but glad it wasnt me." Whatever you decide, good luck!
thanks for your input. I am not really sure I understand the risk argument. Academic research, e.g.: http://www.iijournals.com/doi/abs/10.39 ... 7.26.1.117 (which was recently also discussed in a piece by Swedroe) suggests that based on current valuations, emerging markets should have expected annual returns of 12%, though admittedly they have had a wide range of possible outcomes starting from today's P/B ratio (from -8.8% to 36.9% annual returns). On the other hand estimates of future returns in the US market based on current valuations are generally very low, and the risk of large losses seems to be quite high http://econompicdata.blogspot.fr/2016/0 ... nsive.html
Thus it seems to me that in EM one is taking high risk for a potentially high reward. In the US the risk seems high too (based on valuations), whilst the long term rewards are likely to be quite limited (unless you believe that the CAPE can continue to increase indefinitely).
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Re: Are you investing in Emerging Market small caps?

Post by in_reality » Thu Oct 05, 2017 3:23 am

Valuethinker wrote:
Wed Oct 04, 2017 12:05 pm
nisiprius wrote:
Wed Oct 04, 2017 8:54 am
Lauretta, I would caution against what could be called "icing on the icing on the cake." That is to says...

Emerging markets... but why not
Emerging markets small-caps? But why not
Emerging markets small-cap value?? But why not
Emerging markets small-cap value with quality, profitability, momentum, and albedo screens? But why not
Emerging markets plus "frontier markets" small-cap value with quality, profitability, momentum, and albedo screens? But why not...
A lot of research has shown that albedo is a key portfolio success factor.

High albedo portfolios really shine. Or is that just a reflected glow of another factor (like small value momentum inversion? Or atomic fusion? What about black body radiation?).
Well small companies are often quite different than larger emerging exporters.

Value companies often have lower valuations and as we know valuations have something to say about future expected returns.

The other factors I am not paying much attention to as they can get over priced, have higher trading costs etc.

About 5% DGS + EWX.

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Re: Are you investing in Emerging Market small caps?

Post by wander » Thu Oct 05, 2017 6:35 am

Yes, I do invest in Emerging Markets Small Cap.

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Re: Are you investing in Emerging Market small caps?

Post by Blueskies123 » Thu Oct 05, 2017 7:23 am

Investing or invested? Invested, yes. Investing more? No, I have seen what happens to EM when US rates are rising. We do not know what will happen in the future but the time to re-balance into EM was years ago.
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