Small Cap Blend vs Small Cap Value

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Boxtrap
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Small Cap Blend vs Small Cap Value

Post by Boxtrap » Mon May 07, 2018 10:12 am

In my 401k I am fortunate enough to have a few Vanguard funds on offering - enough to build a portfolio I'm happy with. Right now my equities are in VFIAX and VGTSX. I don't have Vanguard small cap value offered as an option, but I DO have Vanguard small cap blend - VSMAX. Given the fairly consistent concept that small caps outperform large caps over the long term, I'm considering moving a portion of my equity holding into VSMAX. But obviously it would be a blend of small and not strictly value.

Everywhere you turn you hear "small cap value, small cap value!" Would love to hear thoughts on what, if any, premium there actually is on the value portion of small cap investing vs just holding a blended fund. Is small cap VALUE really that much better than small cap BLEND?

ChinchillaWhiplash
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Re: Small Cap Blend vs Small Cap Value

Post by ChinchillaWhiplash » Mon May 07, 2018 10:43 am

I think SCG has been shown to not perform well. Holding them in a SCB fund might cancel out gains in SCV. Probably not worth the time to invest in the blended fund as your gains would probably be minimal, especially when you factor in the higher ER.

Jags4186
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Re: Small Cap Blend vs Small Cap Value

Post by Jags4186 » Mon May 07, 2018 10:52 am

Small cap blend historically outperforms large cap blend, small cap value historically outperforms small cap blend.

Vanguards small cap blend and value funds are both not very small. Closer to midcap funds. Midcaps have also historically outperformed large cap blend...

All this to say, if you want to tilt smaller, this fund is perfectly reasonable but you may not be getting what you’re thinking you’re getting.

MotoTrojan
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Re: Small Cap Blend vs Small Cap Value

Post by MotoTrojan » Mon May 07, 2018 11:21 am

ChinchillaWhiplash wrote:
Mon May 07, 2018 10:43 am
I think SCG has been shown to not perform well. Holding them in a SCB fund might cancel out gains in SCV. Probably not worth the time to invest in the blended fund as your gains would probably be minimal, especially when you factor in the higher ER.
This is incorrect. I personally prefer small-value though and like it to be smaller than Vanguard's, so I use VIOV which tracks the S&P600 (median cap is roughly 1/2 the size of VGs).

I will soon use Vanguard's small-value fund in my 401k for rebalancing but push to get VIOV into my Roth/Taxable to allow me to reduce it in the 401k.

Boxtrap
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Re: Small Cap Blend vs Small Cap Value

Post by Boxtrap » Mon May 07, 2018 12:59 pm

MotoTrojan wrote:
Mon May 07, 2018 11:21 am
ChinchillaWhiplash wrote:
Mon May 07, 2018 10:43 am
I think SCG has been shown to not perform well. Holding them in a SCB fund might cancel out gains in SCV. Probably not worth the time to invest in the blended fund as your gains would probably be minimal, especially when you factor in the higher ER.
This is incorrect. I personally prefer small-value though and like it to be smaller than Vanguard's, so I use VIOV which tracks the S&P600 (median cap is roughly 1/2 the size of VGs).

I will soon use Vanguard's small-value fund in my 401k for rebalancing but push to get VIOV into my Roth/Taxable to allow me to reduce it in the 401k.
Thanks for this explanation. So if I understand you correctly, VIOV ETF is basically a more accurate cross-section of ACTUAL small value stocks, whereas VBR/VSIAX is actually more of a small/mid value?

As a corollary to that, what are the advantages and disadvantages of using an ETF versus a fund? Up until now I've strictly been a fund guy but I should probably understand the upside and downside to using ETF's. I know that's a bit of a larger question, but any basic guidance would be appreciated.

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siamond
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Re: Small Cap Blend vs Small Cap Value

Post by siamond » Mon May 07, 2018 1:06 pm

Boxtrap wrote:
Mon May 07, 2018 10:12 am
Given the fairly consistent concept that small caps outperform large caps over the long term [...]
Hm, I am afraid this is a bit of a hasty statement. First (but I'm sure this is what you meant), small-caps blend (SCB) outperformed large caps in the past, which doesn't guarantee this will repeat itself. Next and more to the point, in the US, the outperformance occurred in the 40s and in the 70s, but not otherwise. And 30+ years is a mighty long time to wait for such outperformance to appear while staying the course. In other countries, from what I've read, the 'small effect' has been quite tenuous too. So no, the 'small effect' has definitely NOT been consistent.
Boxtrap wrote:
Mon May 07, 2018 10:12 am
Everywhere you turn you hear "small cap value, small cap value!" Would love to hear thoughts on what, if any, premium there actually is on the value portion of small cap investing vs just holding a blended fund. Is small cap VALUE really that much better than small cap BLEND?
Looking at the past, in the US and other countries, small-caps value (SCV) did display quite a remarkable premium. This still would have required very strong nerves, with periods of 10+ years without any premium materializing, but this certainly happened more often and much more strongly than for small-caps.

Please check this blog article I shared with the community a few months ago, and please make a solid effort at understanding what happened in the past. Again, no guarantee this will repeat itself, but minimally, you need to convince yourself that you would have stayed the course over such history, WITHOUT the advantage of hindsight. If you're honest with yourself, you should at least be skeptical and think twice...

Disclaimer: I do tilt towards SCV, and consciously decided to NOT tilt towards SCB.

tonyc
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Re: Small Cap Blend vs Small Cap Value

Post by tonyc » Mon May 07, 2018 1:10 pm

Boxtrap wrote:
Mon May 07, 2018 12:59 pm
As a corollary to that, what are the advantages and disadvantages of using an ETF versus a fund? Up until now I've strictly been a fund guy but I should probably understand the upside and downside to using ETF's. I know that's a bit of a larger question, but any basic guidance would be appreciated.
https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds

Boxtrap
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Re: Small Cap Blend vs Small Cap Value

Post by Boxtrap » Mon May 07, 2018 1:13 pm

siamond wrote:
Mon May 07, 2018 1:06 pm
Boxtrap wrote:
Mon May 07, 2018 10:12 am
Given the fairly consistent concept that small caps outperform large caps over the long term [...]
Hm, I am afraid this is a bit of a hasty statement. First (but I'm sure this is what you meant), small-caps blend (SCB) outperformed large caps in the past, which doesn't guarantee this will repeat itself. Next and more to the point, in the US, the outperformance occurred in the 40s and in the 70s, but not otherwise. And 30+ years is a mighty long time to wait for such outperformance to appear while staying the course. In other countries, from what I've read, the 'small effect' has been quite tenuous too. So no, the 'small effect' has definitely NOT been consistent.
Boxtrap wrote:
Mon May 07, 2018 10:12 am
Everywhere you turn you hear "small cap value, small cap value!" Would love to hear thoughts on what, if any, premium there actually is on the value portion of small cap investing vs just holding a blended fund. Is small cap VALUE really that much better than small cap BLEND?
Looking at the past, in the US and other countries, small-caps value (SCV) did display quite a remarkable premium. This still would have required very strong nerves, with periods of 10+ years without any premium materializing, but this certainly happened more often and much more strongly than for small-caps.

Please check this blog article I shared with the community a few months ago, and please make a solid effort at understanding what happened in the past. Again, no guarantee this will repeat itself, but minimally, you need to convince yourself that you would have stayed the course over such history, WITHOUT the advantage of hindsight. If you're honest with yourself, you should at least be skeptical and think twice...

Disclaimer: I do tilt towards SCV, and consciously decided to NOT tilt towards SCB.
Thanks so much. I will definitely check out your blog article! And yes, you're absolutely right, what I meant to say was small caps outperformED. Past tense. :)

jalbert
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Re: Small Cap Blend vs Small Cap Value

Post by jalbert » Mon May 07, 2018 1:25 pm

Thanks for this explanation. So if I understand you correctly, VIOV ETF is basically a more accurate cross-section of ACTUAL small value stocks, whereas VBR/VSIAX is actually more of a small/mid value?
Yes, VBR/VSIAX is really a small/mid value fund. It would pair reasonably with an SP500 fund leaving only a small gap in the size dimension.
.
Index fund investor since 1987.

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pezblanco
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Re: Small Cap Blend vs Small Cap Value

Post by pezblanco » Mon May 07, 2018 4:42 pm

Boxtrap wrote:
Mon May 07, 2018 10:12 am
In my 401k I am fortunate enough to have a few Vanguard funds on offering - enough to build a portfolio I'm happy with. Right now my equities are in VFIAX and VGTSX. I don't have Vanguard small cap value offered as an option, but I DO have Vanguard small cap blend - VSMAX. Given the fairly consistent concept that small caps outperform large caps over the long term, I'm considering moving a portion of my equity holding into VSMAX. But obviously it would be a blend of small and not strictly value.

Everywhere you turn you hear "small cap value, small cap value!" Would love to hear thoughts on what, if any, premium there actually is on the value portion of small cap investing vs just holding a blended fund. Is small cap VALUE really that much better than small cap BLEND?
I think that one should read carefully and understand about factor investing before embarking on it. I personally have a heavily tllted portfolio to SCV ... I also personally would not tilt to just small caps only and not control for any other factor. There are reasons for this. I strongly recommend Larry Swedroe's book: The Complete Guide To Factor Based Investing. He discusses the problems with the size factor and research showing how those problems can be mitigated by combining it with other factors (most notably the quality factor). I'm sure there must be other references, but this is easy to read, understand, and basically tells the story.

Dead Man Walking
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Re: Small Cap Blend vs Small Cap Value

Post by Dead Man Walking » Mon May 07, 2018 6:43 pm

Boxtrap wrote:
Mon May 07, 2018 10:12 am
In my 401k I am fortunate enough to have a few Vanguard funds on offering - enough to build a portfolio I'm happy with. Right now my equities are in VFIAX and VGTSX. I don't have Vanguard small cap value offered as an option, but I DO have Vanguard small cap blend - VSMAX. Given the fairly consistent concept that small caps outperform large caps over the long term, I'm considering moving a portion of my equity holding into VSMAX. But obviously it would be a blend of small and not strictly value.

Everywhere you turn you hear "small cap value, small cap value!" Would love to hear thoughts on what, if any, premium there actually is on the value portion of small cap investing vs just holding a blended fund. Is small cap VALUE really that much better than small cap BLEND?
If I were you, I would set up a model portfolio that included all of the funds available in your 401k on the Morningstar site. You can establish a model portfolio that will show the performance of the funds for various time periods. I use 3 months, YTD, 3 years, 5 years, 10 years, and 15 years. You can also set up a view that shows how your funds have performed versus funds within their category/index. Other posters may suggest Portfolio Visualizer.

I have used the Morningstar portfolio manager to track the 15 year returns of small cap funds for a decade or more. Since I have chosen to invest at Vanguard for simplicity, my model portfolio includes all of Vanguard's small cap index funds. I include DFA US Small Cap Value I (DFSVX) and Fidelity Small Cap Discovery (FSCRX) in the model portfolio as funds to which I can compare the performance of the Vanguard small cap index funds. Over the decade of checking 15 year returns, I've noticed that whether small cap value or small cap blend is outperforming depends on whether growth or value is in favor over the period. VSMAX and the investor share class NAESX have been in the hunt. NAESX has outperformed DFSVX over all of the time periods that I check. Of course, growth has been in favor over the last decade. Vanguard's best performing small cap index fund is usually Tax-managed Small Cap Fund (VTMSX) which follows the S&P 600 index.

DMW

Boxtrap
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Re: Small Cap Blend vs Small Cap Value

Post by Boxtrap » Tue May 08, 2018 1:49 pm

pezblanco wrote:
Mon May 07, 2018 4:42 pm
Boxtrap wrote:
Mon May 07, 2018 10:12 am
In my 401k I am fortunate enough to have a few Vanguard funds on offering - enough to build a portfolio I'm happy with. Right now my equities are in VFIAX and VGTSX. I don't have Vanguard small cap value offered as an option, but I DO have Vanguard small cap blend - VSMAX. Given the fairly consistent concept that small caps outperform large caps over the long term, I'm considering moving a portion of my equity holding into VSMAX. But obviously it would be a blend of small and not strictly value.

Everywhere you turn you hear "small cap value, small cap value!" Would love to hear thoughts on what, if any, premium there actually is on the value portion of small cap investing vs just holding a blended fund. Is small cap VALUE really that much better than small cap BLEND?
I think that one should read carefully and understand about factor investing before embarking on it. I personally have a heavily tllted portfolio to SCV ... I also personally would not tilt to just small caps only and not control for any other factor. There are reasons for this. I strongly recommend Larry Swedroe's book: The Complete Guide To Factor Based Investing. He discusses the problems with the size factor and research showing how those problems can be mitigated by combining it with other factors (most notably the quality factor). I'm sure there must be other references, but this is easy to read, understand, and basically tells the story.
Thanks for the reading recommendation!

Boxtrap
Posts: 86
Joined: Tue Oct 10, 2017 1:13 pm

Re: Small Cap Blend vs Small Cap Value

Post by Boxtrap » Wed May 09, 2018 10:35 am

After some more reading of links that you guys posted and some additional reading on my own, it looks like over the long term there was a risk reduction benefit in a portfolio with an equal-amount combination of small cap value and mid cap value, versus small cap value alone. A little backtest messing around in PV seems to show the same as well. In fact, almost identical CAGR but a noticeable reduction in overall volatility. Interesting food for thought.

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