VB vs IJR [Vanguard Small-Cap vs. iShares S&P SmallCap 600]

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claver
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VB vs IJR [Vanguard Small-Cap vs. iShares S&P SmallCap 600]

Post by claver » Sun Jan 26, 2014 11:24 am

I now own IJR in a taxable account.

Is there any reason to prefer VB to IJR?

I know that VB has an ER of .10% and IJR's is .17%. But over periods of 1 yr, 3yrs, 5yrs and 10 yrs, IJR has outperformed VB fairly significantly except at 5 yr when VB barely edged IJR. Also, VB's tax ratio is higher than IJR's and VB's potential cap gains exposure is also somewhat larger than IJR's (data from Morningstar).

IJR also appears to be a purer small cap exposure.

Thanks for your thoughts and ideas.

Claver

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Re: VB vs IJR

Post by livesoft » Sun Jan 26, 2014 11:43 am

If IJR is commission-free, why not? At some brokers VB is commission-free, but IJR is not and vice-versa.
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Re: VB vs IJR

Post by claver » Sun Jan 26, 2014 12:04 pm

Yes, IJR is commission free to me, plus I already own it. But I don't trade much--this is a long term hold for me. So, $7.95 doesn't mean anything one way or the other.

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Re: VB vs IJR

Post by kerplunk » Sun Jan 26, 2014 12:11 pm

I like IJR quite a bit. I'm glad you brought topic this up. I may use IJR for 1/2 of my U.S. small-cap allocation and VB for the other half in the near future, as unminimalistic as that is.

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Re: VB vs IJR

Post by grabiner » Sun Jan 26, 2014 12:19 pm

In a taxable account, I would prefer Vanguard Tax-Managed Small-Cap. It tracks the same index as IJR (S&P 600), has 0.12% expenses, and is likely to have 100% qualified dividends. (However, you'll pay a transaction fee to buy it in your brokerage account; if you buy it, you'll probably want to buy it directly from Vangurd.)

The S&P 600 has a smaller cap range than the FTSE small-cap index. Therefore, you need more of VB than of IJR to get the same small-cap exposure. It's probably still worthwhile; 100% VB costs less than 50% IJR and 50% Total Stock Market Index.
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Re: VB vs IJR [Vanguard Small-Cap vs. iShares S&P SmallCap 6

Post by LadyGeek » Sun Jan 26, 2014 12:28 pm

This thread is now in the Investing - Theory, News & General forum (general investing). I also retitled the thread.

General comment: Please remember that ticker symbols are cryptic acronyms to many readers. A description in the thread title would be helpful.
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Re: VB vs IJR [Vanguard Small-Cap vs. iShares S&P SmallCap 6

Post by Doc » Sun Jan 26, 2014 12:53 pm

Historical Earnings %

VB -17.8%
IJR +3.88

http://portfolios.morningstar.com/fund/ ... ountry=USA

(May need to add IJR as a benchmark to get side by side comparison.)
Historical Earnings Growth

Historical earnings growth shows the rate of increase in a company's earnings per share, based on up to four periodic time periods. When reported for a mutual fund, it shows the weighted average of the growth in earnings for each stock in the fund's portfolio. At Morningstar, this measure helps determine our growth score for each stock and the overall growth orientation of the fund
http://www.morningstar.com/InvGlossary/ ... sures.aspx

I have no idea of the significance of this difference. But other than the market cap difference already mentioned it is the only thing that stands out.

IJR has a larger trading volume but I didn't look at spreads.
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Re: VB vs IJR [Vanguard Small-Cap vs. iShares S&P SmallCap 6

Post by claver » Sun Jan 26, 2014 1:00 pm

@Grabiner--

Yes, I like VTMSX very much, but it is not available to me at Fidelity and moving funds to a new account over multiple days is a potential cost in a volatile market.

But I also note that IJR has a lower tax ratio cost than VTMSX (Morningstar data), so perhaps the tax advantage is to IJR?.

Also, VTMSX has more than twice the potential capital gains exposure than IJR; VTMSX's is one of the highest I've seen, but I assume VTMSX must manage that problem away?

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Re: VB vs IJR [Vanguard Small-Cap vs. iShares S&P SmallCap 6

Post by indexfundfan » Sun Jan 26, 2014 1:32 pm

Vanguard also has a S&P 600 index ETF. The ticker is VIOO. Its trading volume is not high though.
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Re: VB vs IJR [Vanguard Small-Cap vs. iShares S&P SmallCap 6

Post by kerplunk » Sun Jan 26, 2014 1:57 pm

Once your Vanguard portfolio is over $500k, trades are just $2. Makes the choice between these two ETFs even harder.

I will be sticking with 100% VB for my U.S. small-cap allocation, but if I were to do it over again, I would use VB for my tax-advantaged account and IJR for my taxable account.

I wouldn't worry too much about trying to make the best decision between VB and IJR... IJR can be deemed the winner for the past 10 years, but VB might have the edge on the next 10 years over IJR.

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Re: VB vs IJR [Vanguard Small-Cap vs. iShares S&P SmallCap 6

Post by berntson » Sun Jan 26, 2014 2:06 pm

claver wrote: But over periods of 1 yr, 3yrs, 5yrs and 10 yrs, IJR has outperformed VB fairly significantly except at 5 yr when VB barely edged IJR.
Paying attention to absolute returns, even over a "long" period like ten years, encourages performance chasing. This is one of the seven deadly sins of investing. Ignores this piece of data, since it will only cloud your judgement.
claver wrote: IJR also appears to be a purer small cap exposure.
What you want to do is run both funds through the factor analysis at a site like www.portfoliovisualizer.com. Both VB and IJR had alpha near zero. This is a good sign, indicating that the funds are both well-constructed and not bleeding money to excess fees, front running, negative momentum, and so on. It also means that they performed equally well once we adjust for their exposure to small and value risks.

You're right that IJR offers "purer" small cap exposure. This shows up as a higher SMB loading in the factor analysis. IJR performed better in absolute terms over the last decade, not because it's inherently a better fund, but because it's a small fund, and small companies did especially well. When small companies lag, IJR will lag VB.

Suppose you're splitting your domestic allocation between a total-market fund and a small-cap fund. If you decide you want to hold VB instead of IJR, just increase your small allocation a bit (about 25%). This will get you precisely the same expected performance as holding the total market and IJR. On the other hand, note that since IJR lets you hold a smaller small-cap allocation and get the same results, you can hold more total market, which has very low fees and is exceptionally tax efficient.

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Re: VB vs IJR [Vanguard Small-Cap vs. iShares S&P SmallCap 6

Post by nedsaid » Sun Jan 26, 2014 2:20 pm

I have own IJR for several years now and have been very pleased with the results.

Years ago, I had a financial review done through my insurance company and with my agent. They said that I had very little in small cap stocks (though I owned a lot of mid-caps). The IJR ETF was the solution to my problem. Later on, I bought the Vanguard Small Cap Value ETF as well. I have been pleased with that ETF as well. Through my workplace savings plan, I also own shares in the Vanguard Small Cap Index Fund. These two ETFs and the Index Fund are the core of my small cap investing.

So I am thankful that I have paid attention to this area of the market. It has been profitable for me.
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Re: VB vs IJR [Vanguard Small-Cap vs. iShares S&P SmallCap 6

Post by stlutz » Sun Jan 26, 2014 4:15 pm

Key differences:

--By construction methodology, the S&P index can be expected to have a lower average market cap. than the CRSP one (at least currently and for the foreseeable future).

--The S&P index membership is determined by a committee; the CRSP index basically just includes companies that fall into a market cap. range

--S&P requires companies to have at least some record of earning money before they are added to the index; the CRSP index has no such requirement.

The net result is that IJR will be:
a) somewhat smaller than VB
b) be somewhat less volatile/risky than VB
c) somewhat more susceptible to manager risk.

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Re: VB vs IJR [Vanguard Small-Cap vs. iShares S&P SmallCap 6

Post by RNJ » Sun Jan 26, 2014 4:40 pm

berntson wrote:
claver wrote: But over periods of 1 yr, 3yrs, 5yrs and 10 yrs, IJR has outperformed VB fairly significantly except at 5 yr when VB barely edged IJR.
Paying attention to absolute returns, even over a "long" period like ten years, encourages performance chasing. This is one of the seven deadly sins of investing. Ignores this piece of data, since it will only cloud your judgement.
claver wrote: IJR also appears to be a purer small cap exposure.
What you want to do is run both funds through the factor analysis at a site like www.portfoliovisualizer.com. Both VB and IJR had alpha near zero. This is a good sign, indicating that the funds are both well-constructed and not bleeding money to excess fees, front running, negative momentum, and so on. It also means that they performed equally well once we adjust for their exposure to small and value risks.

You're right that IJR offers "purer" small cap exposure. This shows up as a higher SMB loading in the factor analysis. IJR performed better in absolute terms over the last decade, not because it's inherently a better fund, but because it's a small fund, and small companies did especially well. When small companies lag, IJR will lag VB.

Suppose you're splitting your domestic allocation between a total-market fund and a small-cap fund. If you decide you want to hold VB instead of IJR, just increase your small allocation a bit (about 25%). This will get you precisely the same expected performance as holding the total market and IJR. On the other hand, note that since IJR lets you hold a smaller small-cap allocation and get the same results, you can hold more total market, which has very low fees and is exceptionally tax efficient.
+1

Nice analysis.

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Re: VB vs IJR [Vanguard Small-Cap vs. iShares S&P SmallCap 6

Post by claver » Sun Jan 26, 2014 5:26 pm

berntson wrote:
claver wrote: But over periods of 1 yr, 3yrs, 5yrs and 10 yrs, IJR has outperformed VB fairly significantly except at 5 yr when VB barely edged IJR.
Berntson wrote about the above: "Paying attention to absolute returns, even over a "long" period like ten years, encourages performance chasing. This is one of the seven deadly sins of investing. Ignores this piece of data, since it will only cloud your judgement."


I love the portfolio analyzer site you mention in your response! Thank you! I may not sleep for weeks.

But as I usually see it used, I think the term "performance chasing" refers to buying an entity after it has recently run up and pertains primarily to short-term results.
Paying attention to a consistent modest difference in returns over 10 years seems more like empiricism to me. Surely, absolute returns over meaningful or historically significant periods of time are the basis of all investing principles? Otherwise, you are arguing theoretically over what should be true rather than looking at the world and seeing what is true. No?

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Re: VB vs IJR [Vanguard Small-Cap vs. iShares S&P SmallCap 6

Post by grabiner » Sun Jan 26, 2014 6:44 pm

claver wrote:But I also note that IJR has a lower tax ratio cost than VTMSX (Morningstar data), so perhaps the tax advantage is to IJR?.
M* doesn't always get qualified dividends right, and it seems to think the dividends from VTMSX this year were non-qualified. Check tax data directly with the fund company. Vanguard gives VTMSX a pre-tax return of 41.00% (matching M*) and an after-tax 40.66% (compared to M*'s 40.44%); this makes the tax costs of VTMSX slightly lower than of IJR last year.
Also, VTMSX has more than twice the potential capital gains exposure than IJR; VTMSX's is one of the highest I've seen, but I assume VTMSX must manage that problem away?
VTMSX has no ETF class, so it cannot get rid of low-basis stocks the same way ETFs do. It thus accumulates potential capital gains, but it has been able to avoid distributing them, even in the 2002-2007 bull market. (It will deviate slightly from the index in order to avoid capital gains, such as by selling stocks to harvest losses and buying them back later; this tax loss harvesting decreases realized gains but increases unrealized gains.)

But the whole difference is trivial. I would expect VTMSX to beat IJR by about five basis points on average (three points of expenses, and probably another two for tax management); if that five basis points is not worth the loss of convenience, IJR (or Vanguard's equivalent VIOO, which actually costs one basis point more than the iShares fund) is a fine choice.

I have made a similar decision in my Roth IRA. I don't have a brokerage account there, and thus had to live with Investor shares of mutual funds rather than the lower-expense ETF shares until they added Admiral shares.
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Re: VB vs IJR [Vanguard Small-Cap vs. iShares S&P SmallCap 6

Post by claver » Sun Jan 26, 2014 8:18 pm

Thank you, David. Your posts are an education.

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Re: VB vs IJR [Vanguard Small-Cap vs. iShares S&P SmallCap 600]

Post by ReformedSpender » Thu Aug 23, 2018 12:12 pm

Curious to know what caused the difference in portfolio growth starting in Dec 2016 between IJR (portfolio 2 ) and VB (portfolio 1)

https://www.portfoliovisualizer.com/bac ... ion2_2=100

:beer
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Re: VB vs IJR [Vanguard Small-Cap vs. iShares S&P SmallCap 600]

Post by vineviz » Thu Aug 23, 2018 12:37 pm

ReformedSpender wrote:
Thu Aug 23, 2018 12:12 pm
Curious to know what caused the difference in portfolio growth starting in Dec 2016 between IJR (portfolio 2 ) and VB (portfolio 1)

https://www.portfoliovisualizer.com/bac ... ion2_2=100

:beer
Mostly due to higher quality and smaller stocks doing well and n that time period: IJR is more exposed to those factors.
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Re: VB vs IJR [Vanguard Small-Cap vs. iShares S&P SmallCap 600]

Post by ReformedSpender » Thu Aug 23, 2018 12:58 pm

vineviz wrote:
Thu Aug 23, 2018 12:37 pm

Mostly due to higher quality and smaller stocks doing well and n that time period: IJR is more exposed to those factors.
Yes, but by that argument there would be a larger differential between portfolio values as higher quality/smaller stocks in IJR wouldn't limit the 'outperformance' to only 2016 and forward. The two funds seem fairly correlated throughout most of the data period, however, something occurred in late 2016 to IJR to set it on a different trajectory.
Market history shows that when there's economic blue sky, future returns are low, and when the economy is on the skids, future returns are high. The best fishing is done in the most stormy waters.

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Re: VB vs IJR [Vanguard Small-Cap vs. iShares S&P SmallCap 600]

Post by petulant » Thu Aug 23, 2018 1:22 pm

ReformedSpender wrote:
Thu Aug 23, 2018 12:58 pm
vineviz wrote:
Thu Aug 23, 2018 12:37 pm

Mostly due to higher quality and smaller stocks doing well and n that time period: IJR is more exposed to those factors.
Yes, but by that argument there would be a larger differential between portfolio values as higher quality/smaller stocks in IJR wouldn't limit the 'outperformance' to only 2016 and forward. The two funds seem fairly correlated throughout most of the data period, however, something occurred in late 2016 to IJR to set it on a different trajectory.
Not necessarily. The key phrase is “in that time period.” Specific factors can under- or overperform differently in different time periods. It may be that small/quality factors were performing approximately with the market for a few years, then they outperformed. If so, there would be little difference between IJR and VB until the outperformance period started. At that time the one with more exposure to small/quality, IJR, would outperform.

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Re: VB vs IJR [Vanguard Small-Cap vs. iShares S&P SmallCap 600]

Post by MindTheGAAP » Thu Aug 23, 2018 1:30 pm

ReformedSpender wrote:
Thu Aug 23, 2018 12:12 pm
Curious to know what caused the difference in portfolio growth starting in Dec 2016 between IJR (portfolio 2 ) and VB (portfolio 1)

https://www.portfoliovisualizer.com/bac ... ion2_2=100

:beer
They're two very different funds in reality...

Average Market Cap:
IJR: 1,799K
VB: 4,005K

% of Portfolio:
IJR: 11.54% Mid-Cap | 82.99% Small Cap | 5.47% Micro Cap
VB: 63.14% Mid-Cap | 35.75% Small Cap | 0.84% Micro Cap


Not sure why you'd expect them to perform the same?
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Re: VB vs IJR [Vanguard Small-Cap vs. iShares S&P SmallCap 600]

Post by ReformedSpender » Thu Aug 23, 2018 2:01 pm

MindTheGAAP wrote:
Thu Aug 23, 2018 1:30 pm

They're two very different funds in reality...

Average Market Cap:
IJR: 1,799K
VB: 4,005K

% of Portfolio:
IJR: 11.54% Mid-Cap | 82.99% Small Cap | 5.47% Micro Cap
VB: 63.14% Mid-Cap | 35.75% Small Cap | 0.84% Micro Cap


Not sure why you'd expect them to perform the same?
No where in my original post did I state that these funds should perform the same. I made an observation and asked a question. From the back test analysis I provided, both IJR and VB where fairly close in correlation to one another from 2004 through mid 2016. IJR portfolio than grew significantly different late 2016 and onward.
Market history shows that when there's economic blue sky, future returns are low, and when the economy is on the skids, future returns are high. The best fishing is done in the most stormy waters.

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Re: VB vs IJR [Vanguard Small-Cap vs. iShares S&P SmallCap 600]

Post by vineviz » Thu Aug 23, 2018 3:15 pm

petulant wrote:
Thu Aug 23, 2018 1:22 pm
ReformedSpender wrote:
Thu Aug 23, 2018 12:58 pm
vineviz wrote:
Thu Aug 23, 2018 12:37 pm

Mostly due to higher quality and smaller stocks doing well and n that time period: IJR is more exposed to those factors.
Yes, but by that argument there would be a larger differential between portfolio values as higher quality/smaller stocks in IJR wouldn't limit the 'outperformance' to only 2016 and forward. The two funds seem fairly correlated throughout most of the data period, however, something occurred in late 2016 to IJR to set it on a different trajectory.
Not necessarily. The key phrase is “in that time period.” Specific factors can under- or overperform differently in different time periods. It may be that small/quality factors were performing approximately with the market for a few years, then they outperformed. If so, there would be little difference between IJR and VB until the outperformance period started. At that time the one with more exposure to small/quality, IJR, would outperform.
Exactly what I would have said.
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