What is a "standard" Small Cap tilt portfolio

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SpartanBull
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What is a "standard" Small Cap tilt portfolio

Post by SpartanBull »

Hello,
I've been looking into Small Cap/Small Cap Value tilting lately. I'm aware that there are a couple of distinct camps among bogleheads. There is the 3-fund portfolio group, who essentially believe that total stock market/total international has plenty of risk/return for them, and they're comfortable holding the market rate. Separately, theres a large number of people who tilt to small cap, small cap value, etc.
While I feel that I know what a fairly standard 3-fund portfolio looks like (as a young, relatively new investor this is where I am currently), I'm trying to see what a typical tilt portfolio looks like. I'm aware that theres one hundred different ways one could do it, but I'm just looking for a baseline. Is it 25% of equities to small cap? 50% Is there a common range? And additionally, is Small cap Value or just small cap the most standard choice of bogleheads, or the extended market index? Not looking for an exact one size fits all answer, but just curious what a fairly standard (tilt) portfolio looks like.
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David Jay
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Re: What is a "standard" Small Cap tilt portfolio

Post by David Jay »

My small cap value tilt is 10% of total portfolio in VSIAX/SCV (Vanguard Small Cap Value).

[edit] which equals approximately 15% of equity allocation
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telemark
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Re: What is a "standard" Small Cap tilt portfolio

Post by telemark »

One pattern that's pretty common is

25% large cap
25% large value
25% small cap
25% small value

That is, a 50/50 split across size and another one across value. The Ultimate Buy and Hold and the Coffeehouse portfolios both follow this, with a separate slice for REIT.
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Re: What is a "standard" Small Cap tilt portfolio

Post by PandaBear »

VSIAX (Vanguard Small Cap Value Index Fund) is, in my opinion, not a very good fund. It is not small and not enough value IMO. If you do an xray on it, only about 32% falls into the small cap value bucket. What it does have is a good expense ratio.

Personally, I would buy IJS (iShares S&P Small Cap 600 Value). It has more small-cap in it than VSIAX although a slightly higher expense ratio (0.25%).

Another alternative would be IWN (iShares Russell 2000 Value). It has the same expense ratio as IJS (0.25%).

If you're dead set on using a Vanguard fund, I would use VTWV (Vanguard Russell 2000 Value) which is almost the same as IWN. Or you could purchase VIOV (Vanguard S&P 600 Value) which is almost the same as IJS.
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Re: What is a "standard" Small Cap tilt portfolio

Post by oldcomputerguy »

PandaBear wrote:VSIAX (Vanguard Small Cap Value Index Fund) is, in my opinion, not a very good fund. It is not small and not enough value IMO. If you do an xray on it, only about 32% falls into the small cap value bucket. What it does have is a good expense ratio.

Personally, I would buy IJS (iShares S&P Small Cap 600 Value). It has more small-cap in it than VSIAX although a slightly higher expense ratio (0.25%).

Another alternative would be IWN (iShares Russell 2000 Value). It has the same expense ratio as IJS (0.25%).

If you're dead set on using a Vanguard fund, I would use VTWV (Vanguard Russell 2000 Value) which is almost the same as IWN. Or you could purchase VIOV (Vanguard S&P 600 Value) which is almost the same as IJS.
+1 on IWN. According to Morningstar IWN is 98% smallcap, 48% smallcap value. Most "small-cap" funds have at least a signficant dollop of mid-cap, this one is only 2% midcap.
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Theoretical
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Re: What is a "standard" Small Cap tilt portfolio

Post by Theoretical »

There are many kinds of tilts, ranging from a modest tilt to an extreme like the Larry portfolio (but dampening down volatility with a 30% equity stake) or the ultra-tilts of a Grap.

Most typical that I've seen is for people to have 10-25% Small Value tilts, especially with higher equity. Other folks will go 50/50, with varying amounts of international Small/value. Then you have the only small value folks.

Probably the commonality I've most seen is that most tilters have at least a moderate international stake, and that there aren't many no-international tilters.
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Re: What is a "standard" Small Cap tilt portfolio

Post by nisiprius »

I don't do that kind of investing myself.

The gurus do not seem to be suggesting simply adding small-cap value to a three-fund portfolio.

The Bill Schultheis "Coffeehouse Portfolio," which is intended to be a simple but adequate tilted portfolio allocates equal percentages (10% of total portfolio) to large blend, large value, small blend, and small value. Thus the stock allocation is half large, half small, and within large and small each is half blend, half value.

In 1998, in The Only Guide to a Winning Investment Strategy You Will Ever Need, Larry Swedroe suggested these example portfolios, in which the tilts vary somewhat depending on how aggressive the portfolio is. In the moderate portfolio, as in the Coffeehouse portfolio,
--the stock allocation is equally split between large-caps and small-caps;
--there's a 50/50 split within large, half large blend and half large value;
--the small-cap component is not purely small value; in fact in this case, it's 3/4 small blend and only 1/4 small value.

I'm showing only the stock allocation within these portfolios.

Image
Last edited by nisiprius on Mon Nov 28, 2016 4:03 pm, edited 1 time in total.
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Re: What is a "standard" Small Cap tilt portfolio

Post by lack_ey »

You find lots of opinions and not a lot of consensus. The higher-number-of-funds slices used to be more popular I guess. You can see that pattern here and as suggested above:
https://www.bogleheads.org/wiki/Lazy_po ... portfolios
viewtopic.php?t=38374

There's also the question of how to tilt with international stocks as there isn't as much coverage in terms of fund offerings there.

Supposing you believe strongly in these factors (but not in some other ones, for whatever reasons), your conceptualization of risk and where the factor returns are coming from should guide your allocations. One school of thought would suggest that you aim to get the cheapest allocation (in terms of explicit fund expense ratios and looking at internal trading costs too) that has the desired factor loading coefficients. In this case Vanguard's small value index fund is very useful because though it has lower loadings than in some other funds, the additional cost per unit of non-market-beta is low. But if you believe that more of the return will come from the smallest and value-est portion of the market, you should be more willing to pay a higher cost per unit of exposure for a fund that targets that part of the market more strongly. Of course with greater concentration you do give up some diversification perhaps in sectors, stocks... but probably not a big deal.

Maybe one way to think about the above is this: how strongly do you believe in interaction effects between factors? If they're just additive, you should just care about the raw loadings however you get them and then costs. Historically I think the data suggests that's not quite right (that is, there is some interaction), but how much of any interaction effect seen historically might be a result of the particulars of history that might not apply today? For example, every time you look at potential factor effect sizes being larger in small caps, you have to wonder how much of that might have been enabled by the higher transaction costs in days long past. And possibly also more mispricings perhaps from less research being done, if you're at least partly receptive to that explanation.

P.S. probably goes without saying, but to keep perspective, as a young, relatively new investor, personal income and savings rate matter so much more than any of these finer allocation details
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Re: What is a "standard" Small Cap tilt portfolio

Post by ruralavalon »

Rick Ferri has at times suggested 25 - 33% of domestic stocks in small-cap value, and the remainder in total stock market.
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Re: What is a "standard" Small Cap tilt portfolio

Post by Rodc »

telemark wrote:One pattern that's pretty common is

25% large cap
25% large value
25% small cap
25% small value

That is, a 50/50 split across size and another one across value. The Ultimate Buy and Hold and the Coffeehouse portfolios both follow this, with a separate slice for REIT.
That is common.

But if you look at theory, it says that something like 50% Large Blend + 50% SVC should give about the same result. History does too.

What matters is both have about the same shift to small and shift to value. And since SC growth is supposedly the worst, the second might even do a little better.

The fly in the ointment here is that not all small cap or small value funds are really the same amount of small or the same amount of value. Indeed (used to be) Vanguard large value was actually tilted more large than the market, moving you backwards on size. Vanguard SCV is really more mid than small, and is only moderately value.

You could search the site for how to calculate factor loads of any given fund, or you could go more crude and just use the Morningstar 3x3 style boxes to compare funds or candidate portfolios.

Unclear that trying to get factor loads accurate to three decimal places is useful.

I note that many who tilt do something like 80% TSM and 20% SCV, but to me that starts to get to the point of not being very useful even if tilting is a good idea. I just split 50/50 TSM (easiest in my 401K, and super cheap, and mostly large cap blend) and Vanguard SCV (again as it is easy and cheap in my 401K and more mid-cap, and only moderately value, so I don't feel overboard on the small or value). Useful? Ask me in 20 or 30 years. :)
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Re: What is a "standard" Small Cap tilt portfolio

Post by livesoft »

I look at the sum of the "value" column in a Morningstar X-ray to decide on value tilt.

A description for "degree of tilt" is discussed in this previous thread:
viewtopic.php?t=193537

From that thread:
One can see that NO tilt is 33% while 100% tilt to value could be 48% to 62% in the value column. Then one could say a 50% tilt to value would be 40% to 48% in the value column. I try to keep my portfolio above 40% in the value column.
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Re: What is a "standard" Small Cap tilt portfolio

Post by Garco »

My portfolio "tilts" but I don't think there's a single consensus standard that represents "A Tilted Portfolio." My portfolio tilts by size but not on the value-growth dimension.

I take the term "tilt" as relative to VG Total Market (VTSMX or VTI). And I'm only thinking in terms of the equities part of my portfolio. What share of a "nontilted" portfolio consists of equities, bonds, or real estate -- or of domestic vs. international investments is indeterminate. However, there's a kind of consensus that the percentages in different asset classes (equities, bonds, etc.) that would represent an "untilted" portfolio are also linked to age of the investor.

Even with respect to just equities, different people have different standards for defining "untilted" operationally. If you run an M* X-Ray of VTSMX (VTI), you will find that on the size dimension LC is about 75-80%, and the remaining Extended Market (basically mid- and small-cap) is 20-25%. That would be the allocation within the equities share of an "untilted" portfolio.

Here's what I do. I'm retired and drawing required minimum distributions. I have investments in my "tax advantaged accounts" (401k, TIRA) in 3 asset classes: equities, bonds/fixed income (including multi-asset), and real estate. I also draw income from Social Security; this "annuity" is effectively a 4th asset class. I have a substantial investment in international equities (about 20% of my equities holdings) and a small one in international bond funds. Because I'm retired and living comfortably on income from my tax advantaged retirement accounts + Social Security (I also have some resources in taxable investments), I don't want to take undue risk. Nonetheless, I'm not going with the "age in bonds" idea. Otherwise, I'd only have about 30% of my investment in equities, while I actually have ~50%. So on an age adjusted basis, I might be deemed to have a "risky" portfolio -- but not an especially risky one -- even if I was not "tilting" it. (Also consider that many of the retirement income models assume a fixed 60-40 equities-bonds ratio in retirement! Not an "age in bonds" asset allocation.)

Given all this, how do I know whether I'm tilting or not? It's not so clear considering my entire portfolio, especially since I'm deriving about a third of my daily income in retirement from Social Security. What I think is that because within my equities I have about 30% in mid-small cap, I'm "tilted" away from a standard 20-25% in mid-small that an X-Ray of VTI would suggest. I'm happy with the outcome so far. Further, given all this, I've got enough to think about without without looking at tilts toward value.
Last edited by Garco on Mon Nov 28, 2016 10:45 pm, edited 1 time in total.
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Re: What is a "standard" Small Cap tilt portfolio

Post by GMan82 »

ruralavalon wrote:Rick Ferri has at times suggested 25 - 33% of domestic stocks in small-cap value, and the remainder in total stock market.
This is what I do. I think Rick Ferri has even mentioned it in one of his many many threads on this website. Because I want the SCV factor and I also want to minimize fees, I use a combination of VISVX (Vang SCV Index Inv class), which is available in my Fidelity 403b plan. I also am converting my Roth IRA to VIOV (Vang SP 600 Value Index, similar to iShares IJS). Eventually, my entire Roth will be VIOV.

I like VIOV because it's smaller and more value-y.

I'm 80-20 allocation, with 30% international. So 25% of the remaining 56% allocated to US is in that combo of SCV index funds.
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Re: What is a "standard" Small Cap tilt portfolio

Post by KlangFool »

OP,

I put 8% of my portfolio into VSIAX (Vanguard Small Cap Value Index Fund). That is my small cap value tilt.

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Re: What is a "standard" Small Cap tilt portfolio

Post by feh »

ruralavalon wrote:Rick Ferri has at times suggested 25 - 33% of domestic stocks in small-cap value, and the remainder in total stock market.
I decided to place 1/3 of our US equities in small-value. I try to do the same w/ ex-US equities, but it ends up being just small instead of SV, as ex-US SV funds are hard to find.
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Re: What is a "standard" Small Cap tilt portfolio

Post by Tamahome »

Whoops. I just posted in the link livesoft posted. Meant to post it here:

60% of my equities are US.
1/3 of my US portion or 20% of my total equities are US large value
1/6 of my US portion or 10% of my total equities are US mid value
1/6 of my US portion or 10% of my total equities are US mid blend
3/12 of my US portion or 15% of my total equities are US small value
1/12 of my US portion or 5% of my total equities are US small blend

Of course, my wife's 401k is skewed b/c of bad options.
1/12 of her US portion or 5% of her total portfolio is mid value
11/12 of her US portion or 55% of her total portfolio is US large blend.

This means that our overall tilt is significantly lower than I would like it to be, but we do not have much in the way of options at present.
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Re: What is a "standard" Small Cap tilt portfolio

Post by aj76er »

I think the combination of funds is important.

In my 401k, I have access to Vanguard's S&P500 index fund and also DFA's DFFVX fund (small cap value targeted). DFFVX ranges from mid-caps to small-caps to micro-caps with a value tilt; and thus I view it as a "valuey" extended market fund that compliments the S&P500. I hold these in a 80/20 combination in attempt to produce a total market fund with small value-tilt (note that ~80% of total market is S&P500).

In taxable, I hold VTI (Vanguard total market ETF) and if I were to try and SCV tilt there, then I would use IJS (IShares small cap value S&P600 ETF) since it is more of a pure small value (with no mid-caps, which are already covered by VTI). In this setup, I like Rick Ferri's advice of 20-30% in IJS - but you'll need to adjust based on desired volatility.

If you hold VOO (Vanguard S&P500 ETF), then VBR (Vanguard small cap value ETF) would be a good compliment as it would act more like the "valuey completion index" concept.
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Re: What is a "standard" Small Cap tilt portfolio

Post by Makaveli »

I allocate 10% of my portfolio to SCV via VBR. Of course I thought this was a great fund (and it is) but the more I read on Bogleheads the more I learn. Utilize Morningstar xray visualizer so you know exactly what you're buying and confirm it's what you intended & want.
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Re: What is a "standard" Small Cap tilt portfolio

Post by Earl Lemongrab »

This is my target stock allocation:

Code: Select all

Large Cap      20.00%
Large Val      10.00%
Small Cap      10.00%
Small Val      20.00%
REIT           10.00%
Int Large Cap   7.50%
Int Large Val   7.50%
Int Small Cap  10.00%
Emerg Mkt       5.00%
If I were starting over, I'd probably consider something like the four-fund tilted portfolio, perhaps:

Code: Select all

Large Cap      35.00%
Small Val      35.00%
Int Large Val  15.00%
Int Small Cap  15.00%
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Re: What is a "standard" Small Cap tilt portfolio

Post by Aptenodytes »

Livesoft seems to be the only one distinguishing asset allocations from fund allocations. Holding 100% of your equities in the Vanguard small-cap value fund only gets you to 32% of your equities in small-cap value assets.

For me, it makes sense to manage your assets in terms of fund allocations, because that's how your assets present themselves to your for management. But to arrive at the target fund allocation, you've got to start further upstream, with the asset allocations. Therefore any question about "what is the right small-cap tilt for me" ought to be focusing on assets, not funds.

If the assumption that we are talking about a Vanguard-only universe applies, then there's no problem skipping the asset question and going straight to funds. But not everyone lives in that universe.
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Re: What is a "standard" Small Cap tilt portfolio

Post by Earl Lemongrab »

Aptenodytes wrote:Livesoft seems to be the only one distinguishing asset allocations from fund allocations. Holding 100% of your equities in the Vanguard small-cap value fund only gets you to 32% of your equities in small-cap value assets.
That depends, as the OP asked what a typical tilted portfolio looks like. So showing what you actually hold can be the correct answer. You're right that the desired tilt might not be the actual. In my case the small value allocation (according to Instant X-ray) is 13%. That's less than the targeted 20%, but then I knew going in that the VBR and such will have a good slug of mid-caps as well.

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Re: What is a "standard" Small Cap tilt portfolio

Post by Hukedonfonix4me »

According to x-ray on Morningstar for me:

21 20 20
8 9 9
4 4 4

22.34% Vanguard 500 Index A Large Blend (VFIAX)
19.62% Vanguard Institution Large Blend (VIIIX)
19.02% Vanguard Developed M Foreign Large Blend (VDIPX)
18.96% Vanguard Small Cap I Small Blend (VSCPX)
10.82% MM S&P 500® Index I (MMIZX)
9.24% Vanguard Mid Cap Ind Mid-Cap Blend (VMCIX)
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Re: What is a "standard" Small Cap tilt portfolio

Post by TomCat96 »

A small cap tilt will depend heavily on your risk tolerance and your investing horizon.

Mine is:

21.15% VOO S&P 500 Large Caps
11.24% VO S&P 500 Mid Caps
67% VXF Dow Jones Total Stock Market Completion Index (Mid Caps and Small caps)

By Asset Class mine is:

24.65% Large Cap
41% Mid Cap
35% Small Caps.

0% Bonds/REITS/etc.
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Re: What is a "standard" Small Cap tilt portfolio

Post by Lieutenant.Columbo »

PandaBear wrote:VSIAX (Vanguard Small Cap Value Index Fund) is, in my opinion, not a very good fund. It is not small and not enough value IMO. If you do an xray on it, only about 32% falls into the small cap value bucket. What it does have is a good expense ratio...
PandaBear,
Where does one find the data showing that (for instance) VSIAX is actually only 32% Small+Value?
lack_ey wrote:...Vanguard's small value index fund is very useful because though it has lower loadings than in some other funds, the additional cost per unit of non-market-beta is low...
lack_ey,
would you mind explaining what the sentence in bold means, please? I am familiar with the concept of beta but I do not understand how non-market and per-unit come into play here

thank you both
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Re: What is a "standard" Small Cap tilt portfolio

Post by lack_ey »

Lieutenant.Columbo wrote:
PandaBear wrote:VSIAX (Vanguard Small Cap Value Index Fund) is, in my opinion, not a very good fund. It is not small and not enough value IMO. If you do an xray on it, only about 32% falls into the small cap value bucket. What it does have is a good expense ratio...
PandaBear,
Where does one find the data showing that (for instance) VSIAX is actually only 32% Small+Value?
Thank you
Neither panda nor bear here, but that looks to be from Morningstar style box analysis.

Image

Of course the dividing lines are arbitrary, particularly when deciding on what constitutes a mid vs. small cap.

By the way, most fund companies and index providers split value/growth two ways rather than three, so that part's not particularly special. Also note that the CRSP index Vanguard follows has a relaxed procedure (read the details here) for kicking a stock out of the fund, to reduce turnover at the expense of adulterating the style exposure.

Lieutenant.Columbo wrote:
lack_ey wrote:...Vanguard's small value index fund is very useful because though it has lower loadings than in some other funds, the additional cost per unit of non-market-beta is low...
lack_ey,
would you mind explaining what the sentence in bold means, please? I am familiar with the concept of beta but I do not understand how non-market and per-unit come into play here

thank you both
Traditionally beta is just the regression coefficient on the benchmark. Frequently, on the stock market. That's how it's used in CAPM and in Fama-French 3-factor (and similar) analysis. Sometimes the coefficients for the other factors are called betas as well, though I think Fama-French actually used lowercase b with a subscript for those. Some other authors use beta symbols for all of them.

Getting more directly to the point, by "non-market beta(s)" I mean the loading(s) on size and value. By "per unit" I mean you get higher non-market-beta factor coefficients per additional cost in terms of the expense ratio.

Earlier there were mentions of iShares S&P SmallCap 600 Value ETF (IJS) as an alternative, for example.

Looking at a regression on the past three years, for which Vanguard was using the CRSP index, Vanguard Small-Cap Value ETF (VBR) had market/size/value loadings of 0.98/0.52/0.32. By comparison, iShares S&P SmallCap 600 Value ETF (IJS) had market/size/value loadings of 0.95/0.82/0.44. Don't take these exact numbers too seriously as they're just estimates; check the link for the confidence intervals, noting that future loadings may effectively be a bit different and also that it depends on exactly how you define value and so on, with providers disagreeing on the exact screening methods for value, never mind all the other stuff.

You'll find that total market funds have expense ratios in the 0.03% to 0.05% range (i.e. you can get 1 market beta, 0 size, 0 value for that cost). So what you might be interested in is the amount of extra non-market-beta exposure you can get per unit of additional cost. Because Vanguard's fund only has an expense ratio of 0.08% compared to 0.25% for iShares, it is effectively a higher bang for your buck and works well as long as you're not going for very heavy tilts, seeking high factor exposures on size and value relative to market.

Rather than use something like 75% total market, 25% IJS; use something like 60% total market, 40% VBR. You will end up with similar or higher overall loadings at lower overall cost.

At least, that is the argument. If you believe in strong interaction effects, that the simple linear regression terms don't tell the whole story and will make a big impact on returns, then you might be more interested in exactly how you're getting those overall factor loadings, which exact stocks you're owning. In this case it might make more sense to pay for the specific targeted exposure you want.
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Re: What is a "standard" Small Cap tilt portfolio

Post by Lieutenant.Columbo »

lack_ey wrote:
Lieutenant.Columbo wrote:
PandaBear wrote:VSIAX (Vanguard Small Cap Value Index Fund) is, in my opinion, not a very good fund. It is not small and not enough value IMO. If you do an xray on it, only about 32% falls into the small cap value bucket. What it does have is a good expense ratio...
PandaBear,
Where does one find the data showing that (for instance) VSIAX is actually only 32% Small+Value?
Thank you
Neither panda nor bear here, but that looks to be from Morningstar style box analysis.

Image

Of course the dividing lines are arbitrary, particularly when deciding on what constitutes a mid vs. small cap.

By the way, most fund companies and index providers split value/growth two ways rather than three, so that part's not particularly special. Also note that the CRSP index Vanguard follows has a relaxed procedure (read the details here) for kicking a stock out of the fund, to reduce turnover at the expense of adulterating the style exposure.

Lieutenant.Columbo wrote:
lack_ey wrote:...Vanguard's small value index fund is very useful because though it has lower loadings than in some other funds, the additional cost per unit of non-market-beta is low...
lack_ey,
would you mind explaining what the sentence in bold means, please? I am familiar with the concept of beta but I do not understand how non-market and per-unit come into play here

thank you both
Traditionally beta is just the regression coefficient on the benchmark. Frequently, on the stock market. That's how it's used in CAPM and in Fama-French 3-factor (and similar) analysis. Sometimes the coefficients for the other factors are called betas as well, though I think Fama-French actually used lowercase b with a subscript for those. Some other authors use beta symbols for all of them.

Getting more directly to the point, by "non-market beta(s)" I mean the loading(s) on size and value. By "per unit" I mean you get higher non-market-beta factor coefficients per additional cost in terms of the expense ratio.

Earlier there were mentions of iShares S&P SmallCap 600 Value ETF (IJS) as an alternative, for example.

Looking at a regression on the past three years, for which Vanguard was using the CRSP index, Vanguard Small-Cap Value ETF (VBR) had market/size/value loadings of 0.98/0.52/0.32. By comparison, iShares S&P SmallCap 600 Value ETF (IJS) had market/size/value loadings of 0.95/0.82/0.44. Don't take these exact numbers too seriously as they're just estimates; check the link for the confidence intervals, noting that future loadings may effectively be a bit different and also that it depends on exactly how you define value and so on, with providers disagreeing on the exact screening methods for value, never mind all the other stuff.

You'll find that total market funds have expense ratios in the 0.03% to 0.05% range (i.e. you can get 1 market beta, 0 size, 0 value for that cost). So what you might be interested in is the amount of extra non-market-beta exposure you can get per unit of additional cost. Because Vanguard's fund only has an expense ratio of 0.08% compared to 0.25% for iShares, it is effectively a higher bang for your buck and works well as long as you're not going for very heavy tilts, seeking high factor exposures on size and value relative to market.

Rather than use something like 75% total market, 25% IJS; use something like 60% total market, 40% VBR. You will end up with similar or higher overall loadings at lower overall cost.

At least, that is the argument. If you believe in strong interaction effects, that the simple linear regression terms don't tell the whole story and will make a big impact on returns, then you might be more interested in exactly how you're getting those overall factor loadings, which exact stocks you're owning. In this case it might make more sense to pay for the specific targeted exposure you want.
lack_ey,
Thank you very much for this wonderful detailed explanation.
As to your very last paragraph, do you yourself side with those who believe in strong interaction effects and use IJS?
or are you in the other camp and use VBR?
Thank you
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Re: What is a "standard" Small Cap tilt portfolio

Post by ruralavalon »

Our domestic stocks are:
12.5%, Vanguard REIT Index Fund Admiral Shares (VGSLX)
27.5%, Vanguard Small-cap Value Index Fund Admiral Shares (VSIAX)
60.0%, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)

The Morningstar style box is:
15/15/16
09/11/07
12/10/04
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Re: What is a "standard" Small Cap tilt portfolio

Post by davidsorensen32 »

Mine is:

44/13/9
5/10/5
4/4/2

What do guys think ? Time to push it over and tilt on SCV ?
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Re: What is a "standard" Small Cap tilt portfolio

Post by lack_ey »

Lieutenant.Columbo wrote:lack_ey,
Thank you very much for this wonderful detailed explanation.
As to your very last paragraph, do you yourself side with those who believe in strong interaction effects and use IJS?
or are you in the other camp and use VBR?
Thank you
Well, there seems to be some effect. I haven't studied it enough to have a real opinion on whether it's large enough to be worth the difference.

IIRC at least on the size axis ignoring value the relationship is kind of not that linear through decile historically, I think with a significant jump between the largest and the next groupings, and then a bump between the smallest and the one up. This kind of implies maybe that as long as you're outside the largest and smallest stocks (both funds stay outside the largest and smallest) it doesn't matter as much as you might otherwise assume based on a linear relationship. Don't know how that interacts with value, though. I should probably take a look at French's data library and dig around.

Both funds also clearly exclude most of the so-called "black hole" small growth stocks with no earnings at all or that are perhaps the most speculative, based on liquidity screens and the value screen (even if say the Vanguard fund does allow holdings to cross over somewhat into growth, it won't be into extreme growth).

Also in general on principle it may be better to simplify models and not assume as much with high confidence about nonlinearities, interactions, etc. Of course linear regressions are going to be "wrong" but they may be usefully close enough. On the flip side, making simpler assumptions can throw away real information.

So I would learn towards using VBR but without confidence. Remember, this is a not-a-real-opinion opinion.
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Re: What is a "standard" Small Cap tilt portfolio

Post by Lieutenant.Columbo »

lack_ey wrote:
Lieutenant.Columbo wrote:lack_ey,
Thank you very much for this wonderful detailed explanation.
As to your very last paragraph, do you yourself side with those who believe in strong interaction effects and use IJS?
or are you in the other camp and use VBR?
Thank you
Well, there seems to be some effect. I haven't studied it enough to have a real opinion on whether it's large enough to be worth the difference.

IIRC at least on the size axis ignoring value the relationship is kind of not that linear through decile historically, I think with a significant jump between the largest and the next groupings, and then a bump between the smallest and the one up. This kind of implies maybe that as long as you're outside the largest and smallest stocks (both funds stay outside the largest and smallest) it doesn't matter as much as you might otherwise assume based on a linear relationship. Don't know how that interacts with value, though. I should probably take a look at French's data library and dig around.

Both funds also clearly exclude most of the so-called "black hole" small growth stocks with no earnings at all or that are perhaps the most speculative, based on liquidity screens and the value screen (even if say the Vanguard fund does allow holdings to cross over somewhat into growth, it won't be into extreme growth).

Also in general on principle it may be better to simplify models and not assume as much with high confidence about nonlinearities, interactions, etc. Of course linear regressions are going to be "wrong" but they may be usefully close enough. On the flip side, making simpler assumptions can throw away real information.

So I would learn towards using VBR but without confidence. Remember, this is a not-a-real-opinion opinion.
thank you very much for explaining this.
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Re: What is a "standard" Small Cap tilt portfolio

Post by Park »

Lieutenant.Columbo wrote:
lack_ey wrote:
Lieutenant.Columbo wrote:lack_ey,
Thank you very much for this wonderful detailed explanation.
As to your very last paragraph, do you yourself side with those who believe in strong interaction effects and use IJS?
or are you in the other camp and use VBR?
Thank you
Well, there seems to be some effect. I haven't studied it enough to have a real opinion on whether it's large enough to be worth the difference.

IIRC at least on the size axis ignoring value the relationship is kind of not that linear through decile historically, I think with a significant jump between the largest and the next groupings, and then a bump between the smallest and the one up. This kind of implies maybe that as long as you're outside the largest and smallest stocks (both funds stay outside the largest and smallest) it doesn't matter as much as you might otherwise assume based on a linear relationship. Don't know how that interacts with value, though. I should probably take a look at French's data library and dig around.

Both funds also clearly exclude most of the so-called "black hole" small growth stocks with no earnings at all or that are perhaps the most speculative, based on liquidity screens and the value screen (even if say the Vanguard fund does allow holdings to cross over somewhat into growth, it won't be into extreme growth).

Also in general on principle it may be better to simplify models and not assume as much with high confidence about nonlinearities, interactions, etc. Of course linear regressions are going to be "wrong" but they may be usefully close enough. On the flip side, making simpler assumptions can throw away real information.

So I would learn towards using VBR but without confidence. Remember, this is a not-a-real-opinion opinion.
thank you very much for explaining this.
A comparison of VBR to IJS should also take into account that IJS is an ETF and VBR is a hybrid of a mutual fund and ETF. When an investor sells an ETF, the other ETF owners don't pay cap gains tax as a result. This is not true with mutual fund owners. From what I can find out, the ETF investors own slightly less than 50% of VBR. As long as more people buy VBR than sell it, there isn't a problem. But if selling is greater than buying such that the fund is forced to sell stocks to meet redemptions, VBR ETF investors will end up paying cap gains tax that they wouldn't in a pure ETF structure.
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Re: What is a "standard" Small Cap tilt portfolio

Post by lack_ey »

The context was a string of quotes about the factor loadings and portfolio composition of the funds, though in practice if using in a taxable account, yes, it is better to consider the tax implications as well. Also consider relative turnover, which matters even outside a taxable account because of trading frictions. Morningstar shows a turnover of 16% for Vanguard's regular small-cap value index fund and 42% for the S&P 600 Value index fund (quoting this rather than IJS as it's not shown for ETFs). And tracking error more generally.

The earlier discussion about costs focused on ER is something of an oversimplification. Internal trading costs, securities lending income, etc. all play a role. Both funds actually track closer than the ER.

In addition, check the different value definitions, and also the implications of the S&P 600 Value having effectively a little bit more of a quality bent.
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Re: What is a "standard" Small Cap tilt portfolio

Post by Park »

lack_ey wrote:The context was a string of quotes about the factor loadings and portfolio composition of the funds, though in practice if using in a taxable account, yes, it is better to consider the tax implications as well. Also consider relative turnover, which matters even outside a taxable account because of trading frictions. Morningstar shows a turnover of 16% for Vanguard's regular small-cap value index fund and 42% for the S&P 600 Value index fund (quoting this rather than IJS as it's not shown for ETFs). And tracking error more generally.

The earlier discussion about costs focused on ER is something of an oversimplification. Internal trading costs, securities lending income, etc. all play a role. Both funds actually track closer than the ER.

In addition, check the different value definitions, and also the implications of the S&P 600 Value having effectively a little bit more of a quality bent.
Your points are well taken Lackey. It looks like IJS started in 2000. It had a cap gains distribution in 2000, but none since. That's from the iShares website. About VBR, the following is from the Bogleheads website :happy .

https://www.bogleheads.org/wiki/Vanguar ... tributions

It looks like VBR started in 1998. VBR had cap gains distributions from 1999-2002, but otherwise none.

I'd welcome it if someone corrected me on the following. When a mutual fund owner sells, the fund sells some of the underlying shares. They'll tend to use shares purchased at a higher cost base to minimize cap gains for the remaining mutual fund owners. When an ETF owner sells, the fund may end up doing nothing, as the ETF seller trades with an ETF buyer on the market. However, it is certainly possible that with ETF selling, the fund will have to transfer underlying shares of the ETF to authorized participants in exchange for ETF shares. There will be no cap gains on the exchange of underlying shares for ETF shares. However, the ETF can use underlying shares with the lowest cost base for that exchange. So the ETF can purge itself of the lower cost base underlying shares, So from what I can see, selling of mutual fund shares can result in increased unrealized cap gains for the remaining mutual fund owners. But when ETF shares get sold, this can result in decreased unrealized cap gains for the remaining ETF owners.

If this is true, then the hybrid mutual fund/ETF structure of Vanguard's ETFs might not be as tax efficient as a pure ETF structure. When it comes to low turnover strategies, such as a total market index approach, that may not be that important. But for higher turnover strategies, it may be. About VBR's lower turnover, might that be intentional on Vanguard's part to minimize this taxation problem?

A point to remember is that the above assumes one can use tax lots. At present, one can. But one can't exclude the possibility that tax lots might disappear in the future. If so, total stock market strategies may become more attractive.
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Re: What is a "standard" Small Cap tilt portfolio

Post by triceratop »

Park wrote: A comparison of VBR to IJS should also take into account that IJS is an ETF and VBR is a hybrid of a mutual fund and ETF. When an investor sells an ETF, the other ETF owners don't pay cap gains tax as a result. This is not true with mutual fund owners. From what I can find out, the ETF investors own slightly less than 50% of VBR. As long as more people buy VBR than sell it, there isn't a problem. But if selling is greater than buying such that the fund is forced to sell stocks to meet redemptions, VBR ETF investors will end up paying cap gains tax that they wouldn't in a pure ETF structure.
I don't think this is true...at all. Do you have a source?

In fact all the literature I have read indicates it is the reverse: when redemptions exceed purchases in the mutual fund, the ETF redemption process helps the Vanguard mutual fund avoid realizing capital gains.
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Re: What is a "standard" Small Cap tilt portfolio

Post by Park »

triceratop wrote:
Park wrote: A comparison of VBR to IJS should also take into account that IJS is an ETF and VBR is a hybrid of a mutual fund and ETF. When an investor sells an ETF, the other ETF owners don't pay cap gains tax as a result. This is not true with mutual fund owners. From what I can find out, the ETF investors own slightly less than 50% of VBR. As long as more people buy VBR than sell it, there isn't a problem. But if selling is greater than buying such that the fund is forced to sell stocks to meet redemptions, VBR ETF investors will end up paying cap gains tax that they wouldn't in a pure ETF structure.
I don't think this is true...at all. Do you have a source?

In fact all the literature I have read indicates it is the reverse: when redemptions exceed purchases in the mutual fund, the ETF redemption process helps the Vanguard mutual fund avoid realizing capital gains.
Let's assume that redemptions exceed purchases by the mutual fund owners of a Vanguard hybrid ETF/MF. Vanguard has to sell underlying shares of the fund to meet the redemptions of the departing mutual fund owners. They can't exchange underlying shares for the mutual fund units of departing mutual fund owners; there are exceptions to the last statement, but it is uncommon. Assume that the underlying shares have gone up in price. This will result in cap gains distributions for both the mutual fund and ETF owners of the fund. The ETF owners will receive cap gains distributions that they wouldn't in a pure ETF structure.

Due to the ETF redemption procedure, the cost base of the underlying shares that are sold in the last paragraph may be higher than it otherwise would be in a pure mutual fund. When the fund exchanges underlying shares for ETF shares with authorized participants, it can purge itself of underlying shares with low cost base without any tax liability doing so. So the hybrid structure can result in lower cap gains distributions for the mutual funds owners than a pure mutual fund would.

When it comes to meeting the redemptions of mutual fund owners, the fund can sell underlying shares with higher cost base to minimize cap gains distributions. This will minimize any cap gains distributions to both the ETF and mutual fund owners. However, this will increase the unrealized cap gains exposure for the remaining mutual fund and ETF owners.

Assume that redemptions exceed purchases by the mutual fund owners of a Vanguard hybrid ETF/MF. However, assume that the underlying shares have gone down in price. This will decrease any cap gains distributions that year. If there will be no cap gain distributions that year, the cap losses can be kept for possible future use.

However, I have read the following from morningstar. An ETF has the option to sell underlying shares, and not just exchange them with authorized participants. So it can also accumulate cap losses that can be used to offset any cap gains resulting from changes in the portfolio.

The bottom line is that when there is net mutual fund redemption, a mutual fund has to sell underlying shares. If those shares have gone up in price, there will be cap gains distributions. And in Vanguard's hydrid mutual fund/ETF structure, the ETF owners will end up with cap gains distributions that they wouldn't in a pure ETF structure. There is a cost advantage to Vanguard's ETFs, but that advantage comes with a price.

Please correct me if I'm wrong.
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Re: What is a "standard" Small Cap tilt portfolio

Post by Doc »

nisiprius wrote:In 1998, in The Only Guide to a Winning Investment Strategy You Will Ever Need, Larry Swedroe suggested ...
In his more recent book he is even suggesting 100% small/value but read the book. He is also changing his equity/fixed income to compensate. The idea is to cut the tails on the variance while minting the same "average" risk.

Reducing the Risk of Black Swans: Using the Science of Investing to Capture Returns With Less Volatility by Larry Swedroe & Kevin Grogan

I'm 40% small and I only consider the three lower M* style boxes as small. I also tilt to value where tax consideraions allow.
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Re: What is a "standard" Small Cap tilt portfolio

Post by Lieutenant.Columbo »

GMan82 wrote:
ruralavalon wrote:Rick Ferri has at times suggested 25 - 33% of domestic stocks in small-cap value, and the remainder in total stock market.
This is what I do. I think Rick Ferri has even mentioned it in one of his many many threads on this website. Because I want the SCV factor and I also want to minimize fees, I use a combination of VISVX (Vang SCV Index Inv class), which is available in my Fidelity 403b plan. I also am converting my Roth IRA to VIOV (Vang SP 600 Value Index, similar to iShares IJS). Eventually, my entire Roth will be VIOV.

I like VIOV because it's smaller and more value-y.

I'm 80-20 allocation, with 30% international. So 25% of the remaining 56% allocated to US is in that combo of SCV index funds.
GMan82,
If you like VIOV's size and value, may I ask why you hold part of your SCV on VISVX at all, since both have an ER of 0.2?
Thank you.
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Re: What is a "standard" Small Cap tilt portfolio

Post by Theoretical »

Lieutenant.Columbo wrote:
GMan82 wrote:
ruralavalon wrote:Rick Ferri has at times suggested 25 - 33% of domestic stocks in small-cap value, and the remainder in total stock market.
This is what I do. I think Rick Ferri has even mentioned it in one of his many many threads on this website. Because I want the SCV factor and I also want to minimize fees, I use a combination of VISVX (Vang SCV Index Inv class), which is available in my Fidelity 403b plan. I also am converting my Roth IRA to VIOV (Vang SP 600 Value Index, similar to iShares IJS). Eventually, my entire Roth will be VIOV.

I like VIOV because it's smaller and more value-y.

I'm 80-20 allocation, with 30% international. So 25% of the remaining 56% allocated to US is in that combo of SCV index funds.
GMan82,
If you like VIOV's size and value, may I ask why you hold part of your SCV on VISVX at all, since both have an ER of 0.2?
Thank you.
The VISVX is in his 403b.
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Re: What is a "standard" Small Cap tilt portfolio

Post by Lieutenant.Columbo »

Theoretical wrote:
Lieutenant.Columbo wrote:
GMan82 wrote:
ruralavalon wrote:Rick Ferri has at times suggested 25 - 33% of domestic stocks in small-cap value, and the remainder in total stock market.
This is what I do. I think Rick Ferri has even mentioned it in one of his many many threads on this website. Because I want the SCV factor and I also want to minimize fees, I use a combination of VISVX (Vang SCV Index Inv class), which is available in my Fidelity 403b plan. I also am converting my Roth IRA to VIOV (Vang SP 600 Value Index, similar to iShares IJS). Eventually, my entire Roth will be VIOV.

I like VIOV because it's smaller and more value-y.

I'm 80-20 allocation, with 30% international. So 25% of the remaining 56% allocated to US is in that combo of SCV index funds.
GMan82,
If you like VIOV's size and value, may I ask why you hold part of your SCV on VISVX at all, since both have an ER of 0.2?
Thank you.
The VISVX is in his 403b.
:oops:
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Re: What is a "standard" Small Cap tilt portfolio

Post by leonard »

I went with a Merriman-type portfolio with the corresponding tilt.

If I did it over - I'd do a TrevH-type portfolio with the corresponding tilt.
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Re: What is a "standard" Small Cap tilt portfolio

Post by GMan82 »

Yup, 403b limitation. I have Fidelity for my 403b, but access to Vanguard funds. Unfortunately, I don't have access to Vanguard Admiral funds and the Fidelity SCV fund is too expensive. IJS was a possibility, but they don't allow me to do ETFs in my BrokerageLink account, something that I'm complaining about.

So for now, I'm slowly converting my Roth to SCV. To keep my asset allocation intact, I buy slowly in my 403b and once it reaches a good amount, I'll is exchange it in my 403b for FSKTX (Fidelity Total Market Institutional) and sell VTSAX in my Roth for more VIOV. Once the value is higher, I may convert to IJS in my Roth and eat the Vanguard commission, which admittedly for a one-time fee won't be much, but I'll probably do that once I'm fully SCV in Roth. Hopefully, someone will hear my complaints by then and I can just do IJS in my BL account.
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Re: What is a "standard" Small Cap tilt portfolio

Post by Lieutenant.Columbo »

Rodc wrote:But if you look at theory, it says that something like 50% Large Blend + 50% SVC should give about the same result. History does too.

What matters is both have about the same shift to small and shift to value. And since SC growth is supposedly the worst, the second might even do a little better.

The fly in the ointment here is that not all small cap or small value funds are really the same amount of small or the same amount of value. Indeed (used to be) Vanguard large value was actually tilted more large than the market, moving you backwards on size. Vanguard SCV is really more mid than small, and is only moderately value.
[...]
I note that many who tilt do something like 80% TSM and 20% SCV, but to me that starts to get to the point of not being very useful even if tilting is a good idea. I just split 50/50 TSM (easiest in my 401K, and super cheap, and mostly large cap blend) and Vanguard SCV (again as it is easy and cheap in my 401K and more mid-cap, and only moderately value, so I don't feel overboard on the small or value). Useful? Ask me in 20 or 30 years. :)
Rodc,
Do Theory and History also say which tilt (split) and which (Vanguard?) funds one should consider in Ex-US stocks?
thank you
feh wrote:I decided to place 1/3 of our US equities in small-value. I try to do the same w/ ex-US equities, but it ends up being just small instead of SV, as ex-US SV funds are hard to find.
well, feh, if that Ex-US SMALL fund you use is indeed "small", it may no matter that/if it is not "Valuey", based on what today...
larryswedroe wrote:...Vanguard unfortunately doesn't offer such good options in international where being small becomes even more important because the largest diversification benefits come from small stocks, not large...
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Re: What is a "standard" Small Cap tilt portfolio

Post by feh »

Lieutenant.Columbo wrote:
feh wrote:I decided to place 1/3 of our US equities in small-value. I try to do the same w/ ex-US equities, but it ends up being just small instead of SV, as ex-US SV funds are hard to find.
well, feh, if that Ex-US SMALL fund you use is indeed "small", it may no matter that/if it is not "Valuey", based on what today...
larryswedroe wrote:...Vanguard unfortunately doesn't offer such good options in international where being small becomes even more important because the largest diversification benefits come from small stocks, not large...
Interesting. I'll have to do some more reading.

I hold both VSS and IJS for my ex-US small, but VSS comprises about 70% of that category in my portfolio.
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Re: What is a "standard" Small Cap tilt portfolio

Post by Lieutenant.Columbo »

feh wrote:...I hold both VSS and IJS for my ex-US small, but VSS comprises about 70% of that category in my portfolio.
is there an Ex-US version of IJS?
Other than the 0.25% ER, does it cost anything to trade and to maintain IJS in the Vanguard platform?
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Re: What is a "standard" Small Cap tilt portfolio

Post by feh »

Lieutenant.Columbo wrote:
feh wrote:...I hold both VSS and IJS for my ex-US small, but VSS comprises about 70% of that category in my portfolio.
is there an Ex-US version of IJS?
Other than the 0.25% ER, does it cost anything to trade and to maintain IJS in the Vanguard platform?
Ah, my bad. I meant SCZ in my post above, not IJS.

Comparing SCZ to VSS, they are very similar in regard to company size, actually falling in the medium box, but SCZ is more expensive. I'm sure I hold it for TLH purposes.
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Re: What is a "standard" Small Cap tilt portfolio

Post by Rodc »

Lieutenant.Columbo wrote: Do Theory and History also say which tilt (split) and which (Vanguard?) funds one should consider in Ex-US stocks?
thank you
I don't think theory cares what country. FWIW I was not suggesting 50/50 was optimal vs something else. Rather that adding a SCV fund to something like S&P 500 or TSM should behave a lot like a four fund tilted portfolio as long as the overall tilt is about the same. I do not have much of a line up of cheap index or index-like funds in my 401K over on the X-US side so I have not really paid enough attention in that space to make a recommendation.
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Re: What is a "standard" Small Cap tilt portfolio

Post by Tamahome »

OP: There is no "standard". Da-da-daaa-dummmmm. (Scary music, as people on this site debate things like tilt to extremes).

As you delve more into tilt, you will find that not only is there not a standard upon which all agree, but there are different tilts. For example, the 25 LV, 25 LB, 25 SV, 25 SB breakup is a common one, but it leaves out mid-caps. Search this site for "Mel's unloved midcaps" and open your eyes to another important aspect of tilt.

Also, there are those of us who believe that tilt should be a flexible strategy. What? Flexible tilt? What the heck? You see, a small/value tilt is a VERY long term strategy. As someone who slices, dices, and tilts, I do not recommend a small value tilt to anyone with a horizon of 15 years. Why? The premium may not show up in that time. Small Value underperforms for large tracts of time. Yup, your super awesome secret strategy is not secret so much as it is that most people cannot wait the time necessary for it to work. I have a sliding scale of tilt purchases. Right now, I am heavily tilted (you will see me reporting two numbers: My actual tilt and my desired tilt. I rebalance with new money, so hitting my desired tilt takes time). When I am 15 years from retirement, I will no longer purchase any tilted funds (but keep the ones that I have), as the strategy is too long term for purchases that close to retirement. My slice and dice will start to look more and more 3-fundy over time BECAUSE I believe in the strategy, but I also understand it and the risks that come with it.

Currently, my equities look like this:
20% Large Value (Vanguard VEIRX)
10% Mid Value (Vanguard)
10% Mid Blend (Vanguard)
15% Small Value (DFA)
5% Small Blend (Vanguard or DFA... I honestly cannot remember right now, nor do I think it matters much)
14% International Small (a mix of small and mid) (DFA)
16% International (in a DFA fund that somewhat leans value, but is not value enough for me to call it value. I would say the breakdown is something like 12 blend/ 4 value the way the fund is structured, and I am ok with this)
4% Total Emerging (Vanguard)
3% Emerging Small (DFA)
3% Emerging Value (DFA)

When I hit 15 years out, my equities purchases will look a lot more like:
60% Total Market
30% Total Developed International
10% Emerging

However, I will keep the old funds that I purchased with the original tilt, giving them time to do what I want them to do. Just as I rebalance with new money, I will have a gentle curve away from a tilt over time. (I prefer a curve to a sharp change. Similarly, I will curve into bonds as I go instead of sharp changes. That will mean simply purchasing bonds at a more aggressive rate rather than selling stocks to buy bonds and continuing to buy stocks. As I age and my portfolio gets larger, this may become impossible, so I may have to revisit that strategy. My goal at retirement is to be 60 equities and 40 fixed income, however, my wife is a decade younger than I am, and women outlive men, so I am planning for a retirement that will last at least 20 years past my death, thus the more aggressive than usual plan).

The point of that is that your situation will have a lot to do with the makeup of your portfolio, as well. A tilted strategy that makes sense for one individual may not make as much sense for another. A part of why I can take on more risk is that I have been saving aggressively. If my tilt does not work out, I will not be eating dog food. I can afford to gamble that money for a higher likelihood that my family will be left better off without the risk of making myself a burden to them in the end.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
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