Getting deeper small-cap value exposure in taxable is almost free

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Getting deeper small-cap value exposure in taxable is almost free

Post by grabiner » Sat Mar 11, 2017 11:44 pm

There are several ETF options for small-cap value investors. The funds which give better exposure to small-cap and value are not necessarily the best options, because they cost more; you might use a larger amount of a less expensive fund instead to get the same exposure. However, I noticed that the deeper-small-value funds have lower dividend yields, and thus lower tax costs. Thus, if you hold your small-cap value in a taxable account, it is almost free to use VIOV (S&P 600 Value) or RZV (S&P 600 Pure Value) for deeper exposure than VBR (CRSP Small-Cap Value).

(It isn't completely free since you might sell the funds, and the lower-yielding funds will have more of their return from unrealized gains rather than reinvested dividends. However, for a long-term holding, this won't make much of a difference; if you pay 13% rather than 12% of your investment in capital gains after holding it for 30 years, that is an annualized cost of 0.03%.)

Vanguard Small-Cap Value Index (VSIAX or VBR):
Average market cap: $3290M
P/E: 18.46
P/B: 1.81
Expense ratio: 0.07%
Yield: 1.79%
Tax cost in a 28% bracket, assuming 70% qualified dividends: 0.34%
Total cost: 0.41%

Vanguard S&P 600 Small-Cap Value (VIOV)
Average market cap: $1389M
P/E: 18.10
P/B: 1.62
Expense ratio: 0.20%
Yield: 1.17%
Tax cost in a 28% bracket, with 80% qualified dividends: 0.21%
Total cost: 0.42%

Guggenheim S&P 600 Pure Value (RZV):
Average market cap: $799M
P/E: 13.80
P/B: 1.04
Expense ratio: 0.35%
Yield: 0.47% (this is distribution yield; no SEC yield published)
Tax cost in a 28% bracket, assuming 80% qualified dividends (it was 100% last year): 0.08%
Total cost: 0.43%

Alternatives not to use in taxable: SLYV (SPDR S&P 600 Small-Cap Value) tracks the same index as VIOV but has distributed a lot of capital gains, while none of the three ETFs above has ever distributed a capital gain. VTWV (Russell 2000 Value) has a higher yield and less in qualified dividends than VIOV, which makes it more expensive for only a slight increase in value exposure. And DFA's funds, even the tax-managed targeted value, have no ETF class and thus generate significant capital gains. Any of these would be reasonable in an IRA.
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by Northern Flicker » Sat Mar 11, 2017 11:55 pm

VIOV had a 42% turnover rate last year. Not sure you can count on it not having capital gain distributions in the future.
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by Lieutenant.Columbo » Sun Mar 12, 2017 2:18 am

grabiner wrote:...if you hold your small-cap value in a taxable account, it is almost free to use VIOV (S&P 600 Value) or RZV (S&P 600 Pure Value) for deeper exposure than VBR (CRSP Small-Cap Value).

(It isn't completely free since you might sell the funds, and the lower-yielding funds will have more of their return from unrealized gains rather than reinvested dividends. However, for a long-term holding, this won't make much of a difference; if you pay 13% rather than 12% of your investment in capital gains after holding it for 30 years, that is an annualized cost of 0.03%.)
...
Vanguard S&P 600 Small-Cap Value (VIOV)
Average market cap: $1389M
P/E: 18.10
P/B: 1.62
Expense ratio: 0.20%
Yield: 1.17%
Tax cost in a 28% bracket, with 80% qualified dividends: 0.21%
Total cost: 0.42%

Guggenheim S&P 600 Pure Value (RZV):
Average market cap: $799M
P/E: 13.80
P/B: 1.04
Expense ratio: 0.35%
Yield: 0.47% (this is distribution yield; no SEC yield published)
Tax cost in a 28% bracket, assuming 80% qualified dividends (it was 100% last year): 0.08%
Total cost: 0.43%
grabiner,
Three questions:
1. Where do the 12% and 13% numbers in capital gains when selling VIOV/RZV come from?
2. Should the 0.03% additional annualized cost for "selling" RZV 30 yrs later be added to the 0.43% cost for "using" RZV, the total being 0.46%?
3. trying to understand: how does RZV's 0.47% distribution yield agree with what you said about it not having distributed capital gains ever? :?
Thank you very much!
Last edited by Lieutenant.Columbo on Sun Mar 12, 2017 8:38 am, edited 1 time in total.
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by unclescrooge » Sun Mar 12, 2017 7:59 am

grabiner wrote:There are several ETF options for small-cap value investors. The funds which give better exposure to small-cap and value are not necessarily the best options, because they cost more; you might use a larger amount of a less expensive fund instead to get the same exposure. However, I noticed that the deeper-small-value funds have lower dividend yields, and thus lower tax costs. Thus, if you hold your small-cap value in a taxable account, it is almost free to use VIOV (S&P 600 Value) or RZV (S&P 600 Pure Value) for deeper exposure than VBR (CRSP Small-Cap Value).

(It isn't completely free since you might sell the funds, and the lower-yielding funds will have more of their return from unrealized gains rather than reinvested dividends. However, for a long-term holding, this won't make much of a difference; if you pay 13% rather than 12% of your investment in capital gains after holding it for 30 years, that is an annualized cost of 0.03%.)

Vanguard Small-Cap Value Index (VSIAX or VBR):
Average market cap: $3290M
P/E: 18.46
P/B: 1.81
Expense ratio: 0.07%
Yield: 1.79%
Tax cost in a 28% bracket, assuming 70% qualified dividends: 0.34%
Total cost: 0.41%

Vanguard S&P 600 Small-Cap Value (VIOV)
Average market cap: $1389M
P/E: 18.10
P/B: 1.62
Expense ratio: 0.20%
Yield: 1.17%
Tax cost in a 28% bracket, with 80% qualified dividends: 0.21%
Total cost: 0.42%

Guggenheim S&P 600 Pure Value (RZV):
Average market cap: $799M
P/E: 13.80
P/B: 1.04
Expense ratio: 0.35%
Yield: 0.47% (this is distribution yield; no SEC yield published)
Tax cost in a 28% bracket, assuming 80% qualified dividends (it was 100% last year): 0.08%
Total cost: 0.43%

Alternatives not to use in taxable: SLYV (SPDR S&P 600 Small-Cap Value) tracks the same index as VIOV but has distributed a lot of capital gains, while none of the three ETFs above has ever distributed a capital gain. VTWV (Russell 2000 Value) has a higher yield and less in qualified dividends than VIOV, which makes it more expensive for only a slight increase in value exposure. And DFA's funds, even the tax-managed targeted value, have no ETF class and thus generate significant capital gains. Any of these would be reasonable in an IRA.
Very interesting!

Can I conclude that for people in high tax brackets using taxable accounts, an ETF with a higher expense ratio but zero capital gains can be better then a cheaper mutual fund where all gains are distributed?

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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by grabiner » Sun Mar 12, 2017 9:19 am

jalbert wrote:VIOV had a 42% turnover rate last year. Not sure you can count on it not having capital gain distributions in the future.
I was suspicious that small-cap value ETFs would be able to avoid capital gains with the ETF structure when it was created, but it has now been around for years, and Vanguard and other providers have been able to avoid them. Vanguard's ETFs have been around for a long time, and VNQ (REIT Index) is the only stock ETF which has distributed a gain other than just after getting started (when there aren't shares at a variety of different prices to allow the redemption process to eliminate gains).

VIOV currently reports a 5.96% realized loss, and 3.56% unrealized gain; that is, despite six years of high returns, it has a net capital loss. (Even a net gain wouldn't mean that a distribution is coming, as ETFs don't sell all their stock.)
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by grabiner » Sun Mar 12, 2017 9:48 am

Lieutenant.Columbo wrote:Three questions:
1. Where do the 12% and 13% numbers in capital gains when selling VIOV/RZV come from?
These were made-up numbers; the actual capital gain will depend on market returns.

Here's an example which I will work out in more detail. Assume that the funds return 8% before expenses and taxes, the investment is held for 30 years, and after-tax dividends are used to buy more shares.

VBR will return 7.59% annualized before sale, consisting of 6.14% unrealized gains and 1.45% reinvested dividends. Therefore, .0614/.0759 of the growth is a capital gain taxed upon sale. $10,000 grows to $89,775 before sale. The capital gain is $64,555, with a tax bill of $9680 for a final value of $80,095 and a final growth rate of 7.18%

RZV will return 7.57% annualized before sale, consisting of 7.18% unrealized gains and 0.39% reinvested dividends. Therefore, .0718/.0757 of the growth is a capital gain taxed upon sale. $10,000 grows to $89,276 before sale. The capital gain is $75,192, with a tax bill of $11,279 for a final value of $77,997 and a final growth rate of 7.09%.

In this example, the larger capital gain resulted in an extra tax cost of 0.07% on RZV, annualized over 30 years; the taxes on the capital gains were 10.8% and 12.6% of the pre-sale value.

However, if the stock market returns 8%, you probably won't sell all your stock during your lifetime, since you choose a risk level which means that you won't run out of money if the market has below-expected returns. If you sell only half your stock, you reduce the capital gain by more than half, since you will sell the stock purchased in later years for higher prices.
2. Should the 0.03% additional annualized cost for "selling" RZV 30 yrs later be added to the 0.43% cost for "using" RZV, the total being 0.46%?
Yes, this cost, or whatever your estimated cost is, should be added.
3. trying to understand: how does RZV's 0.47% distribution yield agree with what you said about it not having distributed capital gains ever? :?
The distribution yield is all dividends. The ETF creation-redemption process allows ETFs to eliminate a lot of the capital gains without selling stock, and RZV has done this.
unclescrooge wrote:Can I conclude that for people in high tax brackets using taxable accounts, an ETF with a higher expense ratio but zero capital gains can be better then a cheaper mutual fund where all gains are distributed?
Absolutely; I just chose a typical number. In particular, since states tax all dividends at the same rate, investors in high-tax states could come out ahead with the lower-yielding funds.

Add an 8.33% state tax (6% after deducting from federal tax at 28%) to the examples above, and the tax costs are 0.45% on VBR, 0.28% on VIOV, 0.11% on RZV. The pre-sale total costs are now 0.52%, 0.48%, 0.46%, so RZV actually costs less. However, the state tax will also increase the cost of the capital gains when you sell, unless you retire in a state which does not have an income tax.
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by NYC_Guy » Sun Mar 12, 2017 10:24 am

You are missing IJS, which I use to tilt a fair amount to small cap value in my equity portfolio. Having looked at the various ETFs (including how "small" the underlying index is, ER, tax efficiency and size/liquidity of trading), I concluded that IJS was the best for me. On the other hand, I use VXUS for my international ETF. I do think investors that tilt and use ETFs should be considering, at a minimum, all of the Blackrock and Vanguard choices. ER, tax efficiency, index and liquidity all matter.

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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by Lieutenant.Columbo » Sun Mar 12, 2017 10:39 am

grabiner wrote:...Assume that the funds return 8% before expenses and taxes, the investment is held for 30 years, and after-tax dividends are used to buy more shares.

VBR will return 7.59% annualized before sale, consisting of 6.14% unrealized gains and 1.45% reinvested dividends. Therefore, .0614/.0759 of the growth is a capital gain taxed upon sale. $10,000 grows to $89,775 before sale. The capital gain is $64,555, with a tax bill of $9680 for a final value of $80,095 and a final growth rate of 7.18%

RZV will return 7.57% annualized before sale, consisting of 7.18% unrealized gains and 0.39% reinvested dividends. Therefore, .0718/.0757 of the growth is a capital gain taxed upon sale. $10,000 grows to $89,276 before sale. The capital gain is $75,192, with a tax bill of $11,279 for a final value of $77,997 and a final growth rate of 7.09%.

In this example, the larger capital gain resulted in an extra tax cost of 0.07% on RZV, annualized over 30 years; the taxes on the capital gains were 10.8% and 12.6% of the pre-sale value.
thank you for this detailed example, I understand now.
From this example, I infer that VIOV would have been a slighter better choice than RZV if both funds had the same 8% return (growth rate of 7.18% VIOV versus 7.09% RZV).

But since RZV's small-value tilt is deeper than VIOV's, it would be reasonable to expect/assume that RZV's return over the same time period would be a Little higher than VIOV's, which might have resulted in the same or slightly higher after-tax after-expenses growth rate for RZV, correct?
Either way (with same returns or slightly larger return for RZV), it seems that these VIOV and RZV come out essentially the same.

Of course, I assume "things" would be different if one (and not both) funds decided to change their "no-capital-gains-distributed" policy.

Excellent Topic on the nuances of fund selection!
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by retiredjg » Sun Mar 12, 2017 11:00 am

David, I'm reading this to say....if a person wants to use mutual funds instead of ETFs and if Vanguard Small-Cap Value Index VSIAX is "small enough for you", then using VSIAX in taxable is not a bad choice.

Have I over-read your post?

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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by Grt2bOutdoors » Sun Mar 12, 2017 11:38 am

Lieutenant.Columbo wrote: From this example, I infer that VIOV would have been a slighter better choice than RZV if both funds had the same 8% return (growth rate of 7.18% VIOV versus 7.09% RZV).

But since RZV's small-value tilt is deeper than VIOV's, it would be reasonable to expect/assume that RZV's return over the same time period would be a Little higher than VIOV's, which might have resulted in the same or slightly higher after-tax after-expenses growth rate for RZV, correct?
Either way (with same returns or slightly larger return for RZV), it seems that these VIOV and RZV come out essentially the same.

Of course, I assume "things" would be different if one (and not both) funds decided to change their "no-capital-gains-distributed" policy.

Excellent Topic on the nuances of fund selection!
I would not make that assumption, you still need to overcome RZV's higher expense ratio, 0.15% higher may seem small potatoes, but it all adds up over time.
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by grabiner » Sun Mar 12, 2017 11:48 am

retiredjg wrote:David, I'm reading this to say....if a person wants to use mutual funds instead of ETFs and if Vanguard Small-Cap Value Index VSIAX is "small enough for you", then using VSIAX in taxable is not a bad choice.
This is correct. However, if you want more small-cap value exposure in a taxable account, it costs almost nothing to use VIOV or RZV instead. It would also be reasonable to get the same amount of small-cap value exposure by holding less of VIOV or RZV, and holding a total-market fund with the extra money. (By the same calculations as above, Vanguard Total Stock Market at 0.05% expenses and 1.86% yield almost all qualified costs 0.34%, 0.44% with 6% state tax added.)
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by Grt2bOutdoors » Sun Mar 12, 2017 11:50 am

grabiner wrote:
retiredjg wrote:David, I'm reading this to say....if a person wants to use mutual funds instead of ETFs and if Vanguard Small-Cap Value Index VSIAX is "small enough for you", then using VSIAX in taxable is not a bad choice.
This is correct. However, if you want more small-cap value exposure in a taxable account, it costs almost nothing to use VIOV or RZV instead. It would also be reasonable to get the same amount of small-cap value exposure by holding less of VIOV or RZV, and holding a total-market fund with the extra money. (By the same calculations as above, Vanguard Total Stock Market at 0.05% expenses and 1.86% yield almost all qualified costs 0.34%, 0.44% with 6% state tax added.)
So, if someone wanted a 10% exposure tilt to small cap value and used any of choices above, how do they calculate how much less of those ETF's to purchase vs. VBR when coupled with VTSAX?
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by grabiner » Sun Mar 12, 2017 11:51 am

Grt2bOutdoors wrote:
Lieutenant.Columbo wrote: From this example, I infer that VIOV would have been a slighter better choice than RZV if both funds had the same 8% return (growth rate of 7.18% VIOV versus 7.09% RZV).

But since RZV's small-value tilt is deeper than VIOV's, it would be reasonable to expect/assume that RZV's return over the same time period would be a Little higher than VIOV's, which might have resulted in the same or slightly higher after-tax after-expenses growth rate for RZV, correct?
Either way (with same returns or slightly larger return for RZV), it seems that these VIOV and RZV come out essentially the same.

Of course, I assume "things" would be different if one (and not both) funds decided to change their "no-capital-gains-distributed" policy.

Excellent Topic on the nuances of fund selection!
I would not make that assumption, you still need to overcome RZV's higher expense ratio, 0.15% higher may seem small potatoes, but it all adds up over time.
In my calculation, I assumed equal returns before expenses. I would expect higher pre-expense returns from RZV than from VBR or VIOV if value and small-cap outperform, but this comes with extra risk.
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by grabiner » Sun Mar 12, 2017 11:56 am

Grt2bOutdoors wrote:So, if someone wanted a 10% exposure tilt to small cap value and used any of choices above, how do they calculate how much less of those ETF's to purchase vs. VBR when coupled with VTSAX?
There are two reasonable measures.

One is to do a Fama-French regression; if Fund X has a 0.8 factor loading on value, and Fund Y has a 0.4 factor loading, then you need twice as much of Fund Y to get the same value exposure. The problem with Fama-French is that it is based on returns, and factors unrelated to value exposure can also affect returns. If the index construction rules of the S&P 600 Value caused it to outperform other value indexes when value outperformed growth (which happened in 2000-2002 when the Internet bubble burst), then it would appear to have more value exposure.

The other is to look at your overall portfolio allocation, but make sure to get the denominators right. If you have $10K in a fund with a P/B of 2, and $10K in a fund with a P/B of 1, then the total book value of your portfolio is $15K, so your overall P/B ratio is 1.33, not 1.5. For this calculation, you should average the book/price ratios of 0.5 and 1.0 to get 0.75, then take the reciprocal again to get back to price/book.
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by Grt2bOutdoors » Sun Mar 12, 2017 1:53 pm

Thanks David.
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by unclescrooge » Sun Mar 12, 2017 2:32 pm

grabiner wrote:
Lieutenant.Columbo wrote:Three questions:
1. Where do the 12% and 13% numbers in capital gains when selling VIOV/RZV come from?
These were made-up numbers; the actual capital gain will depend on market returns.

Here's an example which I will work out in more detail. Assume that the funds return 8% before expenses and taxes, the investment is held for 30 years, and after-tax dividends are used to buy more shares.

VBR will return 7.59% annualized before sale, consisting of 6.14% unrealized gains and 1.45% reinvested dividends. Therefore, .0614/.0759 of the growth is a capital gain taxed upon sale. $10,000 grows to $89,775 before sale. The capital gain is $64,555, with a tax bill of $9680 for a final value of $80,095 and a final growth rate of 7.18%

RZV will return 7.57% annualized before sale, consisting of 7.18% unrealized gains and 0.39% reinvested dividends. Therefore, .0718/.0757 of the growth is a capital gain taxed upon sale. $10,000 grows to $89,276 before sale. The capital gain is $75,192, with a tax bill of $11,279 for a final value of $77,997 and a final growth rate of 7.09%.

In this example, the larger capital gain resulted in an extra tax cost of 0.07% on RZV, annualized over 30 years; the taxes on the capital gains were 10.8% and 12.6% of the pre-sale value.

However, if the stock market returns 8%, you probably won't sell all your stock during your lifetime, since you choose a risk level which means that you won't run out of money if the market has below-expected returns. If you sell only half your stock, you reduce the capital gain by more than half, since you will sell the stock purchased in later years for higher prices.
2. Should the 0.03% additional annualized cost for "selling" RZV 30 yrs later be added to the 0.43% cost for "using" RZV, the total being 0.46%?
Yes, this cost, or whatever your estimated cost is, should be added.
3. trying to understand: how does RZV's 0.47% distribution yield agree with what you said about it not having distributed capital gains ever? :?
The distribution yield is all dividends. The ETF creation-redemption process allows ETFs to eliminate a lot of the capital gains without selling stock, and RZV has done this.
unclescrooge wrote:Can I conclude that for people in high tax brackets using taxable accounts, an ETF with a higher expense ratio but zero capital gains can be better then a cheaper mutual fund where all gains are distributed?
Absolutely; I just chose a typical number. In particular, since states tax all dividends at the same rate, investors in high-tax states could come out ahead with the lower-yielding funds.

Add an 8.33% state tax (6% after deducting from federal tax at 28%) to the examples above, and the tax costs are 0.45% on VBR, 0.28% on VIOV, 0.11% on RZV. The pre-sale total costs are now 0.52%, 0.48%, 0.46%, so RZV actually costs less. However, the state tax will also increase the cost of the capital gains when you sell, unless you retire in a state which does not have an income tax.
Thanks for the detailed explanation. This is gold!

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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by maximuum » Sun Mar 12, 2017 3:29 pm

Grabiner,

I believe you have previously stated you don't believe it is worth it to value invest in taxable accounts. Does this mean you have changed your mind and are willing to use these small value etf's in taxable?

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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by cfs » Sun Mar 12, 2017 3:31 pm

Thank you shipmate David for all the good information. Thanks for reading ~cfs~
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by grabiner » Sun Mar 12, 2017 4:35 pm

maximuum wrote:I believe you have previously stated you don't believe it is worth it to value invest in taxable accounts. Does this mean you have changed your mind and are willing to use these small value etf's in taxable?
My preference for avoiding value in taxable accounts was originally based on the tax break on qualified dividends going away on schedule, and an uncertainty whether small-cap value ETFs could continue to avoid capital gains. With neither of these an issue, the tax cost for value is now relatively low, and small-cap value, with the lower yields on small-caps, is about as tax-efficient as large-cap blend. Therefore, I do recommend that investors who want to tilt do so even if they have limited tax-deferred space.

My Roth IRA and HSA are large enough to hold my target allocation to value, so I don't need to hold value stocks in taxable, but I would probably use RZV if I needed more value there.
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by baw703916 » Sun Mar 12, 2017 6:55 pm

Good thread, David. You have noticed the same thing I have: while value stocks tend to have higher dividend yields, deep value stocks sometimes don't, and small stocks tend to have lower dividends that large stocks. So SV has one factor (V) which tends to increase tax costs (but not by quite as much if it's deep value) and another (S) which tends to decrease tax costs. Also important is minimizing distributions due to index turnover, which ETFs (and the Vanguard funds with an ETF share class) have been quite successful yet.

Regarding RZV, I wasn't sure several years ago whether it would stay around, or be able to avoid turnover due to the extreme tilt. So I decided not to hold in in taxable accounts. In retrospect, my fears were unfounded.
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by Ketawa » Mon Mar 13, 2017 12:20 pm

I still would not hold RZV due to its persistent exposure to negative momentum. It has a -0.5 momentum loading since inception and never positive over any 24-month period according to Porfolio Visualizer. It touches 0.0 a couple times over 12-month periods. Even if you are not interested in loading on momentum, it still seems wise to avoid funds which might have far lower expected returns than their value or size characteristics would indicate due to negative momentum. Link
NYC_Guy wrote:You are missing IJS, which I use to tilt a fair amount to small cap value in my equity portfolio. Having looked at the various ETFs (including how "small" the underlying index is, ER, tax efficiency and size/liquidity of trading), I concluded that IJS was the best for me. On the other hand, I use VXUS for my international ETF. I do think investors that tilt and use ETFs should be considering, at a minimum, all of the Blackrock and Vanguard choices. ER, tax efficiency, index and liquidity all matter.
IJS tracks the same index as VIOV and the expense ratio for VIOV is 5 bp lower. For the purpose of looking at the cost of holding small cap value in taxable, there isn't really a need to look at IJS individually, although size/liquidity of trading can still be a consideration in choosing one over the other. VIOV still has a low bid/ask spread due to the ability to arbitrage with IJS despite having a far lower daily volume.

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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by NYC_Guy » Mon Mar 13, 2017 8:23 pm

VIOV is just too small. I have a significant amount in IJS, so the 5 bps is noticeable to me (over $1000 per year). But my position in IJS (if it were in VIOV) would be equal to nearly a full day of VIOV's volume. I'm willing to pay a small premium to have a much deeper pool. And yes, I know the arbs can keep things balanced. But if I need to TLH small cap -- and my guess is that I will with respect to my more recent purchases -- I don't want to get crappy execution because arbs are eating my lunch.

Thus, I think ER, liquidity, tax efficiency and index all matter. VIOV and IJS are identical on index (assuming no tracking error). But IJS's liquidity and tax efficiency > ER difference (for me). But don't think I'm not waiting for Blackrock to match the 20bp of VIOV...

On the other hand VXUS >> IXUS (for me).

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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by Lieutenant.Columbo » Mon Mar 13, 2017 8:52 pm

NYC_Guy wrote:...IJS's liquidity and tax efficiency > ER difference (for me). But don't think I'm not waiting for Blackrock to match the 20bp of VIOV...
NYC_Guy,
IJS essentially owns the S&P SmallCap 600 Value Index market, what incentive does Blackrock have to lower its ER?
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by NYC_Guy » Mon Mar 13, 2017 9:05 pm

Lieutenant.Columbo wrote:
NYC_Guy wrote:...IJS's liquidity and tax efficiency > ER difference (for me). But don't think I'm not waiting for Blackrock to match the 20bp of VIOV...
NYC_Guy,
IJS essentially owns the S&P SmallCap 600 Value Index market, what incentive does Blackrock have to lower its ER?
Hope springs eternal.

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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by Theoretical » Mon Mar 13, 2017 9:18 pm

They've cut the core funds and the smart betas rather drastically of late. It's not crazy to hope.

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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by neurosphere » Mon Oct 09, 2017 5:55 pm

NYC_Guy wrote:
Mon Mar 13, 2017 8:23 pm
VIOV is just too small. I have a significant amount in IJS, so the 5 bps is noticeable to me (over $1000 per year). But my position in IJS (if it were in VIOV) would be equal to nearly a full day of VIOV's volume. I'm willing to pay a small premium to have a much deeper pool. And yes, I know the arbs can keep things balanced. But if I need to TLH small cap -- and my guess is that I will with respect to my more recent purchases -- I don't want to get crappy execution because arbs are eating my lunch.

Thus, I think ER, liquidity, tax efficiency and index all matter. VIOV and IJS are identical on index (assuming no tracking error). But IJS's liquidity and tax efficiency > ER difference (for me).
Hi NYC_Guy, I realize this thread is 7 months old. But I was digging into some SCV ETF data. I hold SLYV, VIOV, and IJS, in various accounts, for various reasons which make sense to me. SLYV tracks the same index as the other two, no?

SLYV has an ER of 0.15%, 10 basis points lower than IJS. Also, the volume (56,000) and assets ($1B) of SLYV are both higher than VIOV.

I'm wondering if SLYV can't entice you with a 10 basis point savings over IJS, if VIOV (with only a 5 bps savings) does not?

If I've done the math correctly, it seems you have $1.6MM in SCV? Perhaps an annual savings of $1600 (10 basis points) doesn't mean much, in that situation, if you don't get good execution on TLH your entire position. :D
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by Doc » Mon Oct 09, 2017 6:45 pm

@neurosphere

I think the issue is trading volume. You need to look at level 2 quotes during market hours to get a good feeling for trading cost. I'm a relatively modest ETF trader but 15000 shares average is pretty small. I would probably move the market if I wanted to liquidate our SCV in one day if it was in VIOV.
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by neurosphere » Mon Oct 09, 2017 7:22 pm

Doc wrote:
Mon Oct 09, 2017 6:45 pm
@neurosphere

I think the issue is trading volume. You need to look at level 2 quotes during market hours to get a good feeling for trading cost. I'm a relatively modest ETF trader but 15000 shares average is pretty small. I would probably move the market if I wanted to liquidate our SCV in one day if it was in VIOV.
Hi Doc, I understand about VIOV. But SLYV has 4-5 times the volume and assets, and 10 basis points less than IJS. So I'm wondering if perhaps SLYV is "volume-y" enough compared to VIOV. :wink:

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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by Doc » Mon Oct 09, 2017 8:35 pm

neurosphere wrote:
Mon Oct 09, 2017 7:22 pm
Doc wrote:
Mon Oct 09, 2017 6:45 pm
@neurosphere

I think the issue is trading volume. You need to look at level 2 quotes during market hours to get a good feeling for trading cost. I'm a relatively modest ETF trader but 15000 shares average is pretty small. I would probably move the market if I wanted to liquidate our SCV in one day if it was in VIOV.
Hi Doc, I understand about VIOV. But SLYV has 4-5 times the volume and assets, and 10 basis points less than IJS. So I'm wondering if perhaps SLYV is "volume-y" enough compared to VIOV. :wink:
I didn't look at SLYV but 10 bps is not a deal breaker. Minimizing ER is not a goal in itself. It is only a metric to use as a guide. I'm using IJS & Vg SV ETF VBR + a couple of minor positions in higher cost active funds.
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by NYC_Guy » Tue Oct 10, 2017 12:04 pm

neurosphere wrote:
Mon Oct 09, 2017 5:55 pm
NYC_Guy wrote:
Mon Mar 13, 2017 8:23 pm
Hi NYC_Guy, I realize this thread is 7 months old. But I was digging into some SCV ETF data. I hold SLYV, VIOV, and IJS, in various accounts, for various reasons which make sense to me. SLYV tracks the same index as the other two, no?

SLYV has an ER of 0.15%, 10 basis points lower than IJS. Also, the volume (56,000) and assets ($1B) of SLYV are both higher than VIOV.

I'm wondering if SLYV can't entice you with a 10 basis point savings over IJS, if VIOV (with only a 5 bps savings) does not?

If I've done the math correctly, it seems you have $1.6MM in SCV? Perhaps an annual savings of $1600 (10 basis points) doesn't mean much, in that situation, if you don't get good execution on TLH your entire position. :D
I think SLYV is an excellent choice. Still a little small for my taste, but I wouldn't reject it as a viable SCV option. My statement from seven months ago concerned why I thought VIOV isn't a great place to be (for me). I would love for Blackrock to match SLYV's expense ratio :D

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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by letsgobobby » Tue Oct 10, 2017 12:22 pm

grabiner wrote:
Sat Mar 11, 2017 11:44 pm
There are several ETF options for small-cap value investors. The funds which give better exposure to small-cap and value are not necessarily the best options, because they cost more; you might use a larger amount of a less expensive fund instead to get the same exposure. However, I noticed that the deeper-small-value funds have lower dividend yields, and thus lower tax costs. Thus, if you hold your small-cap value in a taxable account, it is almost free to use VIOV (S&P 600 Value) or RZV (S&P 600 Pure Value) for deeper exposure than VBR (CRSP Small-Cap Value).

(It isn't completely free since you might sell the funds, and the lower-yielding funds will have more of their return from unrealized gains rather than reinvested dividends. However, for a long-term holding, this won't make much of a difference; if you pay 13% rather than 12% of your investment in capital gains after holding it for 30 years, that is an annualized cost of 0.03%.)

Vanguard Small-Cap Value Index (VSIAX or VBR):
Average market cap: $3290M
P/E: 18.46
P/B: 1.81
Expense ratio: 0.07%
Yield: 1.79%
Tax cost in a 28% bracket, assuming 70% qualified dividends: 0.34%
Total cost: 0.41%

Vanguard S&P 600 Small-Cap Value (VIOV)
Average market cap: $1389M
P/E: 18.10
P/B: 1.62
Expense ratio: 0.20%
Yield: 1.17%
Tax cost in a 28% bracket, with 80% qualified dividends: 0.21%
Total cost: 0.42%

Guggenheim S&P 600 Pure Value (RZV):
Average market cap: $799M
P/E: 13.80
P/B: 1.04
Expense ratio: 0.35%
Yield: 0.47% (this is distribution yield; no SEC yield published)
Tax cost in a 28% bracket, assuming 80% qualified dividends (it was 100% last year): 0.08%
Total cost: 0.43%

Alternatives not to use in taxable: SLYV (SPDR S&P 600 Small-Cap Value) tracks the same index as VIOV but has distributed a lot of capital gains, while none of the three ETFs above has ever distributed a capital gain. VTWV (Russell 2000 Value) has a higher yield and less in qualified dividends than VIOV, which makes it more expensive for only a slight increase in value exposure. And DFA's funds, even the tax-managed targeted value, have no ETF class and thus generate significant capital gains. Any of these would be reasonable in an IRA.

Does this impact where one should hold small cap value in the first place? In other words, traditionally I've held VBR in a tax-advantaged account; but perhaps something else should go there while RZV or VIOV should go in taxable?

(

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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by grabiner » Tue Oct 10, 2017 6:10 pm

letsgobobby wrote:
Tue Oct 10, 2017 12:22 pm
grabiner wrote:
Sat Mar 11, 2017 11:44 pm
There are several ETF options for small-cap value investors. The funds which give better exposure to small-cap and value are not necessarily the best options, because they cost more; you might use a larger amount of a less expensive fund instead to get the same exposure. However, I noticed that the deeper-small-value funds have lower dividend yields, and thus lower tax costs. Thus, if you hold your small-cap value in a taxable account, it is almost free to use VIOV (S&P 600 Value) or RZV (S&P 600 Pure Value) for deeper exposure than VBR (CRSP Small-Cap Value).
Does this impact where one should hold small cap value in the first place? In other words, traditionally I've held VBR in a tax-advantaged account; but perhaps something else should go there while RZV or VIOV should go in taxable?
Small-cap value is still costlier to hold in taxable than large-cap blend (in extra tax cost for VBR, or expenses for VIOV or RZV), so if you have the room, it's better to hold large-cap blend in taxable and small-cap value in an IRA. But if you do need to hold small-cap value in taxable, then the discussion in this thread suggests using RZV or VIOV.
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by drk » Sat Feb 10, 2018 3:35 pm

I found this post while digging around for information about SLYV because it's offered commission-free at TDA. The chart below tracks IJS, VIOV, and SLYV from the inception of VIOV, which is the youngest of the three. Now I'm curious why State Street seems to be so loose with capital gains distributions: you can see the impact of its large annual December distributions since 2014 2013.

Image
Last edited by drk on Sat Feb 10, 2018 4:08 pm, edited 1 time in total.

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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by Doc » Sat Feb 10, 2018 3:47 pm

drk wrote:
Sat Feb 10, 2018 3:35 pm
The chart below tracks IJS, VIOV, and SLYV from the inception of VIOV, which is the youngest of the three.
You do realize you are looking at a price chart not a total return chart?

By adding a money market fund first you can force a total return chart.

Image

Now what is it that you are asking about?

If you reinvest that large dividend the three lines become one.
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by drk » Sat Feb 10, 2018 3:52 pm

Doc wrote:
Sat Feb 10, 2018 3:47 pm
drk wrote:
Sat Feb 10, 2018 3:35 pm
The chart below tracks IJS, VIOV, and SLYV from the inception of VIOV, which is the youngest of the three.
You do realize you are looking at a price chart not a total return chart?

By adding a money market fund first you can force a total return chart.

Image

Now what is it that you are asking about?

If you reinvest that large dividend the three lines become one.
Sorry, I thought I made it clear that I wasn't talking about total return by talking about the impact of capital gains distributions on the percentage increase in price. I would still have to pay taxes now on the large short-term capital gains distributions, and the total return hides that.

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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by Doc » Sat Feb 10, 2018 4:00 pm

drk wrote:
Sat Feb 10, 2018 3:52 pm
I would still have to pay taxes now on the large short-term capital gains distributions, and the total return hides that.
AARRGGHH.

Image http://etfs.morningstar.com/distributio ... ture=en_US

Icky poo sith. :(
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by drk » Sat Feb 10, 2018 4:08 pm

Doc wrote:
Sat Feb 10, 2018 4:00 pm
Icky poo sith. :(
Precisely. For those holding in taxable, they've received a lovely December gift since 2013.

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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by grabiner » Sat Feb 10, 2018 4:53 pm

Doc wrote:
Sat Feb 10, 2018 4:00 pm
drk wrote:
Sat Feb 10, 2018 3:52 pm
I would still have to pay taxes now on the large short-term capital gains distributions, and the total return hides that.
AARRGGHH.

Image http://etfs.morningstar.com/distributio ... ture=en_US

Icky poo sith. :(
Going back to the start of the thread, this is why to use VIOV, VBR, or RZV if you hold small-cap value in your taxable account. The corresponding graph for those three ETFs is all green.

(Is there any way to get this information easily for a mutual fund? M* has a table on the "Quote" page which shows the last five distributions, not the last five years, so you will see only a year and a quarter for a fund which distributes dividends quarterly.)
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by Doc » Sat Feb 10, 2018 5:37 pm

grabiner wrote:
Sat Feb 10, 2018 4:53 pm
(Is there any way to get this information easily for a mutual fund? M* has a table on the "Quote" page which shows the last five distributions, not the last five years, so you will see only a year and a quarter for a fund which distributes dividends quarterly.)
You can get a handle on it on the tax tab but you need to do a little math.
http://performance.morningstar.com/fund ... ture=en_US

Image
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by grabiner » Sun Feb 11, 2018 12:01 am

Doc wrote:
Sat Feb 10, 2018 5:37 pm
grabiner wrote:
Sat Feb 10, 2018 4:53 pm
(Is there any way to get this information easily for a mutual fund? M* has a table on the "Quote" page which shows the last five distributions, not the last five years, so you will see only a year and a quarter for a fund which distributes dividends quarterly.)
You can get a handle on it on the tax tab but you need to do a little math.
http://performance.morningstar.com/fund ... ture=en_US

Image
One caveat: M* often doesn't know about qualified dividends. You can confirm this because M* may show different tax costs for Admiral and ETF shares of the same fund. Since M* assumes the highest tax bracket, an error with qualified dividends may significantly overestimate the tax cost. Therefore, if you get tax data from M*, confirm it with the fund provider.
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by Nahtanoj » Sun Feb 11, 2018 11:20 am

In addition to tax cost, and degree of exposure to value and small factors, how much weight does it make sense to give to portfolio turnover when evaluating these small cap value funds? According to M*, the turnover ratio of both VSIAX and VBR is 18%, while IJS is at 48%, and RSV at 68%.

Trading has a cost, too, and particularly in smaller-cap companies where liquidity tends to be less. If you use the Vanguard funds, you sacrifice some value and small exposure compared to IJS and RSV, but how do you weight the offsetting advantage of lower turnover?

On a separate point, M* reports turnover ratios for ETFs, but it doesn't state whether these ratios include the trading that occurs as a result of the creation / redemption process, or just the turnover within the indices that the ETFs track (and disregarding the creation / redemption process). But it appears to be something more like the latter, because M* reports the exact same turnover ratio (18%) for both VSIAX (which is set up as an open end mutual fund) and VBR (which is an ETF).

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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by stan1 » Sun Feb 11, 2018 11:37 am

how much weight does it make sense to give to portfolio turnover when evaluating these small cap value funds
There's a lot going on under the hood but what's on the surface is expense ratio and whether there are capital gains distributions. Vanguard has shown they can lower expenses with savings passed on to investors and avoid capital gains distributions. Blackrock has shown they can operate low cost ETFs and avoid capital gains distributions (but they don't always pass savings on expenses on to investors). The funds underlying cost of trading is reflected in the expenses. I'd guess they consider a lot of what they do as proprietary so you won't find a white paper on the internet about it.
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by Doc » Sun Feb 11, 2018 11:43 am

stan1 wrote:
Sun Feb 11, 2018 11:37 am
Cost of trading is reflected in the expenses
Morningstar wrote:Expense Ratio

The expense ratio is the annual fee that all funds or ETFs charge their shareholders. It expresses the percentage of assets deducted each fiscal year for fund expenses, including 12b-1 fees, management fees, administrative fees, operating costs, and all other asset-based costs incurred by the fund.

Portfolio transaction fees, or brokerage costs, as well as initial or deferred sales charges are not included in the expense ratio. The expense ratio, which is deducted from the fund's average net assets, is accrued on a daily basis.
So trading cost is included in the expenses but not the expense ratio so the only handle we have on trading costs may be the turnover. :?:
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by stan1 » Sun Feb 11, 2018 11:48 am

Doc wrote:
Sun Feb 11, 2018 11:43 am
stan1 wrote:
Sun Feb 11, 2018 11:37 am
Cost of trading is reflected in the expenses
Morningstar wrote:Expense Ratio

The expense ratio is the annual fee that all funds or ETFs charge their shareholders. It expresses the percentage of assets deducted each fiscal year for fund expenses, including 12b-1 fees, management fees, administrative fees, operating costs, and all other asset-based costs incurred by the fund.

Portfolio transaction fees, or brokerage costs, as well as initial or deferred sales charges are not included in the expense ratio. The expense ratio, which is deducted from the fund's average net assets, is accrued on a daily basis.
So trading cost is included in the expenses but not the expense ratio so the only handle we have on trading costs may be the turnover. :?:
No, a fund's operating expenses are what they are and include whatever underlying trading the fund/ETF needs to do to track an index. The expense ratio is calculated from that. Your personal trading and transaction costs such as if you pay a commission at a brokerage are not included in the funds expenses and thus not reflected in the expense ratio. I thought my post was clear but I edited for further clarification.

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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by grabiner » Sun Feb 11, 2018 11:54 am

Nahtanoj wrote:
Sun Feb 11, 2018 11:20 am
In addition to tax cost, and degree of exposure to value and small factors, how much weight does it make sense to give to portfolio turnover when evaluating these small cap value funds? According to M*, the turnover ratio of both VSIAX and VBR is 18%, while IJS is at 48%, and RSV at 68%.

Trading has a cost, too, and particularly in smaller-cap companies where liquidity tends to be less. If you use the Vanguard funds, you sacrifice some value and small exposure compared to IJS and RSV, but how do you weight the offsetting advantage of lower turnover?
To check this, compare the portfolio returns to its benchmark return. If trading is costing the fund money (or gaining it money), this is where you will see it. (All of these comparisons are NAV, not market price, against the benchmark, but it doesn't make much difference for these ETFs, as they trade very close to NAV.)

VBR (Vanguard Small-Cap Value Index) is 0.01% below the index return since inception, 0.01% above for the last ten years. Whatever Vanguard is doing is working well, as it is covering the expenses, which are now down to 0.07%.

VIOV (Vanguard S&P 600 Value Index) is 0.19% below the index return since inception; this is essentially the same as the 0.20% expense ratio of the fund.

IJS (iShares S&P 600 Value Index) is 0.21% below the index return since inception, 0.16% below over the last ten years, so it has covered a bit of the 0.25% expense ratio.

RZV (Guggenheim S&P 600 Pure Value Index) is 0.23% below the index return since inception, 0.22% below for the last ten years, so it has covered some of its 0.35% expense ratio.

Thus whatever is going on with turnover doesn't appear to have hurt any of these funds; they are outperforming their indexes before expenses.
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by Nahtanoj » Sun Feb 11, 2018 12:48 pm

Interesting. Thank you.

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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by Cantrip » Tue Aug 13, 2019 3:58 am

By just looking at tax efficiency and factor load it seems VIOV is the obvious choice over VBR. But I am worried about fund alpha.

From 2001-2007, when the value factor was at its best, the S&P600 value index returned only 0.5% more than the S&P600 index and had a negative 3.5% alpha per year. Over this time DFSVX (the DFA SCV fund) had a positive alpha of 0.12% per year.

Since 2007, as growth has been better than value, the S&P600 value index has had a mild positive alpha. I worry that the S&P600 value index is not as valuey as it seems -- and therefore overperforms its factor loads in growth environments and underperforms in value environments. I also don't like the greater than 40% yearly turnover in VIOV.

Any thoughts on this? I would prefer to use VSIAX as it is a mutual fund. It also has a much lower yearly turnover and about the twice the number of stocks reducing the chance of negative alpha. But the greater tax efficiency with using a smaller amount of VIOV and a greater amount of the total market fund is enticing.

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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by Forester » Tue Aug 13, 2019 6:23 am

Off topic; why are US investors always stressing over taxable accounts?

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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by whodidntante » Tue Aug 13, 2019 6:47 am

Forester wrote:
Tue Aug 13, 2019 6:23 am
Off topic; why are US investors always stressing over taxable accounts?
"We" are not a nation filled with people stressing about taxable accounts. But this is the bogleheads forum where things are a bit warped. You can post you are worth two million dollars here and ask if you can retire, and be told to come back and ask when you have accumulated some real money. :happy
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Re: Getting deeper small-cap value exposure in taxable is almost free

Post by Doc » Tue Aug 13, 2019 7:00 am

Cantrip wrote:
Tue Aug 13, 2019 3:58 am
I would prefer to use VSIAX as it is a mutual fund. It also has a much lower yearly turnover and about the twice the number of stocks reducing the chance of negative alpha. But the greater tax efficiency with using a smaller amount of VIOV and a greater amount of the total market fund is enticing.
VSIAX is not very small when compared to the S&P or Russell equivalents.
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