Vanguard Value Index Mutual Fund Question

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dcarste
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Vanguard Value Index Mutual Fund Question

Post by dcarste » Fri Nov 24, 2017 1:48 pm

Has anyone done the actual research on how the Vanguard Value Indexes are created, meaning which companies are included in the Value Index? I see many wanting to 'tilt' towards value based on past 'evidence' it produces better returns. Here is an overview of how it is constructed in more simplistic terms:

FORWARD PE (a fake pe guessing what it will be in the future) weighted 66% and 33% weight on company's Historical PE, used as Value metric 1. that value metric is then weighted with the companies price to book ratio to complete to a single metric we will call X.

The second metric, we will call Y. Y is calculated by looking at the companies Dividend to price ratio (irrelevant valuation or sceptic at best), and it's Price to Sales ratio). Y is weighted 66% score of price to sales and 33% dividend to price.

The index then includes companies based on a 66% weighting of their 'X' score above (forward PE and trailing PE), and 33% weight of Y (price to sales and price to dividends).

This is simplistic but exactly in reality, see page 33 on included link if you are a math geek.

Buyer beware tilting towards value, as value is very subjective, what is a 'value' company? Amazon bought last year because it doubled (or whatever it did)? Or Target with a low forward PE and low price to sales? Value is in hindsight in my humble opinion. One decent thing about blending the Value index and S&P500 index is making sure not too much of your money gets concentrated on 'hot' stocks (i.e. the 'currently' highest market value company).

Vanguard Growth Index calculation is also included around page 33 too in PDF link below.

I see no reason whatsoever to tilt, this is nothing but a cheap active smart beta fund, just like small value, small growth index. It could be smart beta, or DUMB beta, as jack bogle would say - you only find out in hindsight. Thoughts or any appreciation thrown my way for digging and spelling out WHAT you are buying in these 'tilting' indexes (smart beta indexes no different than a smart BETA etf).

www.crsp.com/files/Equity-Indexes-Metho ... uide_0.pdf

KyleAAA
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Re: Vanguard Value Index Mutual Fund Question

Post by KyleAAA » Fri Nov 24, 2017 3:21 pm

The point with the value premium is that it isn’t sensitive to the exact definition of “value.” The fact that you can define value in any number of reasonable ways and it still persists is exactly why we have so much trust in it. Value being subjective is a feature, not a bug: it works either way.

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SimpleGift
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Re: Vanguard Value Index Mutual Fund Question

Post by SimpleGift » Fri Nov 24, 2017 3:41 pm

dcarste wrote:
Fri Nov 24, 2017 1:48 pm
Buyer beware tilting towards value, as value is very subjective, what is a 'value' company?
The definition of the growth and value factors does vary among index providers and research firms. For example, using Morningstar's style definitions, Vanguard's Total Stock Market Fund (VTMSX) will always be equally balanced between growth and value:
  • Image
But when analyzing VTMSX according to the Fama-French 2x3 size and value bucket definitions, it has predominately been a large growth fund over its history (in purple):
This is to not say that the definitions of growth and value are meaningless — it's just that they are subjective and one does need to read the fine print and be aware of how investing styles are defined by the various index providers and research firms.
Cordially, Todd

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nedsaid
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Re: Vanguard Value Index Mutual Fund Question

Post by nedsaid » Fri Nov 24, 2017 4:01 pm

SimpleGift wrote:
Fri Nov 24, 2017 3:41 pm
dcarste wrote:
Fri Nov 24, 2017 1:48 pm
Buyer beware tilting towards value, as value is very subjective, what is a 'value' company?
The definition of the growth and value factors does vary among index providers and research firms. For example, using Morningstar's style definitions, Vanguard's Total Stock Market Fund (VTMSX) will always be equally balanced between growth and value:
  • Image
But when analyzing VTMSX according to the Fama-French 2x3 size and value bucket definitions, it has predominately been a large growth fund over its history (in purple):
This is to not say that the definitions of growth and value are meaningless — it's just that they are subjective and one does need to read the fine print and be aware of how investing styles are defined by the various index providers and research firms.
Thank you for confirming that US Total Stock Market has predominately been a large growth fund. If just over 50% of Total Market's market cap is in just 100 stocks, how could it be otherwise?
A fool and his money are good for business.

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Taylor Larimore
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Re: Vanguard Value Index Mutual Fund Question

Post by Taylor Larimore » Fri Nov 24, 2017 4:09 pm

US Total Stock Market has predominately been a large growth fund.
Bogleheads:

There is something to be said for having most of our investments in the largest and most successful companies in the United States.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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TinkerPDX
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Re: Vanguard Value Index Mutual Fund Question

Post by TinkerPDX » Fri Nov 24, 2017 4:19 pm

dcarste wrote:
Fri Nov 24, 2017 1:48 pm
Has anyone done the actual research on how the Vanguard Value Indexes are created, meaning which companies are included in the Value Index? I see many wanting to 'tilt' towards value based on past 'evidence' it produces better returns. Here is an overview of how it is constructed in more simplistic terms:

FORWARD PE (a fake pe guessing what it will be in the future) weighted 66% and 33% weight on company's Historical PE, used as Value metric 1. that value metric is then weighted with the companies price to book ratio to complete to a single metric we will call X.

The second metric, we will call Y. Y is calculated by looking at the companies Dividend to price ratio (irrelevant valuation or sceptic at best), and it's Price to Sales ratio). Y is weighted 66% score of price to sales and 33% dividend to price.

The index then includes companies based on a 66% weighting of their 'X' score above (forward PE and trailing PE), and 33% weight of Y (price to sales and price to dividends).

This is simplistic but exactly in reality, see page 33 on included link if you are a math geek.

Buyer beware tilting towards value, as value is very subjective, what is a 'value' company? Amazon bought last year because it doubled (or whatever it did)? Or Target with a low forward PE and low price to sales? Value is in hindsight in my humble opinion. One decent thing about blending the Value index and S&P500 index is making sure not too much of your money gets concentrated on 'hot' stocks (i.e. the 'currently' highest market value company).

Vanguard Growth Index calculation is also included around page 33 too in PDF link below.

I see no reason whatsoever to tilt, this is nothing but a cheap active smart beta fund, just like small value, small growth index. It could be smart beta, or DUMB beta, as jack bogle would say - you only find out in hindsight. Thoughts or any appreciation thrown my way for digging and spelling out WHAT you are buying in these 'tilting' indexes (smart beta indexes no different than a smart BETA etf).

www.crsp.com/files/Equity-Indexes-Metho ... uide_0.pdf
Appreciate you sharing the information.

Sounds imperfect, but as good a formulaic way as any to me, and I’ll stick with my value tilt.

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