I think every new investment proposal should receive scrutiny, and investment decisions should never be guided by immediate excitement.jhfenton wrote: ↑Fri Apr 27, 2018 7:16 amIf you actually want "value" exposure, the new VFVA is a more concentrated take on it.comeinvest wrote: ↑Fri Apr 27, 2018 12:55 amWhat precisely is a tangible benefit of the new VFVA (Vanguard US Value Factor ETF) vs. the old VBR (small cap value), mid cap value, large cap value, etc.?
The expense ratio of VFVA is about twice that of the old ETFs.
I gather that VFVA does not track an index, but on the other hand the relevant indexes (CRSP US Small Cap Value Index, etc.) are constructed to minimize turnover too, so I'm curious if there is a tangible benefit here.
Also, VFVA seems to follow a strict, rules based approach too. I'm not sure where exactly the "active" part comes into play, or if "active" is just Vanguard's terminology for "non-market cap" or "rules-based factor".
With the old ETFs, the investor has more control over the weighting of large/mid/small depending on individual preferences or overall portfolio.
Finally, I'm not sure if "deeper value" is necessarily a benefit. If deeper value was always better, as sometimes suggested in this forum, one could easily tweak the portfolio construction rules (weighting and cutoff numbers) to achieve arbitrary deep factor exposure, at no additional cost since the data and the computers are already there.
The CRSP value funds have fairly dilute value exposure for two main reasons: (1) They include 50% of the market by "value", so you are getting a lot of stocks with middling value characteristics. (2) They market cap weight the included stocks, potentially diluting the value exposure further.
I have no problem owning the CRSP funds. I own Vanguard Mid-Cap Value Index Admiral in my 401(k), and I have Vanguard Small-Cap Value Index Admiral in two of our retirement accounts. They offer a cheap and almost infinitely scalable mix of beta, value, and, for the mid and small funds, size factors. They have moderate tracking error to the popular indices people see on TV, so they may be easier for folks to hold on to.
Vanguard certainly could tweak the CRSP indexing rules to create "passive" funds with deeper value characteristics. They could limit the indices to 33% of the market by value and weight the holdings by the strength of their value characteristics rather than market cap.
At that point, though, if you simply gave the manager the discretion to determine when to rebalance the index, you'd essentially have the new "active" value factor ETF.
To be honest, if you aren't immediately excited by VFVA upon looking at its construction methodology and its portfolio characteristics, you shouldn't even consider it. It should not be sold to anyone. There is a reason they are marketing them as a tool for advisors.
... thanks for confirming the chracteristics of VFVA and the old value funds. I gather that the "deeper value" is the main benefit of VFVA, and that they implement what I understand is some sort of weighting by value (details undisclosed), which seems similar to RAFI's fundamental indexes. However, my questions that naturally arose are not answered yet:
(1) What EXACTLY (if any) is the "active" portion of the algorithm, or the capital allocation? If there is indeed an "active" portion beyond the quantitative algorithm, then why can't the "active" portfolio decisions not be formulated using rules and incorporated into the algo a priori? What would be an example of a scenario where the active manager would intervene and deviate from the rules based algo? How would typical psychological fallacies and biases of active management be avoided when deviating from the rules based algo on an "ad hoc" basis?
(2) What precisely is the justification of the twice as high expense ratio compared to the old value funds?
If it is the deeper value: Value cutoff numbers or weightings are just parameters to a simple computer algorithm, that should carry zero additional intellectual or computational cost. The data set with the corporate financials is already available. Fundamental style indexing (weighted by value, etc.) can be coded into a simple algorithm. Dynamic factor exposure depending on factor valuations can be coded into a simple algorithm and has been done by Research Affiliates.
If it is the additional "active" human management: What is the evidence that this adds value (expected risk-adjusted return) to the investor?
(3) The doctrine "deeper value = better" cannot be universal, because there is a natural upper limit to value tilt (and same for other factors). Drawbacks of extremely deep value could be either reduced diversification, or capacity of the strategy, or others. It would be easy to control the amount of value tilt by adjusting the parameters of the algorithm, at no cost; therefore I'm sure the degree of value tilt was deliberately chosen by the fund managers. I think that those who argue "the more valuey the better" and are constantly measuring and on the lookout for deeper value funds, would have to mention and quantify their optimal degree of value tilt at the same time, for this argument to make sense.