Is Vanguard Small Cap Index really small cap?

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birdsgears
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Is Vanguard Small Cap Index really small cap?

Post by birdsgears » Mon Jun 11, 2018 8:34 pm

According to Morningstar portfolio analysis, Vanguard Small Cap index (naesx) is roughly, 65% mid cap and 35% small cap. Looks like it is weighted significantly towards mid cap. Am I missing something obvious? I am currently reallocating my portfolio and the ratio of mid cap and small cap allocation in this fund has definitely changed according to Morningstar, and this is important to my reallocation. thanks for any responses.
anders

stlutz
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Re: Is Vanguard Small Cap Index really small cap?

Post by stlutz » Mon Jun 11, 2018 8:49 pm

There is no one true definition of the word "Smallcap". The Vanguard fund defines it as the smallest 15% of the market by market cap (if I'm remembering correctly).

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Taylor Larimore
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Re: Is Vanguard Small Cap Index really small cap?

Post by Taylor Larimore » Mon Jun 11, 2018 8:58 pm

birdsgears wrote:
Mon Jun 11, 2018 8:34 pm
According to Morningstar portfolio analysis, Vanguard Small Cap index (naesx) is roughly, 65% mid cap and 35% small cap. Looks like it is weighted significantly towards mid cap. Am I missing something obvious? I am currently reallocating my portfolio and the ratio of mid cap and small cap allocation in this fund has definitely changed according to Morningstar, and this is important to my reallocation. thanks for any responses.
birdsgears:

The Vanguard Small Cap Index Fund (NAESX) benchmark is the CRSP US Small Cap Index which tracks "the bottom 2%-15% of the investable market capitalization."

https://investor.vanguard.com/mutual-fu ... olio/naesx

Best wishes
Taylor
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johan851
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Re: Is Vanguard Small Cap Index really small cap?

Post by johan851 » Mon Jun 11, 2018 9:16 pm

CRSP has a nice page explaining their approach here.

http://www.crsp.com/indexes-pages/key-c ... benchmarks

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Re: Is Vanguard Small Cap Index really small cap?

Post by vineviz » Mon Jun 11, 2018 9:48 pm

Vanguard Small Cap index (NAESX) has noticeably less exposure to small caps than their best ETFs, like Vanguard S&P Small-Cap 600 ETF (VIOO) or Russell 2000 ETF (VTWO).

If you want efficient exposure to small-cap stocks and can use ETFs instead of mutual funds, I'd avoid NAESX. It's not a bad fund, but it's not a solidly small cap fund.

Both of the ETFs I mentioned above are available with with a value component too: Vanguard S&P Small-Cap 600 Value ETF (VIOV) and Vanguard Russell 2000 Value ETF (VTWV).
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Is Vanguard Small Cap Index really small cap?

Post by david1082b » Mon Jun 11, 2018 10:34 pm

If you want easy access to smaller stocks, the small 600 pure value is only 1.67% midcap according to M* http://portfolios.morningstar.com/fund/ ... ture=en-US

birdsgears
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Re: Is Vanguard Small Cap Index really small cap?

Post by birdsgears » Tue Jun 12, 2018 10:21 am

more to my liking but without the value emphasis. thanks.
anders

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Re: Is Vanguard Small Cap Index really small cap?

Post by birdsgears » Tue Jun 12, 2018 10:39 am

Taylor,
thanks, sounds like the Vanguard small cap is really a small to mid in the older definition and I should allocate accordingly, meaning I stop using the Vanguard Mid-cap Index to achieve the allocations to large, medium, and small that I want for domestics. I will move to a combination of the Vanguard 500 Stock Index and Small cap index. Works for me.
anders

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Re: Is Vanguard Small Cap Index really small cap?

Post by MotoTrojan » Tue Jun 12, 2018 10:43 am

birdsgears wrote:
Tue Jun 12, 2018 10:39 am
Taylor,
thanks, sounds like the Vanguard small cap is really a small to mid in the older definition and I should allocate accordingly, meaning I stop using the Vanguard Mid-cap Index to achieve the allocations to large, medium, and small that I want for domestics. I will move to a combination of the Vanguard 500 Stock Index and Small cap index. Works for me.
Good plan. Mid-cap CRSP doesn’t add much. I personally prefer the deeper small premium of the S&P600 (value too) but you have the right idea, simplify :).

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Re: Is Vanguard Small Cap Index really small cap?

Post by nedsaid » Tue Jun 12, 2018 11:39 am

stlutz wrote:
Mon Jun 11, 2018 8:49 pm
There is no one true definition of the word "Smallcap". The Vanguard fund defines it as the smallest 15% of the market by market cap (if I'm remembering correctly).
Well, sometimes close enough is close enough. Mid-Caps perform in a similar fashion to Small-Caps, tend to have a little less return with a little less volatility. Many feel that Mid-Caps are the "sweet spot" of the stock market. I would not obsess over this.
A fool and his money are good for business.

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Re: Is Vanguard Small Cap Index really small cap?

Post by dcabler » Tue Jun 12, 2018 11:49 am

nedsaid wrote:
Tue Jun 12, 2018 11:39 am
stlutz wrote:
Mon Jun 11, 2018 8:49 pm
There is no one true definition of the word "Smallcap". The Vanguard fund defines it as the smallest 15% of the market by market cap (if I'm remembering correctly).
Well, sometimes close enough is close enough. Mid-Caps perform in a similar fashion to Small-Caps, tend to have a little less return with a little less volatility. Many feel that Mid-Caps are the "sweet spot" of the stock market. I would not obsess over this.
+1 on this, which is why I landed in Mid-Cap land a while back.... Even on Midcaps there is no single definition. And with M* having moved their breakpoints around, it looks like lots of formerly small is now leaking into mid and what was formerly mid is leaking more into large. I tend instead to run FF regressions on portfoliovisualizer to at least get a relative feel for small-ness and valuey-ness these days....

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Re: Is Vanguard Small Cap Index really small cap?

Post by nedsaid » Tue Jun 12, 2018 12:06 pm

dcabler wrote:
Tue Jun 12, 2018 11:49 am
nedsaid wrote:
Tue Jun 12, 2018 11:39 am
stlutz wrote:
Mon Jun 11, 2018 8:49 pm
There is no one true definition of the word "Smallcap". The Vanguard fund defines it as the smallest 15% of the market by market cap (if I'm remembering correctly).
Well, sometimes close enough is close enough. Mid-Caps perform in a similar fashion to Small-Caps, tend to have a little less return with a little less volatility. Many feel that Mid-Caps are the "sweet spot" of the stock market. I would not obsess over this.
+1 on this, which is why I landed in Mid-Cap land a while back.... Even on Midcaps there is no single definition. And with M* having moved their breakpoints around, it looks like lots of formerly small is now leaking into mid and what was formerly mid is leaking more into large. I tend instead to run FF regressions on portfoliovisualizer to at least get a relative feel for small-ness and valuey-ness these days....
Fill in the blank: ________ is in the eye of the beholder. We like to believe that everything is neat and precise in the investing world but it just isn't so. Definitions of such things as Small-Cap and Value are slippery. For example, Morningstar defines Small-Cap as the bottom 9% of stocks by market cap whereas CRSP has a 15% definition. As far as Value, there are at least a couple major schools of thought regarding Value. There is the academic definition and the intrinsic value definition as given by disciples of Benjamin Graham. Close enough is close enough.
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Re: Is Vanguard Small Cap Index really small cap?

Post by vineviz » Tue Jun 12, 2018 12:31 pm

nedsaid wrote:
Tue Jun 12, 2018 11:39 am
Well, sometimes close enough is close enough. Mid-Caps perform in a similar fashion to Small-Caps, tend to have a little less return with a little less volatility. Many feel that Mid-Caps are the "sweet spot" of the stock market. I would not obsess over this.
Although most of the benefit of small-cap investing comes from avoiding the top two deciles of investable stocks, that effectively means that the small cap premium happens most strongly in stocks with market caps under $2 billion.

The median market cap of NAESX is more than twice that, which is why the S&P 600-based funds (like VIOO) are so much more exposed to the size premium.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Is Vanguard Small Cap Index really small cap?

Post by Doc » Tue Jun 12, 2018 12:41 pm

nedsaid wrote:
Tue Jun 12, 2018 11:39 am
Well, sometimes close enough is close enough. Mid-Caps perform in a similar fashion to Small-Caps, tend to have a little less return with a little less volatility. Many feel that Mid-Caps are the "sweet spot" of the stock market. I would not obsess over this.
Re: "the sweet spot"

Not according to Larry Swedroe and Kevin Grogan. See many references to "Reducing the Risk of Black Swans".

The gist of the argument is that by going very small and valuey you increase returns but increase risk. Then by modifying your AA by adding more bonds you get your risk back to where your started but maintain the yield advantage. You reduce the "tail" risk in the distribution both plus and minus.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Re: Is Vanguard Small Cap Index really small cap?

Post by WhiteMaxima » Tue Jun 12, 2018 12:44 pm

Vanguard Small Cap Tax managed fund. I like small cap index fund. Less covered. More growth potential.

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Re: Is Vanguard Small Cap Index really small cap?

Post by johan851 » Tue Jun 12, 2018 1:36 pm

The median market cap of NAESX is more than twice that, which is why the S&P 600-based funds (like VIOO) are so much more exposed to the size premium.
It's also worth noting that due to the cap weighted nature of these indexes, most of your invested dollars are steered towards the larger companies. Even though the CRSP small cap index goes pretty small, the biggest few companies tend to dominate the index. Just like you see with total market indices.

Vanguard small cap, per CRSP's illustration, has both larger and smaller companies compared to the S&P 600 index. Cap weighting results in more mid-cap exposure. It might match everyone's expectations more closely to describe NAESX as "non large cap".

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Re: Is Vanguard Small Cap Index really small cap?

Post by nedsaid » Tue Jun 12, 2018 1:44 pm

vineviz wrote:
Tue Jun 12, 2018 12:31 pm
nedsaid wrote:
Tue Jun 12, 2018 11:39 am
Well, sometimes close enough is close enough. Mid-Caps perform in a similar fashion to Small-Caps, tend to have a little less return with a little less volatility. Many feel that Mid-Caps are the "sweet spot" of the stock market. I would not obsess over this.
Although most of the benefit of small-cap investing comes from avoiding the top two deciles of investable stocks, that effectively means that the small cap premium happens most strongly in stocks with market caps under $2 billion.

The median market cap of NAESX is more than twice that, which is why the S&P 600-based funds (like VIOO) are so much more exposed to the size premium.
I own an ETF based on the S&P 600 Small-Cap Index and have been very pleased with it. I also own a Micro-Cap Index EFT and though the performance has been okay, I have been somewhat disappointed with it. Morningstar says that I may as well have been in the Vanguard Small-Cap Index. Smaller is not always better. Front running was a big problem with the Micro-Cap Index ETF. Oh well. Also, as you go smaller and smaller with market cap, liquidity gets to be an issue. Thus you see a lot of the more liquid Mid-Caps in Small-Cap funds.
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Re: Is Vanguard Small Cap Index really small cap?

Post by nedsaid » Tue Jun 12, 2018 1:48 pm

Doc wrote:
Tue Jun 12, 2018 12:41 pm
nedsaid wrote:
Tue Jun 12, 2018 11:39 am
Well, sometimes close enough is close enough. Mid-Caps perform in a similar fashion to Small-Caps, tend to have a little less return with a little less volatility. Many feel that Mid-Caps are the "sweet spot" of the stock market. I would not obsess over this.
Re: "the sweet spot"

Not according to Larry Swedroe and Kevin Grogan. See many references to "Reducing the Risk of Black Swans".

The gist of the argument is that by going very small and valuey you increase returns but increase risk. Then by modifying your AA by adding more bonds you get your risk back to where your started but maintain the yield advantage. You reduce the "tail" risk in the distribution both plus and minus.
I don't know, Mel Lindauer likes them. I have too.

Do understand the theory behind Small/Value tilts. Mostly I have done this with Vanguard Small-Cap Value Index ETF which has a lot of Mid-Caps and is not too valuey. But so far it has been good enough. These type of funds are not easy too find, the ones you find have their flaws. Many have expense ratios higher than what many Bogleheads will tolerate. Don't have access to Dimensional Fund Advisors though I could probably get a Bridgeway fund.
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Re: Is Vanguard Small Cap Index really small cap?

Post by Doc » Tue Jun 12, 2018 1:59 pm

nedsaid wrote:
Tue Jun 12, 2018 1:48 pm
These type of funds are not easy too find, the ones you find have their flaws. Many have expense ratios higher than what many Bogleheads will tolerate.
Yep.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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Re: Is Vanguard Small Cap Index really small cap?

Post by nedsaid » Tue Jun 12, 2018 2:08 pm

Doc wrote:
Tue Jun 12, 2018 1:59 pm
nedsaid wrote:
Tue Jun 12, 2018 1:48 pm
These type of funds are not easy too find, the ones you find have their flaws. Many have expense ratios higher than what many Bogleheads will tolerate.
Yep.
The tilting strategies are easier in theory than they are in practice. This is true of other investment strategies as well. One reason a lot of folks have thrown in the towel and just index. I guess I am an eternal optimist.
A fool and his money are good for business.

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Re: Is Vanguard Small Cap Index really small cap?

Post by Doc » Tue Jun 12, 2018 2:38 pm

nedsaid wrote:
Tue Jun 12, 2018 2:08 pm
The tilting strategies are easier in theory than they are in practice. This is true of other investment strategies as well. One reason a lot of folks have thrown in the towel and just index. I guess I am an eternal optimist.
How about an ETF?

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Re: Is Vanguard Small Cap Index really small cap?

Post by jeffyscott » Tue Jun 12, 2018 2:42 pm

johan851 wrote:
Tue Jun 12, 2018 1:36 pm
It's also worth noting that due to the cap weighted nature of these indexes, most of your invested dollars are steered towards the larger companies. Even though the CRSP small cap index goes pretty small, the biggest few companies tend to dominate the index. Just like you see with total market indices.
Yes, total stock market puts $1 of every $8 in just 5 stocks. And, per m*, nearly 50% is not just large, but giant cap.
press on, regardless - John C. Bogle

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Re: Is Vanguard Small Cap Index really small cap?

Post by vineviz » Tue Jun 12, 2018 3:40 pm

nedsaid wrote:
Tue Jun 12, 2018 2:08 pm
The tilting strategies are easier in theory than they are in practice. This is true of other investment strategies as well. One reason a lot of folks have thrown in the towel and just index. I guess I am an eternal optimist.
If someone is willing to use ETFs, it doesn’t seem like it would be hard. Equal portions in VTI, VIOV, VXUS, and VGLT would be a killer portfolio.

Or even more powerful:

25.00% Vanguard Long-Term Treasury ETF (VGLT)
25.00% Vanguard S&P Small-Cap 600 Value ETF (VIOV)
25.00% Vanguard Russell 1000 Value ETF (VONV)
25.00% iShares Edge MSCI Intl Value Factor ETF (IVLU)
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Is Vanguard Small Cap Index really small cap?

Post by Electron » Tue Jun 12, 2018 3:53 pm

You can also see the differences in the Median Market Cap reported in the Vanguard Annual Reports.

Vanguard Small-Cap Index Fund: Median Market Cap = $4.1B

Vanguard Tax-Managed Small-Cap Fund (S&P 600 Index): Median Market Cap = $1.8B
Electron

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Re: Is Vanguard Small Cap Index really small cap?

Post by brokendirtdart » Tue Jun 12, 2018 4:30 pm

WhiteMaxima wrote:
Tue Jun 12, 2018 12:44 pm
Vanguard Small Cap Tax managed fund. I like small cap index fund. Less covered. More growth potential.
I recently discovered and purchased this fund.

It's largest holding of Vanguard Real Estate ETF is a bit "odd" and appears to be off the benchmark.

https://investor.vanguard.com/mutual-fu ... o-holdings

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Re: Is Vanguard Small Cap Index really small cap?

Post by nedsaid » Tue Jun 12, 2018 5:11 pm

Doc wrote:
Tue Jun 12, 2018 2:38 pm
nedsaid wrote:
Tue Jun 12, 2018 2:08 pm
The tilting strategies are easier in theory than they are in practice. This is true of other investment strategies as well. One reason a lot of folks have thrown in the towel and just index. I guess I am an eternal optimist.
How about an ETF?

Image

e/r 0.25% :D
DFA US Small-Cap Value I (DFSVX) has a stylebox like this:

00 00 00
11 06 03
37 32 11

Expense ratio: 0.52%. So whatever ETF you are citing looks pretty good.
A fool and his money are good for business.

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Re: Is Vanguard Small Cap Index really small cap?

Post by triceratop » Tue Jun 12, 2018 5:13 pm

nedsaid wrote:
Tue Jun 12, 2018 5:11 pm
Doc wrote:
Tue Jun 12, 2018 2:38 pm
nedsaid wrote:
Tue Jun 12, 2018 2:08 pm
The tilting strategies are easier in theory than they are in practice. This is true of other investment strategies as well. One reason a lot of folks have thrown in the towel and just index. I guess I am an eternal optimist.
How about an ETF?

Image

e/r 0.25% :D
DFA US Small-Cap Value I (DFSVX) has a stylebox like this:

00 00 00
11 06 03
37 32 11

Expense ratio: 0.52%. So whatever ETF you are citing looks pretty good.
Its IJS/VIOV -- S&P600 Value ETF. Oh and VIOV is available at an expense of 0.20%.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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nedsaid
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Re: Is Vanguard Small Cap Index really small cap?

Post by nedsaid » Tue Jun 12, 2018 5:15 pm

vineviz wrote:
Tue Jun 12, 2018 3:40 pm
nedsaid wrote:
Tue Jun 12, 2018 2:08 pm
The tilting strategies are easier in theory than they are in practice. This is true of other investment strategies as well. One reason a lot of folks have thrown in the towel and just index. I guess I am an eternal optimist.
If someone is willing to use ETFs, it doesn’t seem like it would be hard. Equal portions in VTI, VIOV, VXUS, and VGLT would be a killer portfolio.

Or even more powerful:

25.00% Vanguard Long-Term Treasury ETF (VGLT)
25.00% Vanguard S&P Small-Cap 600 Value ETF (VIOV)
25.00% Vanguard Russell 1000 Value ETF (VONV)
25.00% iShares Edge MSCI Intl Value Factor ETF (IVLU)
Well, when a chosen fund doesn't perform as expected, folks always say that it had too many mid-caps and wasn't valuey enough. I bought Vanguard Small-Cap Value Index ETF before I read criticisms of it. Last I looked, the Vanguard product, despite its shortcomings, had been outperforming the DFA Small-Cap Value fund. Not surprising as larger, growthier stocks have been outperforming Value since the 2008-2009 financial crisis. So I did it all wrong and then found out I wasn't so wrong after all. :wink:
A fool and his money are good for business.

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Re: Is Vanguard Small Cap Index really small cap?

Post by nedsaid » Tue Jun 12, 2018 5:20 pm

triceratop wrote:
Tue Jun 12, 2018 5:13 pm
nedsaid wrote:
Tue Jun 12, 2018 5:11 pm
Doc wrote:
Tue Jun 12, 2018 2:38 pm
nedsaid wrote:
Tue Jun 12, 2018 2:08 pm
The tilting strategies are easier in theory than they are in practice. This is true of other investment strategies as well. One reason a lot of folks have thrown in the towel and just index. I guess I am an eternal optimist.
How about an ETF?

Image

e/r 0.25% :D
DFA US Small-Cap Value I (DFSVX) has a stylebox like this:

00 00 00
11 06 03
37 32 11

Expense ratio: 0.52%. So whatever ETF you are citing looks pretty good.
Its IJS/VIOV -- S&P600 Value ETF. Oh and VIOV is available at an expense of 0.20%.
The S&P Indexes are really good. I wish I had purchased that rather than the Vanguard Small-Cap Value Index ETF but I haven't checked to see which one actually has done better. I own the S&P 600 Small-Cap Index ETF and it has been a great investment, I suspect the Value version of the S&P 600 has done really well too. Anywho, I can blame it on Paul Merriman and his company which recommended the Vanguard Small-Cap Value Index ETF. Oh well. I will just blame the choice of indexes.

Edit: Just looked it up on Morningstar, IJS has outperformed VBR. Confirms my suspicions.
A fool and his money are good for business.

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Re: Is Vanguard Small Cap Index really small cap?

Post by WhiteMaxima » Tue Jun 12, 2018 5:40 pm

Over the years, small cap grow to mid cap and so do Vanguard small cap.

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Re: Is Vanguard Small Cap Index really small cap?

Post by 3funder » Tue Jun 12, 2018 5:46 pm

nedsaid wrote:
Tue Jun 12, 2018 11:39 am
stlutz wrote:
Mon Jun 11, 2018 8:49 pm
There is no one true definition of the word "Smallcap". The Vanguard fund defines it as the smallest 15% of the market by market cap (if I'm remembering correctly).
Well, sometimes close enough is close enough. Mid-Caps perform in a similar fashion to Small-Caps, tend to have a little less return with a little less volatility. Many feel that Mid-Caps are the "sweet spot" of the stock market. I would not obsess over this.
+1. Couldn't have said it any better myself.

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Re: Is Vanguard Small Cap Index really small cap?

Post by WhiteMaxima » Tue Jun 12, 2018 6:06 pm

Vanguard Extend Market Index (a blend of mid and small cap)?

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Re: Is Vanguard Small Cap Index really small cap?

Post by Doc » Tue Jun 12, 2018 6:52 pm

triceratop wrote:
Tue Jun 12, 2018 5:13 pm
ts IJS/VIOV -- S&P600 Value ETF. Oh and VIOV is available at an expense of 0.20%.
VIOV average volume < 10k :(
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

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