Why do small cap funds have very high PE ratio?

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vu8
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Location: Columbus, Ohio

Why do small cap funds have very high PE ratio?

Post by vu8 » Sun Jul 15, 2018 5:55 pm

Hi there, both VXF and VB have more than 40 PE ratio! Is this normal comparing to the S&P 500's 23 PE ratio?

drk
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Re: Why do small cap funds have very high PE ratio?

Post by drk » Sun Jul 15, 2018 5:57 pm

You need to cite your sources. I see 19.4 for VXF and 19.9 for VB.

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FIREchief
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Re: Why do small cap funds have very high PE ratio?

Post by FIREchief » Sun Jul 15, 2018 6:34 pm

Why do you think PE, as a stand alone metric for a specific stock, even matters? (or, for that matter, for the entire market; but that's a whole different conversation)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

asif408
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Re: Why do small cap funds have very high PE ratio?

Post by asif408 » Sun Jul 15, 2018 9:27 pm

Usually P/Es are high after a segment of the market has done well. In the last 15 years, small caps have had almost double the return of large caps. So that should explain a good chunk of the difference.

It's hard to give you an idea of what is normal because you didn't specify the type of P/E ratio you are looking at. Is it trailing earnings, forward earnings, cyclically adjusted earnings, earnings before taxes, interest, depreciation, and amoritization (EBITDA), etc.?

averagedude
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Re: Why do small cap funds have very high PE ratio?

Post by averagedude » Sun Jul 15, 2018 9:41 pm

Looking at Vanguard, i see where the small cap blend fund has a trailing PE of 19.9 versus the 500 index of 21.0. If your sources are correct, i would think that the reason PE's are higher for small companies is because they have higher growth potential than larger companies.

fennewaldaj
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Re: Why do small cap funds have very high PE ratio?

Post by fennewaldaj » Sun Jul 15, 2018 9:47 pm

My understanding is that it is due to more companies with negative earnings. Companies with negative earnings are less common in the large cap space. A lot of the common sites like morningstar don't really account for that. ETF.com does as far as I know. The trailing PE for the S=P 600 value per etf.com is almost 100 while the forward PE per morningstar is 16.48.

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