Does international small cap matter?

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hungrywave
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Does international small cap matter?

Post by hungrywave » Sat Apr 13, 2019 8:34 pm

Our current portfolio includes Fidelity Zero International Index Fund (FZILX) and Fidelity Emerging Markets Index Fund (FPADX). I was hoping these would be similar to their cousin Vanguard indexes but it seems they differ by leaving out small caps.

I am torn between simplicity and wanting efficiency. Does this matter for long term investing? Should I do anything to get small cap exposure (eg add a Vanguard fund)?

stan1
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Re: Does international small cap matter?

Post by stan1 » Sat Apr 13, 2019 8:59 pm

The one word answer: no

The longer answer: If you want international small to potentially make a difference you'd want to hold it at 10% of your portfolio. Adding under 5% at market capitalization weight won't have an impact plus or minus. There's a small group here whose primary international holdings are emerging markets and small cap (not developed large). I would have chosen total international but since you already have the large cap developed and emerging markets I wouldn't bother with a small sliver of international small.

letsgobobby
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Re: Does international small cap matter?

Post by letsgobobby » Sat Apr 13, 2019 9:40 pm

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Last edited by letsgobobby on Thu Apr 18, 2019 12:11 am, edited 1 time in total.

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nisiprius
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Re: Does international small cap matter?

Post by nisiprius » Sun Apr 14, 2019 9:37 am

How much has it mattered in the past?

VFWIX, Vanguard FTSE All-World Ex-US, without small-caps, blue.
VGTSX, Vanguard Total International Stock index, with small-caps--and a skosh more midcaps than VFWIX--orange.

Source

Image

Image

Basically, small-caps don't form a large enough part of the market, international or US, to move the needle much. (More for the US, but still not much). In US stocks, I switched some years ago from the Vanguard 500 index fund to the Vanguard Total Stock Market index fund, simply because my goal had always been to own the market, and given the same expense ratio, Total Stock was a more faithful realization of that goals.

People who believe that the small-cap premium exists and is important to have, almost always want much more of it than the amount that the market naturally contains, so--regardless of whether the core holding is total market or large-caps only--they need to add a separate small-cap fund. If you've decided to add a small-cap fund, having a few tablespoons of small-caps in the core holding doesn't do anything but make the calculations harder. Also, the people who have the strongest feelings about tilting a portfolio generally suggest, not just small-caps, but small-cap value. That is to say, they want to see the extra weight all in the bottom left corner, not spread all the way across the bottom row like the "2-2-2" in VGTSX.
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averagedude
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Re: Does international small cap matter?

Post by averagedude » Sun Apr 14, 2019 10:06 am

I personally have a 25% tilt to International small caps in my portfolio and i estimate that it will give me a gain or loss annualized return of 0.25% over the long haul. So the answer to your question is no, especially if you are not in your 20s or 30s. I use (VFSAX), the Vanguard FTSE all world ex US small cap fund.

FireProof
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Re: Does international small cap matter?

Post by FireProof » Sun Apr 14, 2019 10:13 am

They might provide a valuable tilt, because they are the one thing that is still a little less correlated. But as market weight, no, it's just too little to matter.

Trader Joe
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Re: Does international small cap matter?

Post by Trader Joe » Sun Apr 14, 2019 10:46 am

hungrywave wrote:
Sat Apr 13, 2019 8:34 pm
Our current portfolio includes Fidelity Zero International Index Fund (FZILX) and Fidelity Emerging Markets Index Fund (FPADX). I was hoping these would be similar to their cousin Vanguard indexes but it seems they differ by leaving out small caps.

I am torn between simplicity and wanting efficiency. Does this matter for long term investing? Should I do anything to get small cap exposure (eg add a Vanguard fund)?
No it does not matter.

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SimpleGift
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Re: Does international small cap matter?

Post by SimpleGift » Sun Apr 14, 2019 10:48 am

hungrywave wrote:
Sat Apr 13, 2019 8:34 pm
I am torn between simplicity and wanting efficiency. Does this matter for long term investing? Should I do anything to get small cap exposure (eg add a Vanguard fund)?
I'm one of those investors with a substantial tilt to small caps in international stocks, using Vanguard's FTSE All-World ex-US Small Cap Index Fund (VFSVX) ever since it's inception. Though this fund is about half mid-caps and half small caps, it seems an adequate representation of the asset class.
  • Blue is Vanguard FTSE All-World ex-US Small Cap Index Fund - VFSVX (small and mid caps)
    Orange is Vanguard Total International Stock Index Fund - VGTSX (virtually no small caps)

    Image
    Source: Morningstar
Fortunately, the fund has provided a small cap return premium over the ten years of its existence — but no guarantees.
Last edited by SimpleGift on Sun Apr 14, 2019 10:59 am, edited 3 times in total.

Triple digit golfer
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Re: Does international small cap matter?

Post by Triple digit golfer » Sun Apr 14, 2019 10:55 am

What I believe OP is asking is not whether to tilt or not or whether tilting matters, but whether a total international index vs. a large cap international index (say VTIAX vs. VFWAX) will matter much.

If that is the case, then the answer is no.

garlandwhizzer
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Re: Does international small cap matter?

Post by garlandwhizzer » Sun Apr 14, 2019 1:15 pm

50% of my INTL exposure is in SC, substantially overweighted relative to cap weighted indexes. Reasons: First, better diversification relative to US TSM which is dominated by US LC and plays in the same global markets as INTL LC. INTL SC tends to play not in global markets but in their home country markets which provides increased diversification. Second, I expect INTL SC to produce higher long term returns than INTL LC. The fact that many investors shy away from the perceived increased risk of SC INTL creates a premium. I am not convinced that factor investing is a clear winner in the highly efficient US markets, but I do believe that factors like SCV are likely to work in the less efficient, less professionally scrutinized, and less liquid INTL markets over the long term.

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Doc
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Re: Does international small cap matter?

Post by Doc » Sun Apr 14, 2019 2:55 pm

garlandwhizzer wrote:
Sun Apr 14, 2019 1:15 pm
50% of my INTL exposure is in SC, substantially overweighted relative to cap weighted indexes. Reasons: First, better diversification relative to US TSM which is dominated by US LC and plays in the same global markets as INTL LC. INTL SC tends to play not in global markets but in their home country markets which provides increased diversification.
Agree with the foreign small cap overweight. Large US and large foreign are both dominated by multinationals and you do not get much diversification by substituting or overweighting one for the other.

As far as outperformance of INTL SC vs INTL LC - who knows.
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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nisiprius
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Re: Does international small cap matter?

Post by nisiprius » Sun Apr 14, 2019 7:19 pm

Hungrywave, there are two separate discussions going on here. Let me try to summarize.

1) The difference between two international index funds, such as VFWIX and VGTSX, whose main difference is that one of them lacks small-caps, is tiny. There's every reason to expect the difference between FZILX and VGTSX to be tiny. If you would be happy holding just VGTSX as your only foreign stock fund, then you should be happy holding only FZILX.

2) Many posters in this thread (not I, but many) feel strongly that most investors would benefit from having a considerable overweight in international small caps. These posters would not be happy holding any of these three funds--VFWIX, VGTSX, FZILX--as their only international stock fund. Whichever one is chosen, they would advocate adding a second international small-cap fund as well. They would advocate doing this whether or not the first fund lacks small-caps (VFWIX, FZILX), or has the small amount of them contained in VGTSX.

So, if you don't want a small-cap overweight, either VGTSX by itself or FZILX by itself, the difference between them doesn't matter.

But if you do want a small-cap overweight, then, VGTSX + an international small-cap fund, or FZILX + an international small-cap fund. Again, the difference between VGTSX and FZILX as the main fund doesn't matter. If you are serious about wanting small-cap exposure you almost certainly want much more than you would get in VGTSX by itself. So, regardless of whether you have VGTSX or FZILX, either way, you would still need an additional international small-cap fund to give you the desired overweight.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Topic Author
hungrywave
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Re: Does international small cap matter?

Post by hungrywave » Sun Apr 14, 2019 7:35 pm

nisiprius wrote:
Sun Apr 14, 2019 7:19 pm
Many posters in this thread (not I, but many) feel strongly that most investors would benefit from having a considerable overweight in international small caps.
This is an amazing summary!

May I ask why you do not feel strongly about international small caps? And do you have a similar position on US small caps?

NYCwriter
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Re: Does international small cap matter?

Post by NYCwriter » Sun Apr 14, 2019 9:01 pm

I think striving for simplicity until necessary is always best.

I do hold US small cap, so I'm guilty as charged. But because my 457b uses a low-cost VG Primecap mutual fund (low cost index funds aren't available) and my Roth has a dividend fund, I'm skewed toward US large cap even with Total as a core holding in taxable.

I own VEA/VWO but within that 17-20% allocation I'm less unbalanced.

I haven't read all the arguments on volatility versus outperformance. I think you accept the possibility of both with small caps.

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Dialectical Investor
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Re: Does international small cap matter?

Post by Dialectical Investor » Sun Apr 14, 2019 9:07 pm

NYCwriter wrote:
Sun Apr 14, 2019 9:01 pm
I think striving for simplicity until necessary is always best.

I do hold US small cap, so I'm guilty as charged.
No, you're not guilty. As simple as possible, if you want to overweight small cap stocks using an index fund, means, in all likelihood, including an additional stock fund. The non-simple thing to do would be to hold three or four small-cap stock funds, or to hold 100 individual small-cap stocks. Then you would be guilty.

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