Small Cap Value heads Rejoice !!!

[MotoTrojan]

Latest Arnott interview (9 min): value's rebound could come with a vengeance https://www.youtube.com/watch?v=0YocJ4N8_2o

100% outperformance relative to growth over 5 years (as he notes after the Nifty-Fifty period) sure would be fun.

[Day9]

What do you think is more likely, another 2000-style tech crash, or the big tech companies dominating the market cap like in the olden days where a handful of railroad companies had a gigantic share of the market cap, or even older days where companies like the East India and South China Sea companies dominated? Imagine Facebook, Apple, Amazon, Google, and Microsoft together making up over 50% of the world market cap

That seems unlikely, but honestly so does a 2000-style tech crash. These companies are not pets.com.

[caklim00]

Anyone done much research on XSVM, the S&P600 Small Value w/ Momentum ETF?

https://www.invesco.com/us-rest/content ... dnsName=us

Fund has made several large index changes in last decade (see disclaimer) so ignore the backtest in the link above, but I saw a Bloomberg index going back a few decades and it smashed he S&P600 value and pure-value indices. Probably best to keep in tax-advantaged given the potential drastic index change (RAFI, pure value, dynamic small-cap, etc...).

Pretty concentrated with only 120 stocks ranking high on value and momentum, and then weighted on value score rather than market-cap (similar to Avantis).

I used to hold the old PXSV back when it was the RAFI SCV fund. There were a bunch of us that held it and then jumped ship when they switched to Russell 2000 Fundamental Pure Value or whatever they called it. At some point in time it switched again and then even switched ticker symbols to XSVM.

FWIW, altruistafa has it ranked #1 for US SCV: https://www.altruistfa.com/USsmallcapvaluefunds.htm
but RZV was #1 for them for many years.

[Robert T]

Anyone done much research on XSVM, the S&P600 Small Value w/ Momentum ETF?
https://www.invesco.com/us-rest/content ... dnsName=us

I did look at this recently. Unfortunately I only have access to the past 10 years of data from the S&P website - nevertheless that can be instructive (in a relative sense). Personally, I am not too enthusiastic (even through I do have a greater appreciation for momentum).

Concerns I have:

(i) Over the past 10 years it did not have a significant momentum load (even though it was non-negative). It did however have a slightly higher size and value load relative to the S&P600 Value Index.

(ii) To achieve this, it had to reduce its stock holding to about 120 stocks and increase turnover to 136%. If this is representative of future turnover and stock holdings it implies more limited capacity than S&P600 value. In comparison, I am even concerned about the long-term capacity of MTUM which has a similar number of stocks (125) and similar turnover (138), but the average market cap of companies in that fund is 162.67bn compared to XSVM’s 0.84bn average market cap. If AUM increases significantly the market impact from turnover will erode returns (not something accounted for in back-tests).

(iii) For an investor who wants exposure to both value and momentum in a small cap fund, then S&P600 Growth (IJT), despite it’s name, is still a better option - in my view. It has significant positive exposure to both value and momentum (although the loads to both are fairly low) and it has lower capacity constraints than XSVM (it has almost 3x number of stocks and half the turnover). Currently momentum is one of the sort criteria in S&P600 growth.

(iv) Finally, the fund has changed its underlying index 4 times in 10 years – it seems to be trying to find something that sticks (although the change from the RAFI underlying index was due to RAFI discontinuing their ‘style’ indices which perhaps had lower use/subscription than its core fundamental indexes). In any event, these frequent changes don’t instill confidence.

Annualized return / annualized SD: 8/2010-7/2020

• 10.8 / 21.2 = S&P SmallCap 600 High Momentum Value Index
  9.1 / 19.2 = S&P SmallCap 600 Value Index
  12.8 / 17.5 = S&P SmallCap 600 Growth Index

Robert
.

[MotoTrojan]

What do you think is more likely, another 2000-style tech crash, or the big tech companies dominating the market cap like in the olden days where a handful of railroad companies had a gigantic share of the market cap, or even older days where companies like the East India and South China Sea companies dominated? Imagine Facebook, Apple, Amazon, Google, and Microsoft together making up over 50% of the world market cap

That seems unlikely, but honestly so does a 2000-style tech crash. These companies are not pets.com.

Personally I expect something in the middle with localized popping of bubbly growth stocks (Tesla, Shopify, you know the drill) but the overall market will be more range-bound with mediocre returns over the next decade while smaller and less expensive stocks generate modest returns (4-5% real would be nice). Or maybe SCV goes on a double-digit tear while the market falls 50%, that would be fine too .

[fennewaldaj]

What do you think is more likely, another 2000-style tech crash, or the big tech companies dominating the market cap like in the olden days where a handful of railroad companies had a gigantic share of the market cap, or even older days where companies like the East India and South China Sea companies dominated? Imagine Facebook, Apple, Amazon, Google, and Microsoft together making up over 50% of the world market cap

That seems unlikely, but honestly so does a 2000-style tech crash. These companies are not pets.com.

I think the nifty fifty years are probably a closer comparison if anything. These are good companies for the most part but perhaps too much is being paid for them.

[Forester]

What do you think is more likely, another 2000-style tech crash, or the big tech companies dominating the market cap like in the olden days where a handful of railroad companies had a gigantic share of the market cap, or even older days where companies like the East India and South China Sea companies dominated? Imagine Facebook, Apple, Amazon, Google, and Microsoft together making up over 50% of the world market cap

That seems unlikely, but honestly so does a 2000-style tech crash. These companies are not pets.com.

The big tech companies will dominate their industries but the share prices will go sideways.

[LadyGeek]

The discussion is trending towards large cap. Please stay on-topic, which is small-cap value.

[MotoTrojan]

The discussion is trending towards large cap. Please stay on-topic, which is small-cap value.

So when do you all think we will regain the August highs?!?

[Day9]

Sorry I didn't mean to derail the conversation. I meant that for SCV to overperform, then it would probably need to do well relative to its antithesis Large Cap Growth. That could mean they both go down but LCG goes down a lot more. But I am torn because I do not see today's LCG companies as being like 1999-style Pets.com, and I can see them growing in market share.

fennewaldaj, I did not know about the fifty nifty stocks from that era. Thank you for sharing. That is a great comparison. Those who do not know history are destined to repeat it.

[langlands]

What do you think is more likely, another 2000-style tech crash, or the big tech companies dominating the market cap like in the olden days where a handful of railroad companies had a gigantic share of the market cap, or even older days where companies like the East India and South China Sea companies dominated? Imagine Facebook, Apple, Amazon, Google, and Microsoft together making up over 50% of the world market cap

That seems unlikely, but honestly so does a 2000-style tech crash. These companies are not pets.com.

Personally I expect something in the middle with localized popping of bubbly growth stocks (Tesla, Shopify, you know the drill) but the overall market will be more range-bound with mediocre returns over the next decade while smaller and less expensive stocks generate modest returns (4-5% real would be nice). Or maybe SCV goes on a double-digit tear while the market falls 50%, that would be fine too .

When you say that bubbly growth stocks will crash, is this a statement that the market is not efficient? Will SCV overperform because it is currently underpriced or because of a risk premium?

[MotoTrojan]

What do you think is more likely, another 2000-style tech crash, or the big tech companies dominating the market cap like in the olden days where a handful of railroad companies had a gigantic share of the market cap, or even older days where companies like the East India and South China Sea companies dominated? Imagine Facebook, Apple, Amazon, Google, and Microsoft together making up over 50% of the world market cap

That seems unlikely, but honestly so does a 2000-style tech crash. These companies are not pets.com.

Personally I expect something in the middle with localized popping of bubbly growth stocks (Tesla, Shopify, you know the drill) but the overall market will be more range-bound with mediocre returns over the next decade while smaller and less expensive stocks generate modest returns (4-5% real would be nice). Or maybe SCV goes on a double-digit tear while the market falls 50%, that would be fine too .

When you say that bubbly growth stocks will crash, is this a statement that the market is not efficient? Will SCV overperform because it is currently underpriced or because of a risk premium?

I personally believe that the value premium is due to both a risk and behavioral basis; as to the split, hard yo say. I do not believe the market is efficient (Tesla is all I have to say).

[acegolfer]

I personally believe that the value premium is due to both a risk and behavioral basis; as to the split, hard yo say. I do not believe the market is efficient (Tesla is all I have to say).

Can you elaborate on Tesla?

[MotoTrojan]

I personally believe that the value premium is due to both a risk and behavioral basis; as to the split, hard yo say. I do not believe the market is efficient (Tesla is all I have to say).

Can you elaborate on Tesla?

I do not believe it’s price is a sane representation of even the most bullish discount of future cash flows.

[acegolfer]

I personally believe that the value premium is due to both a risk and behavioral basis; as to the split, hard yo say. I do not believe the market is efficient (Tesla is all I have to say).

Can you elaborate on Tesla?

I do not believe it’s price is a sane representation of even the most bullish discount of future cash flows.

EMH doesn't mean everybody has to agree on Tesla price. You may think it's overpriced. Others may think it's underpriced. That is not an evidence against efficient market.

[langlands]

I personally believe that the value premium is due to both a risk and behavioral basis; as to the split, hard yo say. I do not believe the market is efficient (Tesla is all I have to say).

Can you elaborate on Tesla?

I do not believe it’s price is a sane representation of even the most bullish discount of future cash flows.

EMH doesn't mean everybody has to agree on Tesla price. You may think it's overpriced. Others may think it's underpriced. That is not an evidence against efficient market.

Yes it is not evidence against an efficient market to a third party. But of course when someone says something is overpriced, he thinks he is right and the market is wrong.

[texasfight]

Small cap value will outperform in the short term due to rising real rates. But it will not recover the growth/value divergence going back to like 2008 like everyone likes to chart.

DFA was never capturing some mystical premium, there was simply real economic growth occurring with positive real interest rates. They were on the right side of a macro trade.

That is gone, and now we have an asset price driven economy that soars only due to a lower discount rates. At this point a positive real yield is not sustainable without a collapse in equity and debt markets and eventually USD default. We saw this happen in March 2020, and Fed had to step in.

This time is very different. My guess is we never have "inflation", until we start running out of commodities, my guess is energy costs eventually spill over to everything including food.

[Steve Reading]

I personally believe that the value premium is due to both a risk and behavioral basis; as to the split, hard yo say. I do not believe the market is efficient (Tesla is all I have to say).

Can you elaborate on Tesla?

I do not believe it’s price is a sane representation of even the most bullish discount of future cash flows.

EMH doesn't mean everybody has to agree on Tesla price. You may think it's overpriced. Others may think it's underpriced. That is not an evidence against efficient market.

I think that's his point. Most participants don't actually think it commands that market cap but they go long (or don't short it) any ways because it is a game of musical chairs. Short-sellers have lost 25B this year alone with Tesla so it is a scary stock to short no doubt.

I certainly can't prove the above is what's happening. You might very well be right and the average market participant (dollar-weighted) honestly believes it is worth this price.

But I think it's far more likely that there is momentum on the stock and that people are buying is simply because it used to be worth a little less the day before (i.e. violating even the weak form of the EMH).

[Steve Reading]

Fairly disappointing week for SCV heads. VT basically flat but a value-size tilted portfolio has lost about 4% this past week.

[acegolfer]

I personally believe that the value premium is due to both a risk and behavioral basis; as to the split, hard yo say. I do not believe the market is efficient (Tesla is all I have to say).

Can you elaborate on Tesla?

I do not believe it’s price is a sane representation of even the most bullish discount of future cash flows.

EMH doesn't mean everybody has to agree on Tesla price. You may think it's overpriced. Others may think it's underpriced. That is not an evidence against efficient market.

I think that's his point. Most participants don't actually think it commands that market cap but they go long (or don't short it) any ways because it is a game of musical chairs. Short-sellers have lost 25B this year alone with Tesla so it is a scary stock to short no doubt.

I certainly can't prove the above is what's happening. You might very well be right and the average market participant (dollar-weighted) honestly believes it is worth this price.

But I think it's far more likely that there is momentum on the stock and that people are buying is simply because it used to be worth a little less the day before (i.e. violating even the weak form of the EMH).

There's no way to prove the bold part one way or the other. It's simply un-testable hence can't be used as an evidence for or against EMH.

[MotoTrojan]

DFA was never capturing some mystical premium, there was simply real economic growth occurring with positive real interest rates. They were on the right side of a macro trade.

I have based my decision to strongly tilt towards value on a much longer history than the existence of DFA value funds.

[MotoTrojan]

I personally believe that the value premium is due to both a risk and behavioral basis; as to the split, hard yo say. I do not believe the market is efficient (Tesla is all I have to say).

Can you elaborate on Tesla?

I do not believe it’s price is a sane representation of even the most bullish discount of future cash flows.

EMH doesn't mean everybody has to agree on Tesla price. You may think it's overpriced. Others may think it's underpriced. That is not an evidence against efficient market.

I didn't intend to provide any evidence.

[Massdriver]

This time is very different. My guess is we never have "inflation", until we start running out of commodities, my guess is energy costs eventually spill over to everything including food.

There was a study/analysis linked on interest rates and SCV performance that showed the relationship isn't all that strong. There's a narrative that is often quoted and told here that SCV can't do well in low interest rate environments, but I'm not convinced it is well supported based on some of my prior reading.

I don't think we are anywhere close to running out of anything. I remember when peak oil was a thing in the 2000s. Those folks quickly realized not to underestimate innovation. I would never make the claim inflation is permanently gone either. It is until it isn't, and it could be triggered by things you just can't anticipate.

[Steve Reading]

Can you elaborate on Tesla?

I do not believe it’s price is a sane representation of even the most bullish discount of future cash flows.

EMH doesn't mean everybody has to agree on Tesla price. You may think it's overpriced. Others may think it's underpriced. That is not an evidence against efficient market.

I think that's his point. Most participants don't actually think it commands that market cap but they go long (or don't short it) any ways because it is a game of musical chairs. Short-sellers have lost 25B this year alone with Tesla so it is a scary stock to short no doubt.

I certainly can't prove the above is what's happening. You might very well be right and the average market participant (dollar-weighted) honestly believes it is worth this price.

But I think it's far more likely that there is momentum on the stock and that people are buying is simply because it used to be worth a little less the day before (i.e. violating even the weak form of the EMH).

There's no way to prove the bold part one way or the other. It's simply un-testable hence can't be used as an evidence for or against EMH.

I'm aware you can't prove that, I literally said that in the paragraph right after.

I also don't think Moto was really implying that the EMH is null and void just based on Tesla. If I had to guess, he probably didn't mean it to the literal level that you seem to have taken it. Or maybe he did, what do I know?

[hdas]

-----

[MotoTrojan]

Fairly disappointing week for SCV heads. VT basically flat but a value-size tilted portfolio has lost about 4% this past week.

It's interesting (and useful) to note that for the last 10 years, IJS has performed very similar to IWM. The useful thing here is that IWM has futures, for the folks interested in leverage and/or timing of this things. H

Welcome back!

[MotoTrojan]

I do not believe it’s price is a sane representation of even the most bullish discount of future cash flows.

EMH doesn't mean everybody has to agree on Tesla price. You may think it's overpriced. Others may think it's underpriced. That is not an evidence against efficient market.

I think that's his point. Most participants don't actually think it commands that market cap but they go long (or don't short it) any ways because it is a game of musical chairs. Short-sellers have lost 25B this year alone with Tesla so it is a scary stock to short no doubt.

I certainly can't prove the above is what's happening. You might very well be right and the average market participant (dollar-weighted) honestly believes it is worth this price.

But I think it's far more likely that there is momentum on the stock and that people are buying is simply because it used to be worth a little less the day before (i.e. violating even the weak form of the EMH).

There's no way to prove the bold part one way or the other. It's simply un-testable hence can't be used as an evidence for or against EMH.

I'm aware you can't prove that, I literally said that in the paragraph right after.

I also don't think Moto was really implying that the EMH is null and void just based on Tesla. If I had to guess, he probably didn't mean it to the literal level that you seem to have taken it. Or maybe he did, what do I know?

I like how you phrased it, yup. I understand the premise but not every investor is voting on every stock, and I do believe behavior systematically drives certain stocks higher and others lower irregardless of true economic fundamental drivers.

[Steve Reading]

Fairly disappointing week for SCV heads. VT basically flat but a value-size tilted portfolio has lost about 4% this past week.

It's interesting (and useful) to note that for the last 10 years, IJS has performed very similar to IWM. The useful thing here is that IWM has futures, for the folks interested in leverage and/or timing of this things. H

That IS interesting and useful to note, thanks man!

[MotoTrojan]

Fairly disappointing week for SCV heads. VT basically flat but a value-size tilted portfolio has lost about 4% this past week.

It's interesting (and useful) to note that for the last 10 years, IJS has performed very similar to IWM. The useful thing here is that IWM has futures, for the folks interested in leverage and/or timing of this things. H

That IS interesting and useful to note, thanks man!

I’m seeing something like 35% relative outperformance for the S&P600 flavor in last decade...?

https://www.portfoliovisualizer.com/fun ... chmark=IWN

EDIT: Ah IWM (blend) not IWN. Seems like chance to me, no? The quality component of S&P600 value gave it a boost and the growth component of overall Russell 2000 matched it. No reason to think that’ll continue. Like comparing relative performance of two similar single stocks.

[Steve Reading]

Fairly disappointing week for SCV heads. VT basically flat but a value-size tilted portfolio has lost about 4% this past week.

It's interesting (and useful) to note that for the last 10 years, IJS has performed very similar to IWM. The useful thing here is that IWM has futures, for the folks interested in leverage and/or timing of this things. H

That IS interesting and useful to note, thanks man!

I’m seeing something like 35% relative outperformance for the S&P600 flavor in last decade...?

https://www.portfoliovisualizer.com/fun ... chmark=IWN

EDIT: Ah IWM (blend) not IWN. Seems like chance to me, no? The quality component of S&P600 value gave it a boost and the growth component of overall Russell 2000 matched it. No reason to think that’ll continue. Like comparing relative performance of two similar single stocks.

Maybe, I haven't looked too much into it. If I do use futures in the future (pardon the pun), it might be something I look at more closely.

[MotoTrojan]

Fairly disappointing week for SCV heads. VT basically flat but a value-size tilted portfolio has lost about 4% this past week.

It's interesting (and useful) to note that for the last 10 years, IJS has performed very similar to IWM. The useful thing here is that IWM has futures, for the folks interested in leverage and/or timing of this things. H

That IS interesting and useful to note, thanks man!

I’m seeing something like 35% relative outperformance for the S&P600 flavor in last decade...?

https://www.portfoliovisualizer.com/fun ... chmark=IWN

EDIT: Ah IWM (blend) not IWN. Seems like chance to me, no? The quality component of S&P600 value gave it a boost and the growth component of overall Russell 2000 matched it. No reason to think that’ll continue. Like comparing relative performance of two similar single stocks.

Maybe, I haven't looked too much into it. If I do use futures in the future (pardon the pun), it might be something I look at more closely.

Right on. R2K has too much junk for my liking but maybe you could get leverage while still tilting value with a combo of R2K futures and RZV.

[nedsaid]

What do you think is more likely, another 2000-style tech crash, or the big tech companies dominating the market cap like in the olden days where a handful of railroad companies had a gigantic share of the market cap, or even older days where companies like the East India and South China Sea companies dominated? Imagine Facebook, Apple, Amazon, Google, and Microsoft together making up over 50% of the world market cap

That seems unlikely, but honestly so does a 2000-style tech crash. These companies are not pets.com.

If I had to guess, what would happen is a change of market leadership. Not prediction the end of Tech or anything like that, just that Tech at some point will stop outperforming the rest of the market.

[garlandwhizzer]

nedsaid wrote:

If I had to guess, what would happen is a change of market leadership. Not prediction the end of Tech or anything like that, just that Tech at some point will stop outperforming the rest of the market.

1+

I agree with this assessment. I do not expect a 2000 style tech collapse but instead a change in market leadership. Tech valuations apart from a few like TSLA are not elevated to the insane levels of 1999. Many tech titans produce massive and growing free cash flow and have hundreds of millions of cash on the balance sheet, deserving to be richly valued relative to stagnant growth heavily indebted value companies. In 1999 tech astronomical valuations were based a lot more on hype as opposed to earnings, cash on balance sheet, or free cash flow. No doubt that tech is currently richly valued but not so extreme as in the 1990s bubble.

On the other hand value is very cheap relative to tech but the biggest reason why is that investors are very willing to pay up for consistent robust top line and bottom line growth which has been so rare apart from tech in the slowest economic recovery from a recession (2007-9) in US history. Historically value stocks outperform because some value stocks become growth stock, with consistent and increasing profit and revenue growth which drove not only their earnings but also inflated their stock prices per dollar of earnings. Value stocks that remain value stocks long term go nowhere. In this long 11 year period of slow recovery following the GR, very few value stocks, especially in the SCV space, showed this type of consistent and reliable growth. This IMO is the biggest reason why the gap between value and growth stocks widened to extremes, especially to the LCG tech darlings that kept posting better than expected profits and revenues quarter after quarter. Value only got cheaper as more and more investors piled on to the LCG bandwagon. Unlike the 1990s when investors hadn't seen a real bear market in 17 years, today there is still sufficient lingering fear from the GR, and for those like me old enough to remember the dot com bubble, to keep something of a lid on investor euphoria. Deep bear markets produce long lingering fear. I expect that like all market trends the current love affair with LCG tech titans will not last forever and market leadership will shift elsewhere. Can't say exactly when that will happen, but I suspect we may be closer than many expect. The market action from Robin Hood MOM investors is starting to remind me of the late 1990s.

Garland Whizzer

[MotoTrojan]

Historically value stocks outperform because some value stocks become growth stock, with consistent and increasing profit and revenue growth which drove not only their earnings but also inflated their stock prices per dollar of earnings. Value stocks that remain value stocks long term go nowhere. In this long 11 year period of slow recovery following the GR, very few value stocks, especially in the SCV space, showed this type of consistent and reliable growth. This IMO is the biggest reason why the gap between value and growth stocks widened to extremes, especially to the LCG tech darlings that kept posting better than expected profits and revenues quarter after quarter. Value only got cheaper as more and more investors piled on to the LCG bandwagon.

According to this paper there has actually been an insignificant change in the migration of value-to-growth and growth-to-value. Individually firms are migrating but the multiples of the basket of cheap stocks is still shrinking.

https://www.researchaffiliates.com/en_u ... rated.html

[nedsaid]

nedsaid wrote:

If I had to guess, what would happen is a change of market leadership. Not prediction the end of Tech or anything like that, just that Tech at some point will stop outperforming the rest of the market.

1+

I agree with this assessment. I do not expect a 2000 style tech collapse but instead a change in market leadership. Tech valuations apart from a few like TSLA are not elevated to the insane levels of 1999. Many tech titans produce massive and growing free cash flow and have hundreds of millions of cash on the balance sheet, deserving to be richly valued relative to stagnant growth heavily indebted value companies. In 1999 tech astronomical valuations were based a lot more on hype as opposed to earnings, cash on balance sheet, or free cash flow. No doubt that tech is currently richly valued but not so extreme as in the 1990s bubble.

On the other hand value is very cheap relative to tech but the biggest reason why is that investors are very willing to pay up for consistent robust top line and bottom line growth which has been so rare apart from tech in the slowest economic recovery from a recession (2007-9) in US history. Historically value stocks outperform because some value stocks become growth stock, with consistent and increasing profit and revenue growth which drove not only their earnings but also inflated their stock prices per dollar of earnings. Value stocks that remain value stocks long term go nowhere. In this long 11 year period of slow recovery following the GR, very few value stocks, especially in the SCV space, showed this type of consistent and reliable growth. This IMO is the biggest reason why the gap between value and growth stocks widened to extremes, especially to the LCG tech darlings that kept posting better than expected profits and revenues quarter after quarter. Value only got cheaper as more and more investors piled on to the LCG bandwagon. Unlike the 1990s when investors hadn't seen a real bear market in 17 years, today there is still sufficient lingering fear from the GR, and for those like me old enough to remember the dot com bubble, to keep something of a lid on investor euphoria. Deep bear markets produce long lingering fear. I expect that like all market trends the current love affair with LCG tech titans will not last forever and market leadership will shift elsewhere. Can't say exactly when that will happen, but I suspect we may be closer than many expect. The market action from Robin Hood MOM investors is starting to remind me of the late 1990s.

Garland Whizzer

Garland Whizzer, Chief Market Strategist for the Bogleheads. This is excellent analysis, nothing here to disagree with. Too many people still around that remember the 2000-2002 and the 2008-2009 bear markets. Not enough suckers for true market euphoria, we need some years to pass for new investors to come in with no memory of either bear market. Two bear markets during the same decade made quite an impression upon me, particularly when each bear market had 50% or more draw downs. Normally, a 50% down bear market is a once in a lifetime occurrence.

[MotoTrojan]

Garland Whizzer, Chief Market Strategist for the Bogleheads. This is excellent analysis, nothing here to disagree with. Too many people still around that remember the 2000-2002 and the 2008-2009 bear markets. Not enough suckers for true market euphoria, we need some years to pass for new investors to come in with no memory of either bear market. Two bear markets during the same decade made quite an impression upon me, particularly when each bear market had 50% or more draw downs. Normally, a 50% down bear market is a once in a lifetime occurrence.

The post TMT-bubble period was a true extended bear with a lost decade; what I worry about is that starting with the GFC, much of the current investing population has been conditioned to believe that market drops always have a V-rebound (even if it takes years like 2008) and thus these drops are just generational buying opportunities. Same thing in 2015-2016, and 2018 and 2020 are the best examples out there with hard inflections up, majorly driven by Fed actions.

I worry that until we have a prolonged bear market, investors will keep winding things tighter and tighter and make it that much harder to see just how irrational things are (like the number of companies today with P/S over 10 compared to the past).

[nedsaid]

Garland Whizzer, Chief Market Strategist for the Bogleheads. This is excellent analysis, nothing here to disagree with. Too many people still around that remember the 2000-2002 and the 2008-2009 bear markets. Not enough suckers for true market euphoria, we need some years to pass for new investors to come in with no memory of either bear market. Two bear markets during the same decade made quite an impression upon me, particularly when each bear market had 50% or more draw downs. Normally, a 50% down bear market is a once in a lifetime occurrence.

The post TMT-bubble period was a true extended bear with a lost decade; what I worry about is that starting with the GFC, much of the current investing population has been conditioned to believe that market drops always have a V-rebound (even if it takes years like 2008) and thus these drops are just generational buying opportunities. Same thing in 2015-2016, and 2018 and 2020 are the best examples out there with hard inflections up, majorly driven by Fed actions.

I worry that until we have a prolonged bear market, investors will keep winding things tighter and tighter and make it that much harder to see just how irrational things are (like the number of companies today with P/S over 10 compared to the past).

The other thing that is different is that in 2008-2009 and in 2020 it seems that the Fed wanted to juice not just the economy but the markets too. The Fed operates with a dual mandate of keeping inflation in check and also keeping employment as high as possible, there now seems like a third unspoken mandate which is keeping the markets high as possible without creating an asset bubble.

[MotoTrojan]

...here now seems like a third unspoken mandate which is keeping the markets high as possible without creating an asset bubble.

If the market is higher than it would be without their efforts, isn't that by default a bubble, or at-least overvalued?

[Dominic]

Sorry I didn't mean to derail the conversation. I meant that for SCV to overperform, then it would probably need to do well relative to its antithesis Large Cap Growth. That could mean they both go down but LCG goes down a lot more. But I am torn because I do not see today's LCG companies as being like 1999-style Pets.com, and I can see them growing in market share.

fennewaldaj, I did not know about the fifty nifty stocks from that era. Thank you for sharing. That is a great comparison. Those who do not know history are destined to repeat it.

The tech giants don't have to crash. Even sustained low returns would open up the possibility of an SCV premium.

[Kaktus]

I am curious to hear what you who follow the different indexes think about the possible probable differences for return on "small cap" versus "large cap" could be over say twenty years IF it turned out to be a good run for small cap. I mean what ball-park figures do you use?
To give some local colour: here in Sweden we can nowadays buy into index stock funds with the biggest companies on the Stockholm exchange with no fee at all while a small cap fund still charge around 1.5% pa.
Thats a really heavy handicap to overcome year after year. Does anyone think it likely?

[Forester]

Mike Green suggesting rise of passive indexing will lessen mean reversion / migration of growth to value & vice versa. Sorry no timestamps but well worth a listen on a commute; https://youtu.be/sMwg6fqseP0

[MotoTrojan]

Mike Green suggesting rise of passive indexing will lessen mean reversion / migration of growth to value & vice versa. Sorry no timestamps but well worth a listen on a commute; https://youtu.be/sMwg6fqseP0

Will have to listen indeed. So does that mean reduced premium?

[MotoTrojan]

I am curious to hear what you who follow the different indexes think about the possible probable differences for return on "small cap" versus "large cap" could be over say twenty years IF it turned out to be a good run for small cap. I mean what ball-park figures do you use?
To give some local colour: here in Sweden we can nowadays buy into index stock funds with the biggest companies on the Stockholm exchange with no fee at all while a small cap fund still charge around 1.5% pa.
Thats a really heavy handicap to overcome year after year. Does anyone think it likely?

I wouldn't pay 1.5% for a good small-value fund, let alone just small-cap.

Here is a backtest from 1972 to August of 2018 (roughly when small-value peaked). Note this test is already not very fair as much of the early small & small-value data uses Fama French results which aren't live funds and don't account for trading costs, so actual returns would be even lower.

As you can see the difference between US Total Market and Small-cap was 1.5%. Small-value did reward you handsomely and would be worth the cost, but who knows what the premium will be in the future after trading costs and that 1.5% can be a huge drag.

I think it makes much more sense if you can get funds in the 0.07% to 0.25% realm, although for ex-US stocks this is closer to 0.36%-0.50% for many options. I do penny up 0.49% for QVAL and 0.59% for IVAL, but justified that by looking at decile backtests to see historic differential from say the top 3rd in price, where a solid value fund would expose you too, with the top decile; plus those only make up 10% each of portfolio and are complimented with more reasonable offerings.

https://www.portfoliovisualizer.com/bac ... ion3_3=100

[nedsaid]

...here now seems like a third unspoken mandate which is keeping the markets high as possible without creating an asset bubble.

If the market is higher than it would be without their efforts, isn't that by default a bubble, or at-least overvalued?

The Fed has always affected the markets. There is the old saying on Wall Street that you don't fight the tape and you don't fight the Fed. It has always been true that monetary easing tends towards higher stock markets. What I am saying is that the Fed is intervening in the markets, directly in the bond market and indirectly in the stock market, in unprecedented ways. Historically, the Fed bought Treasuries when it wanted to inject money into the financial system; now it buys Corporate Bonds and Mortgage Backed Securities and who knows what else. At some point, you wonder if the Fed will start buying stocks.

I wouldn't say that Fed intervention is by default a bubble but certainly all of this quantitative easing has distorted the bond market. As Jeremy Seigel put it, "No asset class left behind." Those tidal waves of cash have to go somewhere and it looks like the cash has gone into the markets. In other words, hard to say how much intervention is too much intervention.

[YRT70]

Anyone done much research on XSVM, the S&P600 Small Value w/ Momentum ETF?
https://www.invesco.com/us-rest/content ... dnsName=us

I did look at this recently. Unfortunately I only have access to the past 10 years of data from the S&P website - nevertheless that can be instructive (in a relative sense). Personally, I am not too enthusiastic (even through I do have a greater appreciation for momentum).

Concerns I have:

(i) Over the past 10 years it did not have a significant momentum load (even though it was non-negative). It did however have a slightly higher size and value load relative to the S&P600 Value Index.

(ii) To achieve this, it had to reduce its stock holding to about 120 stocks and increase turnover to 136%. If this is representative of future turnover and stock holdings it implies more limited capacity than S&P600 value. In comparison, I am even concerned about the long-term capacity of MTUM which has a similar number of stocks (125) and similar turnover (138), but the average market cap of companies in that fund is 162.67bn compared to XSVM’s 0.84bn average market cap. If AUM increases significantly the market impact from turnover will erode returns (not something accounted for in back-tests).

(iii) For an investor who wants exposure to both value and momentum in a small cap fund, then S&P600 Growth (IJT), despite it’s name, is still a better option - in my view. It has significant positive exposure to both value and momentum (although the loads to both are fairly low) and it has lower capacity constraints than XSVM (it has almost 3x number of stocks and half the turnover). Currently momentum is one of the sort criteria in S&P600 growth.

(iv) Finally, the fund has changed its underlying index 4 times in 10 years – it seems to be trying to find something that sticks (although the change from the RAFI underlying index was due to RAFI discontinuing their ‘style’ indices which perhaps had lower use/subscription than its core fundamental indexes). In any event, these frequent changes don’t instill confidence.

Annualized return / annualized SD: 8/2010-7/2020

• 10.8 / 21.2 = S&P SmallCap 600 High Momentum Value Index
  9.1 / 19.2 = S&P SmallCap 600 Value Index
  12.8 / 17.5 = S&P SmallCap 600 Growth Index

Robert
.

Thanks for the detailed answer Robert. Have you also looked at the Avantis SCV funds like AVUV?

I currently hold IJS and I'm considering if there's reason to change to AVUV or maybe SLYV (for the lower TER than IJS).

[YRT70]

Curious, anyone holding SLYV (or IJS) *and* AVUV?

Yep. AVUV has deeper value exposure. VIOV (tracks same index as SLYV/IJS) has a cheaper ER. So rather than choosing one or the other for my SCV allocation I split the difference and hold both.

That is what I’ve been doing!

I am 25% AVUV, SLYV, AVDV, DGS. I know AVDV and DGS don’t quite complement each other so I’m trying to figure out if I’m in an OK allocation.

Why not? Seems like there's very little overlap in countries.

[MotoTrojan]

Curious, anyone holding SLYV (or IJS) *and* AVUV?

Yep. AVUV has deeper value exposure. VIOV (tracks same index as SLYV/IJS) has a cheaper ER. So rather than choosing one or the other for my SCV allocation I split the difference and hold both.

That is what I’ve been doing!

I am 25% AVUV, SLYV, AVDV, DGS. I know AVDV and DGS don’t quite complement each other so I’m trying to figure out if I’m in an OK allocation.

Why not? Seems like there's very little overlap in countries.

+1. If you want developed and emerging small-cap value exposure those are a good pair; cheaper total expense ratio than DLS/DGS and I would expect AVDV to tilt to value more than DLS too. AVUV/SLYV has a ton of overlap in exposure though.

[YRT70]

Curious, anyone holding SLYV (or IJS) *and* AVUV?

Yep. AVUV has deeper value exposure. VIOV (tracks same index as SLYV/IJS) has a cheaper ER. So rather than choosing one or the other for my SCV allocation I split the difference and hold both.

That is what I’ve been doing!

I am 25% AVUV, SLYV, AVDV, DGS. I know AVDV and DGS don’t quite complement each other so I’m trying to figure out if I’m in an OK allocation.

Why not? Seems like there's very little overlap in countries.

+1. If you want developed and emerging small-cap value exposure those are a good pair; cheaper total expense ratio than DLS/DGS and I would expect AVDV to tilt to value more than DLS too. AVUV/SLYV has a ton of overlap in exposure though.

Makes sense. I'm considering moving from DLS to AVDV.

Interestingly though I often get a bit of income from lending out DLS on Interactive Brokers. This makes the higher TER more tolerable.

[MotoTrojan]

Yep. AVUV has deeper value exposure. VIOV (tracks same index as SLYV/IJS) has a cheaper ER. So rather than choosing one or the other for my SCV allocation I split the difference and hold both.

That is what I’ve been doing!

I am 25% AVUV, SLYV, AVDV, DGS. I know AVDV and DGS don’t quite complement each other so I’m trying to figure out if I’m in an OK allocation.

Why not? Seems like there's very little overlap in countries.

+1. If you want developed and emerging small-cap value exposure those are a good pair; cheaper total expense ratio than DLS/DGS and I would expect AVDV to tilt to value more than DLS too. AVUV/SLYV has a ton of overlap in exposure though.

Makes sense. I'm considering moving from DLS to AVDV.

Interestingly though I often get a bit of income from lending out DLS on Interactive Brokers. This makes the higher TER more tolerable.

Nice that sounds neat. I think it is a good move, even though I opted for FNDC as a core ex-US holding (softer tilts) along with IVAL.

[Kaktus]

I am curious to hear what you who follow the different indexes think about the possible probable differences for return on "small cap" versus "large cap" could be over say twenty years IF it turned out to be a good run for small cap. I mean what ball-park figures do you use?
To give some local colour: here in Sweden we can nowadays buy into index stock funds with the biggest companies on the Stockholm exchange with no fee at all while a small cap fund still charge around 1.5% pa.
Thats a really heavy handicap to overcome year after year. Does anyone think it likely?

I wouldn't pay 1.5% for a good small-value fund, let alone just small-cap.

Here is a backtest from 1972 to August of 2018 (roughly when small-value peaked). Note this test is already not very fair as much of the early small & small-value data uses Fama French results which aren't live funds and don't account for trading costs, so actual returns would be even lower.

As you can see the difference between US Total Market and Small-cap was 1.5%. Small-value did reward you handsomely and would be worth the cost, but who knows what the premium will be in the future after trading costs and that 1.5% can be a huge drag.

I think it makes much more sense if you can get funds in the 0.07% to 0.25% realm, although for ex-US stocks this is closer to 0.36%-0.50% for many options. I do penny up 0.49% for QVAL and 0.59% for IVAL, but justified that by looking at decile backtests to see historic differential from say the top 3rd in price, where a solid value fund would expose you too, with the top decile; plus those only make up 10% each of portfolio and are complimented with more reasonable offerings.

https://www.portfoliovisualizer.com/bac ... ion3_3=100

Thanks. Good example. So even during this favourable period 1972-2018 for small cap a say 1.5 % cost handicap would not been worth it. That could be the take away.
So can I ask is the idea with QVAL to get a better, more precise, AA over sectors, or is it a bet on small cap?