acegolfer wrote: ↑Tue Aug 25, 2020 10:19 am
I think his definition is misleading/dangerous. Using his definition, a leveraged SP500 fund will be a "good" fund and VTI will be a "bad" fund.
Let me clarify the definitions of a "good" factor fund and a "bad" factor fund. Notice too, the quotation marks.
A "good" factor fun has more exposure to the Size and Value factors than a "bad" factor fund. In other words, "good" funds have smaller market caps and cheaper stocks than the "bad" funds.
My famous example of Vanguard Small-Cap Value Index, the one based on the CRSP index, has a lot of Mid-Caps and Core stocks in it. I have called it a "bad" factor fund. It really isn't a bad product, I have owned it for probably 12 plus years now. It actually has performed rather well, 5 star compared to 3 star for the similar DFA fund that loads better on Size and Value. I have also commented that DFA and Bridgway are the "good" factor products.
Also trying to point out that definitions of Small-Cap and what constitutes Value have their variations. One person's Small-Cap is another person's Mid-Cap. There have been arguments about the definition of Value, Benjamin Graham and his disciples calculate intrinsic Value and margin of safety, they do their analysis company by company. The academics focus on financial ratios like Price/Book, Price/Earnings, Price/Cash Flow, Price/Sales and consider the cheapest 30% of the market to be Value. Another variation of Value is Growth At A Reasonable Price. I can remember star fund manager Bill Miller calling Amazon.com a Value stock. So there is disagreement among reasonable people as to what a Small-Cap stock is and what represents Value. The definitions are not precise.
So I bought a couple of "bad" factor products because I didn't know better. I was told that if I was really smart that I would have been in Bridgeway or DFA instead. I didn't want to pay the 1% Assets Under Management Fee at Merriman to get access to DFA funds so I looked for alternatives. After doing a lot of reading, I came to the conclusion that good enough was good enough and that close enough was close enough. The Vanguard product suited my needs.
Mid-Value gets you most of the benefits of Small-Value, a bit less return but also a bit less volatility. So it really isn't so bad that the Vanguard product has a lot of Mid-Caps in it. Larry Swedroe says this product is well constructed and it does what it designed to do very well. What I have said is that while the Vanguard fund isn't perfect is does its job pretty well.
DFA and other more deeply Size and Value products have struggled as the stock markets around the world have favored Large and Growthy stocks. The market simply prefers something other than what DFA has selected for its Small Value fund. So in this environment, not surprising at all that the so-called "bad" factor products have outperformed the "good" factor products. In fairness, this is precisely what the presenter from Merriman said would happen in an environment that favored Large Growth over Small Value. What happened was predictable.
The presenter from Merriman showed the model portfolio for his firm using mostly DFA funds. He then showed how an investor could replicate the Merriman portfolio with similar Vanguard funds. The presenter pointed out that the DFA products had smaller market caps and better Value characteristics than the similar Vanguard funds. He thought that the DFA portfolio would outperform a similar Vanguard portfolio by 2% a year, putting Merriman investors ahead by 1% a year even after their 1% Assets Under Management fee. In fairness, he said that in an environment that favored Large Growth that the Vanguard portfolio would outperform a similar DFA portfolio and that is exactly what happened.
Using the "good" and the "bad" labels on funds is meant to illustrate a bit of irony here. The "bad" products have been outperforming the "good" products. I am also having a bit of fun here with the language and also pointing out that there is a lot of nuance here. In no way am I telling people to leverage their portfolios, not sure where that idea has come from, it is something that I have never recommended.
No one has died because I called Vanguard Small Cap Value Index ETF a "bad" factor product, particularly when I put quotation marks around bad. So I have no idea why my definition of "good" or "bad" is dangerous. Pretty much I have commented on the never ending pursuit of perfection.
It is not my intention to mislead anyone, I have posted about this again and again in great detail and it is amazing to me that my comments have been misunderstood. I am certainly not here shilling for DFA or any other provider. I have looked into the Avantis Funds and ETFs, the funds require an advisor to access but the ETFs are available to individual investors. Despite my favorable comments about Avantis, I have not switched my Small/Value investments. So far Vanguard and iShares have met my needs very well.
A fool and his money are good for business.