Small Cap Value heads Rejoice !!!

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grabiner
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Re: Small Cap Value heads Rejoice !!!

Post by grabiner »

muffins14 wrote: Thu Oct 15, 2020 12:22 pm
Uncorrelated wrote: Thu Oct 15, 2020 7:21 am ...
The US portion is around 1/3 VFMF and 2/3 total stock market, I may increase the VFMF allocation to 50% in the future. For the international portion I hold VXUS.
...
At which brokerage do you hold VFMF? Currently in my Fidelity accounts, I am somewhat annoyed that I can't place market orders, as they flag VFMF as an "illiquid security". I either have to place a limit order or contact a fidelity representative.
This isn't a major issue. If you want to place a market order, you can place a marketable limit order instead (buy at the current ask, sell at the current bid). If the bid or ask is still there, this has the same effect.

For a low-volume ETF, this is what you want to do anyway. If the bid/ask spread is $49.95-50.05, and you place a market order to buy, the $50.05 might be withdrawn or taken by someone else and your market order could fill at $51. If the new ask is $50.07, you'll see that and can modify your $50.05 order (or you could just place your limit order at $50.10 so that it would fill with the $50.07 order).
Wiki David Grabiner
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Re: Small Cap Value heads Rejoice !!!

Post by muffins14 »

YRT70 wrote: Fri Oct 16, 2020 8:13 am
muffins14 wrote: Thu Oct 15, 2020 12:22 pm
Uncorrelated wrote: Thu Oct 15, 2020 7:21 am ...
The US portion is around 1/3 VFMF and 2/3 total stock market, I may increase the VFMF allocation to 50% in the future. For the international portion I hold VXUS.
...
At which brokerage do you hold VFMF? Currently in my Fidelity accounts, I am somewhat annoyed that I can't place market orders, as they flag VFMF as an "illiquid security". I either have to place a limit order or contact a fidelity representative.
Why do you mind using limit orders? I'd actually prefer using limit orders for these kind of funds that aren't traded that much.
It's not a huge bother, but it's nice to be able to make a market order and have the purchase immediately and within the spread rather than placing a limit order and having to check back later to see if it executed, and potentially having to place a new order
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

muffins14 wrote: Fri Oct 16, 2020 11:45 am
YRT70 wrote: Fri Oct 16, 2020 8:13 am
muffins14 wrote: Thu Oct 15, 2020 12:22 pm
Uncorrelated wrote: Thu Oct 15, 2020 7:21 am ...
The US portion is around 1/3 VFMF and 2/3 total stock market, I may increase the VFMF allocation to 50% in the future. For the international portion I hold VXUS.
...
At which brokerage do you hold VFMF? Currently in my Fidelity accounts, I am somewhat annoyed that I can't place market orders, as they flag VFMF as an "illiquid security". I either have to place a limit order or contact a fidelity representative.
Why do you mind using limit orders? I'd actually prefer using limit orders for these kind of funds that aren't traded that much.
It's not a huge bother, but it's nice to be able to make a market order and have the purchase immediately and within the spread rather than placing a limit order and having to check back later to see if it executed, and potentially having to place a new order
Grabiner explained it well above.
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Re: Small Cap Value heads Rejoice !!!

Post by Uncorrelated »

rkhusky wrote: Fri Oct 16, 2020 7:40 am
Uncorrelated wrote: Fri Oct 16, 2020 2:40 am
rkhusky wrote: Thu Oct 15, 2020 8:57 pm
That's a different publication, but I see that it's just an intro to the journal publication you reference, with a click-bait title.

I would prefer to see a FF style analysis with Mkt-Rf, Mkt-Rf lagged, HmL and SmB, and give me the R^2. For time periods 1963-1993, 1963-2020, 2000-2020, with the data format that FF used.
A link to the journal article, which contains the items you mentioned, can be found on the right side of the page.
Which journal article has the lagged market-rf factor and HmL and R^2 and the usual F&F data format?

"There Is No Size Effect: Daily Edition" is not a journal article and doesn't provide HmL or R^2 and the size data doesn't look like it is the same as the usual F&F size data, bottom half - top half.

"Size matters, if you control your junk" is a journal article, but doesn't talk about the lagged market-rf factor. I was only able to download the working paper from 2013 and didn't see anything about a lagged market-rf factor.
I'm able to download a 2018 version of the paper from elsevier without registration. The relevant figure is table 2:

Image

Time period 1957 - 2012. t-statistics for size are only significant when controlling for various quality measures or BAB.
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Re: Small Cap Value heads Rejoice !!!

Post by rkhusky »

Uncorrelated wrote: Fri Oct 16, 2020 12:31 pm
I'm able to download a 2018 version of the paper from elsevier without registration. The relevant figure is table 2:

Image

Time period 1957 - 2012. t-statistics for size are only significant when controlling for various quality measures or BAB.
Thanks.

Those R^2 values are small. I am used to seeing values greater than 0.9 from the FF 3-factor model.
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Re: Small Cap Value heads Rejoice !!!

Post by Forester »

Couple of Fintwit posts, credit to the user @EconomPic https://twitter.com/EconomPic

In 2016, Large Growth was cheap relative to its own history (although time window swayed by dotcom bubble);

https://twitter.com/EconomPic/status/697622985935446017
Image

Small Growth, Large & Small Value approaching 2000 cheapness but not there yet;
https://twitter.com/EconomPic/status/13 ... 2366617600
Image
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Re: Small Cap Value heads Rejoice !!!

Post by absolute zero »

Some random questions for team value -

1) Do the S&P 600 Small Cap Value funds like VIOV track an index called "the S&P 600 Small Cap Value" index, or do they track the value stocks within an index called the "S&P 600 Small Cap Index"?

2) Assuming the latter is true for question 2, does that mean that they (Vanguard?) take the index (which is just a blend small cap index) and throw out the 150 most expensive stocks? I see that the number of stocks is 454 for VIOV. Seems like not too much of a value tilt if you're only screening out the 25% most expensive.

3) I see that using PV factor regression, VIOV has a value loading of 0.5. If the fund instead tracked only the cheapest 1/3 of those small cap stocks in the S&P 600 (only had 167 stocks), would we expect the factor loading to be roughly 1.0? Since (as I understand) the FF analysis split HmL into 3 different parts. Or would it be less than 1.0 in that case because the fund would be long only and not actually shorting the most expensive 1/3?
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Re: Small Cap Value heads Rejoice !!!

Post by rascott »

absolute zero wrote: Tue Oct 20, 2020 9:25 am Some random questions for team value -

1) Do the S&P 600 Small Cap Value funds like VIOV track an index called "the S&P 600 Small Cap Value" index, or do they track the value stocks within an index called the "S&P 600 Small Cap Index"?

2) Assuming the latter is true for question 2, does that mean that they (Vanguard?) take the index (which is just a blend small cap index) and throw out the 150 most expensive stocks? I see that the number of stocks is 454 for VIOV. Seems like not too much of a value tilt if you're only screening out the 25% most expensive.

3) I see that using PV factor regression, VIOV has a value loading of 0.5. If the fund instead tracked only the cheapest 1/3 of those small cap stocks in the S&P 600 (only had 167 stocks), would we expect the factor loading to be roughly 1.0? Since (as I understand) the FF analysis split HmL into 3 different parts. Or would it be less than 1.0 in that case because the fund would be long only and not actually shorting the most expensive 1/3?
It tracks the SP600 SCV index.... which is created by S&P, not Vanguard.

I believe this includes both blend and value style stocks. You can find the methodology of these indexes on the S&P site.

There is also a SP600 Pure Value index.... which holds only the stocks out of the SP600 with high value scores. This can be purchased through the ETF ticker RZV, which tracks the Pure Value index and should have higher value loading than IJS/VIOV/SLYV. It holds only about 150 stocks.
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Re: Small Cap Value heads Rejoice !!!

Post by HippoSir »

absolute zero wrote: Tue Oct 20, 2020 9:25 am Some random questions for team value -
1) Do the S&P 600 Small Cap Value funds like VIOV track an index called "the S&P 600 Small Cap Value" index, or do they track the value stocks within an index called the "S&P 600 Small Cap Index"?
It is the former. You can find info about the index it tracks here: https://www.spglobal.com/spdji/en/indic ... /#overview
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Re: Small Cap Value heads Rejoice !!!

Post by rascott »

Rejoice! SCV on a nice little run of late.
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Re: Small Cap Value heads Rejoice !!!

Post by BabaWawa »

rascott wrote: Thu Oct 22, 2020 4:36 pm Rejoice! SCV on a nice little run of late.
Starting to really see the benefits of rebalancing from earlier in the year.
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Re: Small Cap Value heads Rejoice !!!

Post by Uncorrelated »

More evidence on the size premium: Settling the Size Matter, David Blitz, Matthias X. Hanauer
The size premium has failed to materialize since its discovery almost forty years ago, but is seemingly revived when controlling for quality-versus-junk exposures. This paper aims to resolve whether there exists a distinct size premium that can be captured in reality. For the US we confirm that a highly significant alpha emerges in regressions of size on quality, but for international markets we find that the size premium remains statistically indistinguishable from zero. Moreover, the US size premium appears to be beyond the practical reach of investors, because the alpha that is observed ex post in regressions cannot be captured by controlling for quality exposures ex ante. We also find that the significant regression alpha in the US is entirely driven by the short side of quality. Altogether, these results imply that size only adds value in conjunction with a short position in US junk stocks. However, we also show that small-cap exposure is vital for unlocking the full potential of other factors, such as value and momentum. We conclude that size is weak as a stand-alone factor but a powerful catalyst for other factors.
The conclusion is similar to "Fact, Fiction, and the Size Effect" and "Size Matters, If You Control Your Junk". However, they add two additional data points:
When controlling for quality, size is statistically significant only in the US, not in any other investigated market.
In the US, size is statistically significant only when controlling for the short leg of quality, which they argue cannot be exploited in a long-only strategy.

They repeat the advice from AQR that small caps in general have larger exposure to other factors. Generic small cap strategies are unlikely to deliver much of a premium.
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Re: Small Cap Value heads Rejoice !!!

Post by Day9 »

Uncorrelated wrote: Fri Oct 23, 2020 9:26 am More evidence on the size premium: Settling the Size Matter, David Blitz, Matthias X. Hanauer
The size premium has failed to materialize since its discovery almost forty years ago, but is seemingly revived when controlling for quality-versus-junk exposures. This paper aims to resolve whether there exists a distinct size premium that can be captured in reality. For the US we confirm that a highly significant alpha emerges in regressions of size on quality, but for international markets we find that the size premium remains statistically indistinguishable from zero. Moreover, the US size premium appears to be beyond the practical reach of investors, because the alpha that is observed ex post in regressions cannot be captured by controlling for quality exposures ex ante. We also find that the significant regression alpha in the US is entirely driven by the short side of quality. Altogether, these results imply that size only adds value in conjunction with a short position in US junk stocks. However, we also show that small-cap exposure is vital for unlocking the full potential of other factors, such as value and momentum. We conclude that size is weak as a stand-alone factor but a powerful catalyst for other factors.
The conclusion is similar to "Fact, Fiction, and the Size Effect" and "Size Matters, If You Control Your Junk". However, they add two additional data points:
When controlling for quality, size is statistically significant only in the US, not in any other investigated market.
In the US, size is statistically significant only when controlling for the short leg of quality, which they argue cannot be exploited in a long-only strategy.

They repeat the advice from AQR that small caps in general have larger exposure to other factors. Generic small cap strategies are unlikely to deliver much of a premium.
Please check my understanding. If it were possible to short small cap junk with low fees and transaction costs, and go long small cap quality, that would be a good way to further diversify a portfolio that is already loading on market beta, term/duration factor, and value factor?

If that is true, how would one go about that? I doubt either Small Cap Growth or Value funds are exactly Small Cap Junk. There are Small Cap Quality ETFs like XSHQ. But I am not aware of any Small Cap Junk ETF to short. I did a 10 second google search for Small Cap Junk/High yield Bond ETFs but could not find any. Maybe that is part of the reason the premium exists, because it cannot be easily arbitraged away?

But surely big institutional money would be able to make this trade, even if little folk like us have no ETFs to short or trade options on. Unless maybe these small cap junk companies are hard to borrow shares from to short?

Thanks. I'm still deciding between AVUV and IJS/VIOV/SLYV. Portfoliovisualizer says AVUV has been loading higher on small and quality, but your comment about how it can't be captured in long-only strategies has me second guessing.
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

Keep your eyes out for some news on Monday on this ETF DEEP, now being managed by Acquirers Fund (Toby Carlisle, same manager as ZIG).

Going to be dropping the news that it is switching to a small & micro value fund. Just to make it harder for all of you trying to decide what fund to use :P :twisted:.

Prospectus shows that it will start transitioning today but believe Monday will be the official rollout of more info.

Seems like it may be an interesting product for those that don't mind a heftier ER (currently 80bp, unclear if that will change though).

https://www.roundhillinvestments.com/etf/deep/
The Index was established in 2020 by Acquirers Funds LLC (the “Index Provider”) and tracks the performance of a
portfolio of 100 of the most undervalued, fundamentally strong stocks drawn from the smallest 75% of stocks listed
in the United States by market capitalization meeting certain liquidity thresholds. The Index identifies potentially
undervalued stocks by using The Acquirer’s Multiple®, which is a valuation metric developed and published in
2014 by Tobias Carlisle, Managing Member of the Index Provider. The initial universe of stocks is then valued
holistically—assets, earnings, and cash flows are examined—in accordance with the Index methodology to
understand the economic reality of each stock. Each stock is then ranked on the basis of such valuation. Potential
components are further evaluated using statistical measures of fraud, earnings manipulation, and financial distress.
Each potential component is then examined for a margin of safety in three ways: (a) a wide discount to a
conservative valuation, (b) a strong, liquid balance sheet, and (c) a robust business capable of generating free cash
flows. Finally, a forensic-accounting due diligence review is performed, in accordance with the Index methodology,
with respect to each remaining potential component’s financial statements, particularly with respect to the notes and
management’s discussion and analysis. The Index is formed from the 100 highest ranked components that pass each
stage. Each stock will be weighted to approximately 1% of the Index value at the time of each quarterly
reconstitution of the Index.
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Re: Small Cap Value heads Rejoice !!!

Post by Day9 »

The DEEP ETF reminds me of RZV, which had huge negative alpha. Buyer beware.
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Re: Small Cap Value heads Rejoice !!!

Post by Uncorrelated »

Day9 wrote: Fri Oct 23, 2020 12:24 pm
Uncorrelated wrote: Fri Oct 23, 2020 9:26 am More evidence on the size premium: Settling the Size Matter, David Blitz, Matthias X. Hanauer
The size premium has failed to materialize since its discovery almost forty years ago, but is seemingly revived when controlling for quality-versus-junk exposures. This paper aims to resolve whether there exists a distinct size premium that can be captured in reality. For the US we confirm that a highly significant alpha emerges in regressions of size on quality, but for international markets we find that the size premium remains statistically indistinguishable from zero. Moreover, the US size premium appears to be beyond the practical reach of investors, because the alpha that is observed ex post in regressions cannot be captured by controlling for quality exposures ex ante. We also find that the significant regression alpha in the US is entirely driven by the short side of quality. Altogether, these results imply that size only adds value in conjunction with a short position in US junk stocks. However, we also show that small-cap exposure is vital for unlocking the full potential of other factors, such as value and momentum. We conclude that size is weak as a stand-alone factor but a powerful catalyst for other factors.
The conclusion is similar to "Fact, Fiction, and the Size Effect" and "Size Matters, If You Control Your Junk". However, they add two additional data points:
When controlling for quality, size is statistically significant only in the US, not in any other investigated market.
In the US, size is statistically significant only when controlling for the short leg of quality, which they argue cannot be exploited in a long-only strategy.

They repeat the advice from AQR that small caps in general have larger exposure to other factors. Generic small cap strategies are unlikely to deliver much of a premium.
Please check my understanding. If it were possible to short small cap junk with low fees and transaction costs, and go long small cap quality, that would be a good way to further diversify a portfolio that is already loading on market beta, term/duration factor, and value factor?
According to this paper, yes. You don't even need to purchase the long leg.
If that is true, how would one go about that? I doubt either Small Cap Growth or Value funds are exactly Small Cap Junk. There are Small Cap Quality ETFs like XSHQ. But I am not aware of any Small Cap Junk ETF to short. I did a 10 second google search for Small Cap Junk/High yield Bond ETFs but could not find any. Maybe that is part of the reason the premium exists, because it cannot be easily arbitraged away?

But surely big institutional money would be able to make this trade, even if little folk like us have no ETFs to short or trade options on. Unless maybe these small cap junk companies are hard to borrow shares from to short?

Thanks. I'm still deciding between AVUV and IJS/VIOV/SLYV. Portfoliovisualizer says AVUV has been loading higher on small and quality, but your comment about how it can't be captured in long-only strategies has me second guessing.
"Junk" specifically refers to the short leg of the QmJ (quality minus junk) factor. This factor is related to various quality measures, similar to investment and profitability, but almost completely orthogonal to value. This should not be confused with junk bonds.

I would stay away from trying to short ETF's as a retail investor. If such a strategy worked, it would be much more effective to implement is as part of a multifactor ETF. Most fund managers (excluding AQR) seem to shy away from long-short strategies for reasons unclear to me. I suspect they perceive friction costs as too high? But I really don't know. I checked some popular SVC ETF's and they all appear to borrow around 3%, which is certainly too high for my taste: https://iborrowdesk.com/report/IJS

The paper states that there are convincing reasons to over-weight size even if there is no premium:
In the absence of a size premium one might be tempted to conclude that investors should strive
for size neutral portfolios. However, this ignores the existence of powerful interaction effects
between size and other factors, such as value. In particular, it is well known that factor premiums
tend to be bigger among small-cap stocks than among large-cap stocks. We show that standard
factor portfolios, which feature a disproportionately high weight for small-cap stocks, have large
and highly significant alphas compared to factor portfolios without this feature. This means that
size can add a lot of value by serving as a catalyst that helps to unlock the full potential of other
factors, such as value and momentum. This interaction between size and other factors may
already be a sufficient reason for long-only investors to systematically overweight small-cap
stocks, regardless of whether the size characteristic itself is rewarded with a premium.
I would recommend targeting factors in all cap sizes, not just small. Although I don't have numbers to back this up, I suspect this results in better diversification within the individual factors, which may lead to improved factor targeting stability. Research on this is a bit limited, but it sounds logical. If anyone has papers on this I would love to read.

Finally, In europe, emerging markets and asia-pacific ex-japan, SmB loads negatively on the market factor. Suggesting that the common wisdom "small caps have higher returns explained by higher exposure to market beta" is isolated to just the US and japan. Perhaps in europe, small caps are not riskier than large caps?
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Re: Small Cap Value heads Rejoice !!!

Post by Day9 »

Thank you for responding to my post. I can see your reasoning there is partly why you prefer Vanguard Multifactor Fund/ETF, which is 1/3 small, 1/3 mid, 1/3 large cap.

By the way, uncorrelated, you seem like you have quite the modest tilt for someone who is so interested in the topic. I don't recall exactly but I think your portfolio is mostly total market index fund, with an allocation to Vanguard Multifactor. I asked Larry Swedroe his thoughts on Vanguard Multifactor and to summarize his response he said it was fine and you can trust Vanguard, but there are other funds with higher loadings. Looking at the portfoliovisualizer regressions as well, I think your portfolio has a relatively small tilt for someone who is so interested in the topic. Anyway, always enjoy your posts, best of luck to us Factorheads :beer
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

Day9 wrote: Fri Oct 23, 2020 12:57 pm The DEEP ETF reminds me of RZV, which had huge negative alpha. Buyer beware.
First off, the fund hasn't transitioned so ignore past results (although the prior index was a LONG shot from RZV). Also RZV since inception has had just over 1/3 of the negative alpha that DFSVX has had, so not sure what you are seeing there (RZV did have a lot of negative momentum).

https://www.portfoliovisualizer.com/fac ... sion=false

You may not be familiar with Toby's methodology or read the prospectus (key part quoted below) but the quality of DEEP will be light-years above that of RZV due to the additional quality screens, and the general nature of using an enterprise value weight. I would be surprised if it didn't have a RMW (quality factor) well above even a dedicated quality ETF like QUAL (QVAL for example has had >4x the RMW exposure of QUAL).
Each potential component is then examined for a margin of safety in three ways: (a) a wide discount to a
conservative valuation, (b) a strong, liquid balance sheet, and (c) a robust business capable of generating free cash
flows.
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Re: Small Cap Value heads Rejoice !!!

Post by Uncorrelated »

Day9 wrote: Fri Oct 23, 2020 2:45 pm Thank you for responding to my post. I can see your reasoning there is partly why you prefer Vanguard Multifactor Fund/ETF, which is 1/3 small, 1/3 mid, 1/3 large cap.

By the way, uncorrelated, you seem like you have quite the modest tilt for someone who is so interested in the topic. I don't recall exactly but I think your portfolio is mostly total market index fund, with an allocation to Vanguard Multifactor. I asked Larry Swedroe his thoughts on Vanguard Multifactor and to summarize his response he said it was fine and you can trust Vanguard, but there are other funds with higher loadings. Looking at the portfoliovisualizer regressions as well, I think your portfolio has a relatively small tilt for someone who is so interested in the topic. Anyway, always enjoy your posts, best of luck to us Factorheads :beer
I don't think the loadings tell the whole story. It's easy to get some value loading by combining a highly concentrated fund with a broad market fund. Or you can obtain the same loadings with a less concentrated fund. The former has, theoretically, more risk even if the factor loadings of the resulting portfolio are the same. This risk cannot be measured in standard deviation, but presents itself as skew. DFA has a summary paper on this, but the precise impact remains difficult to quantify.

This extends beyond the Fama/French factors. For example, a small cap value fund has exposure to beta, but that source of beta is poorly diversified. It's easy to lose sight of diversification when targeting factors.

Although the evidence on value and other factors is quite clear, there is also a lot we don't know. Perhaps these factors are explained by unattractive risks. Perhaps technological advances brought knowledge about these factors and they are now being arbitraged away. Unlikely, but possible. In face of such uncertainty and my personal financial situation, I believe the only reasonable approach is to be very skeptical and conservative regarding active strategies. If I needed more return, I would probably have a higher tilt. There are no clear answers, but the evidence certainly seems to indicate a more extreme tilt can be useful.

This is all mostly for academic curiosity. I also do research on other trading strategies such as market timing in my spare time. Unlikely to be useful, but still interesting.
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Re: Small Cap Value heads Rejoice !!!

Post by zhuyz05 »

What do you think about this professor's take on value investing?

https://www.youtube.com/watch?v=dA9AlDA ... hDamodaran
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Re: Small Cap Value heads Rejoice !!!

Post by Forester »

zhuyz05 wrote: Fri Oct 23, 2020 7:03 pm What do you think about this professor's take on value investing?

https://www.youtube.com/watch?v=dA9AlDA ... hDamodaran
1) He's fallen for the "broken leg fallacy" by throwing the kitchen sink at valuating a company, as if any of that fluff would alter the fact that the 2010s were never going to be Value's decade, 2) more book value critique which has been done to death
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Re: Small Cap Value heads Rejoice !!!

Post by zhuyz05 »

Forester wrote: Sat Oct 24, 2020 4:15 pm
zhuyz05 wrote: Fri Oct 23, 2020 7:03 pm What do you think about this professor's take on value investing?

https://www.youtube.com/watch?v=dA9AlDA ... hDamodaran
1) He's fallen for the "broken leg fallacy" by throwing the kitchen sink at valuating a company, as if any of that fluff would alter the fact that the 2010s were never going to be Value's decade, 2) more book value critique which has been done to death
I do not think it is fair to say that. He seems to be a well-known finance professor who is generous enough to share his view on investing in his youtube channel (and many of his classes as well). I was just surprised that even academics do not have consensus on the validity of value premiums.
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Re: Small Cap Value heads Rejoice !!!

Post by imak »

zhuyz05 wrote: Fri Oct 23, 2020 7:03 pm What do you think about this professor's take on value investing?

https://www.youtube.com/watch?v=dA9AlDA ... hDamodaran
Prof Damodaran's take on rigidity of value investors is quite true. S&P Value indices and Russell value indices were created about 2 decades ago and their methodology has not changed much since then. As the economy evolves and underlying nature of sectors and industries shift, valuation methods need to be adapted accordingly.

I think his approach is more useful for bottom-up securities valuation, whereas tilters in this forum leans more towards asset-class level "minimalistic value investing" in order to obtain Fama-French factor exposures in a cheap and efficient manner. After all, as Bill Bernstein said, in the long run what matters is factor exposure and expense.
AA: 30% FNDX, 30% FNDA, 10% FNDF, 10% FNDC, 10% REET+VWO+DGS, 10% TMF; EF = VTEB; "Discipline matters more than allocation" ~ W Bernstein
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Re: Small Cap Value heads Rejoice !!!

Post by Forester »

imak wrote: Sat Oct 24, 2020 8:33 pm
zhuyz05 wrote: Fri Oct 23, 2020 7:03 pm What do you think about this professor's take on value investing?

https://www.youtube.com/watch?v=dA9AlDA ... hDamodaran
Prof Damodaran's take on rigidity of value investors is quite true. S&P Value indices and Russell value indices were created about 2 decades ago and their methodology has not changed much since then. As the economy evolves and underlying nature of sectors and industries shift, valuation methods need to be adapted accordingly.

I think his approach is more useful for bottom-up securities valuation, whereas tilters in this forum leans more towards asset-class level "minimalistic value investing" in order to obtain Fama-French factor exposures in a cheap and efficient manner. After all, as Bill Bernstein said, in the long run what matters is factor exposure and expense.
The value funds which don't use the old school FF book price metric have fared even worse. There's no magic Damodaran formula which would have altered the last decade. All he can do is stray into qualitative assessment which is beyond the scope of the low cost funds that we seek to invest in. And all the research would point to his embellishments being foolhardy, versus simply waiting for the market to turn against paying top dollar for expected future earnings.
garlandwhizzer
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Re: Small Cap Value heads Rejoice !!!

Post by garlandwhizzer »

I believe Professor Fama argues that measures of value other than PB are too volatile, they change so much and so quickly that they lead to increased trading frequency which increases fund costs and also amplifies trading frictions in the relatively illiquid SC space. Try selling or buying a large fund sized quantity of a small cap stock quickly and watch its price move constantly in the wrong direction as the trade proceeds. You don't have to bother with that problem in cost-free indexes that are free of trading frictions in the factor models. With real funds however, I think Fama believes that PB is a much more stable measure of value which reduces trading frequency and hence costs and trading frictions, still a valid choice for value investing.

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Uncorrelated
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Re: Small Cap Value heads Rejoice !!!

Post by Uncorrelated »

More papers, this time on betting against beta.

Betting Against Betting Against Beta, Robert Novy-Marx, Mihail Velikov, 2018, http://rnm.simon.rochester.edu/research/BABAB.pdf
Frazzini and Pedersen’s (2014) Betting Against Beta (BAB) factor is based on
the same basic idea as Black’s (1972) beta-arbitrage, but its astonishing performance
has generated academic interest and made it highly influential with practitioners.
This performance is driven by non-standard procedures used in its construction
that effectively, but non-transparently, equal weight stock returns. For each dollar
invested in BAB, the strategy commits on average $1.05 to stocks in the bottom
1% of total market capitalization. BAB earns positive returns after accounting
for transaction costs, but earns these by tilting toward profitability and investment,
exposures for which it is fairly compensated. Predictable biases resulting from the
paper’s non-standard beta estimation procedure drive results presented as evidence
supporting its underlying theory.
The authors identify three non-standard portfolio construction practices used in Frazzini's "Betting against beta" 2014 paper.

First, BAB uses rank-weighting instead of equal weighting. Recall that HmL is the high 1/3 value minus the bottom 1/3 value stocks, each weighted equally. BAB weights the stocks in proportion with their sorting rank. The performance of rank-weighted is almost identical to equally-weighted.

Second, they show that BAB has a non-standard approach of obtaining market neutrality. In Fama/French, the HmL factor is made market neutral by first longing the shorting the High and Low parts of the portfolio. The remaining beta exposure is then hedged away by purchasing the appropriate amount of beta. BAB uses a different approach: they use leverage to scale the high and low parts of the portfolio such that they both have a beta of 1. The paper shows that this non-standard procedure has increased the sharpe ratio of the BAB factor from 0.8 to 1.08.

Third, BAB uses a novel beta estimation technique. Normally, beta's are estimated by regressing the stock against the market portfolio. BAB uses a different approach where the beta's are estimated using a different formula (see paper for details), this formula does not actually yield market beta's. The authors argue that predictable biases in this beta estimation procedure drives most of the the performance of BAB. The authors argue that introduces a market timing element into BAB because it structurally over-hedges market beta when volatility is high and structurally under-hedges market beta when volatility is low, resulting in a volatility managed strategy that has a net long position when market volatility is low. I believe this is exactly the same problem that drives anomalous regressions that show time series momentum exists. (Where are all the papers about that anomaly?)

In addition, they show that paper performance is driven by dramatically over-weighting small and micro-cap stocks. After accounting for transaction costs the BAB factor fails to realize a statistically significant alpha, therefore the BAB factor cannot be implemented as in the paper.

The paper concludes that Frazzini et all failed to provide strong evidence for the existence of the BAB factor. Instead, they provide strong evidence against non-standard procedures. No matter for arbitrary the choices made in the past, following standard procedures dramatically reduces the degrees of freedom available for overfitting of data.
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Uncorrelated
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Re: Small Cap Value heads Rejoice !!!

Post by Uncorrelated »

But Uncorrelated, you didn't answer the question whether BAB is a factor worth targeting. Why did you leave us hanging? Good question!

Understanding defensive equity, Robert Novy-Marx, 2016 http://rnm.simon.rochester.edu/research/UDE.pdf
Following Baker, Bradley, and Wurgler (2011), the sample begins in January 1968. This start date basically coincides with the date at which high volatility stocks began underperforming low volatility stocks, and thus bias the results toward finding impressive defensive strategy performance.
Image
while defensive strategies are typically referred to as “low vol” or ”low beta” strategies, it is really a high volatility or high beta anomaly.
The defensive strategy’s large alpha is primarily driven by the short side. The high volatility stocks in this side of the strategy tend to be small, unprofitable growth stocks, exactly those stocks that the three factor model struggles to price (Fama and French 1993,2014). That is, the three factor model cannot price the defensive strategy because the strategy takes concentrated positions in precisely those stocks that we know the model cannot price. The strategy’s significant three factor alpha is consequently not indicative of a distinct anomaly, but simply a repackaging of an old, well known failure of the model.
Over the last 50 years defensive stocks have delivered higher returns than the most aggressive stocks, and defensive strategies, at least those based on volatility, have delivered significant Fama and French three-factor alphas. This performance is not at all anomalous, however, after properly controlling for size, relative valuations, and, most critically, profitability. While investors would have benefited from a defensive tilt over the period, these benefits derive effectively from an unprofitable small growth exclusion, which could have been implemented more efficiently, and at lower cost, directly.
So... yeah... don't bet against beta.
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hdas
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Re: Small Cap Value heads Rejoice !!!

Post by hdas »

Blackrock entering the fray at a propitious moment. H
BlackRock Is Defying Stock Chaos To Launch Small-Cap Value ETF
OCTOBER 29, 2020 • KATHERINE GREIFELD
Few things divide opinion on Wall Street like the outlook for small-cap stocks or the fate of the value strategy. Yet most market players would probably agree it’s a tough time to launch a product combining the two.

That’s exactly what BlackRock Inc. is doing with a new exchange-traded fund.

The iShares Factors US Small Cap Value ETF began trading on the New York Stock Exchange under the ticker SVAL on Thursday. The fund screens for value-oriented stocks in the Russell 2000 Index based on liquidity, volatility, leverage and analyst sentiment and then weights securities equally.

It’s an eye-catching arrival given the backdrop. Small-cap shares and value strategies have been battered anew this year as the coronavirus sparked an economic crisis. U.S. equities endured yet another bout of volatility this week, a broad selloff that has spared few sectors.

Even after those declines, the S&P 500 Index has still gained 1.2% year-to-date. The Russell 2000 Index, by contrast, is roughly 7.5% lower and value stocks -- those that look cheap relative to fundamentals -- are down more than 15%.

“Our value exposure was really in the large- and mid-cap space, and we didn’t have a dedicated small-cap fund,” Bob Hum, BlackRock’s U.S. head of factor ETFs, said in an interview. “On a forward-looking basis, the future is much brighter than it has been the past few years and we wanted to make sure our lineup has all the exposure our clients are looking for.”

The renaissance of value has eluded investors for years, though there have been plenty of head-fakes in the past few months.

The Russell 1000 Value Index beat its growth counterpart by over 2 percentage points in September for its biggest month of outperformance in a year. On a five-year basis, however, value has trailed growth by nearly 93 percentage points.

Meanwhile, large-cap companies -- led by a handful of technology names -- have trounced small-cap shares over that time period. The S&P 500 has climbed nearly 57% since late 2015, while the Russell 2000 has gained about 32%.

Still, Hum expects SVAL to attract interest once economies start to reopen broadly, and points to recent demand for value and small-cap funds.
....
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vineviz
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Re: Small Cap Value heads Rejoice !!!

Post by vineviz »

hdas wrote: Thu Oct 29, 2020 10:31 am Blackrock entering the fray at a propitious moment. H
It's a bold move, for sure.

https://www.ishares.com/us/products/316 ... ckerSearch

It should be interesting, since the mid-cap version (FOVL) has had one of the highest value factor exposures among the MCV funds. It's much more concentrated than SVAL will be, so it'll exciting to watch.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
YRT70
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

SVAL's value metrics are quite close to AVUV. Average market cap is smaller, 0.92 B vs. 1.66 B for AVUV.

SVAL has 42% financials, AVUV 29%.
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Forester
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Re: Small Cap Value heads Rejoice !!!

Post by Forester »

iShares have a dizzying number of value ETFs by now - 15 US value funds all with varying amount of overlap.
absolute zero
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Re: Small Cap Value heads Rejoice !!!

Post by absolute zero »

YRT70 wrote: Thu Oct 29, 2020 11:24 am SVAL's value metrics are quite close to AVUV. Average market cap is smaller, 0.92 B vs. 1.66 B for AVUV.

SVAL has 42% financials, AVUV 29%.
I thought AVUV was a tough price to pay at 25 bps compared to the S&P 600 value funds. But perhaps worth it for some due to the higher exposure to value and to quality. 30 bps for SVAL seems like it might be too much though. But I guess we’ll find out.
Cantrip
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Re: Small Cap Value heads Rejoice !!!

Post by Cantrip »

In regards to SVAL and equal weighting:

There is an equal weight s&p 600 fund called EWSC which has been around since 2011. From 2011 to 2020 it has had a 5 factor alpha of -2.6%/year vs +1.2%/year for IJR (s&p 600 small cap) and +1.1% year for IWC (microcap index). There may be a possible drag of 3%/year from transaction costs to keep a small (actually effectively a microcap) index equal weight.
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Re: Small Cap Value heads Rejoice !!!

Post by vineviz »

On a recent Rational Reminders podcast (ep. 119), Ben Felix articulately pointed out that typically the direction of causality in US elections is economy>>>political party of the Presidential election winner and not the opposite.

That makes this chart much more about correlation than causation, probably, but I think it's interesting nonetheless.

Image

Data from Ken French data library, using annual returns 1927 to 2019.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
YRT70
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

^ Very interesting Vineviz.

I think Ben would be interested in that too. They just started a new forum. https://community.rationalreminder.ca/login

There's a lot of discussion about factors and small cap value of course.
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

Cantrip wrote: Thu Oct 29, 2020 4:53 pm In regards to SVAL and equal weighting:

There is an equal weight s&p 600 fund called EWSC which has been around since 2011. From 2011 to 2020 it has had a 5 factor alpha of -2.6%/year vs +1.2%/year for IJR (s&p 600 small cap) and +1.1% year for IWC (microcap index). There may be a possible drag of 3%/year from transaction costs to keep a small (actually effectively a microcap) index equal weight.
This is my fear of the new 100-stock equal-weight DEEP methodology since it delves into micro-cap. Hard to overcome a lot of trading fees on top of 80bp ER.
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

absolute zero wrote: Thu Oct 29, 2020 4:14 pm
YRT70 wrote: Thu Oct 29, 2020 11:24 am SVAL's value metrics are quite close to AVUV. Average market cap is smaller, 0.92 B vs. 1.66 B for AVUV.

SVAL has 42% financials, AVUV 29%.
I thought AVUV was a tough price to pay at 25 bps compared to the S&P 600 value funds. But perhaps worth it for some due to the higher exposure to value and to quality. 30 bps for SVAL seems like it might be too much though. But I guess we’ll find out.
I think a 10bp increase (or equal to the popular IJS) is pretty fair for the quality component, momentum screen, and also a break from market-cap weight which increases factor tilt without sacrificing diversification (holdings #). SVAL at 30bp doesn't seem to add enough beyond the more standard index.
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

vineviz wrote: Thu Oct 29, 2020 11:00 am
hdas wrote: Thu Oct 29, 2020 10:31 am Blackrock entering the fray at a propitious moment. H
It's a bold move, for sure.

https://www.ishares.com/us/products/316 ... ckerSearch

It should be interesting, since the mid-cap version (FOVL) has had one of the highest value factor exposures among the MCV funds. It's much more concentrated than SVAL will be, so it'll exciting to watch.
FOVL uses a very different weighting split between the fundamental ratios, giving 50% weight to dividend weighting (yuck), where-as SVAL doesn't use dividends at all and is majority P/CF with some P/E and P/B.

FOVL: 30% P/CF, 5% P/B, 50% P/D, 15% P/E

SVAL: 60% P/CF, 10% P/B, 30% P/E

Concentrated sure, but pretty terrifying to see how it handled the rebound from the March 2020 bottom; tracked VFVA and QVAL (much better methodology IMHO and equally concentrated but with more diverse sector distribution) leading into the drop, but has barely come off the lows since.

https://www.portfoliovisualizer.com/bac ... ion3_3=100
HippoSir
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Re: Small Cap Value heads Rejoice !!!

Post by HippoSir »

MotoTrojan wrote: Sat Oct 31, 2020 9:37 am FOVL uses a very different weighting split between the fundamental ratios, giving 50% weight to dividend weighting (yuck)
Whenever I see methodology like this I wonder what the argument is for the design. Everything I've read indicates dividends are a noisy and poor way to track the value factor, but the folks at FTSE Russell clearly know way more than I ever will in terms of fund design, so why did they choose it?

Just seems strange to me.
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vineviz
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Re: Small Cap Value heads Rejoice !!!

Post by vineviz »

MotoTrojan wrote: Sat Oct 31, 2020 9:37 am
vineviz wrote: Thu Oct 29, 2020 11:00 am
hdas wrote: Thu Oct 29, 2020 10:31 am Blackrock entering the fray at a propitious moment. H
It's a bold move, for sure.

https://www.ishares.com/us/products/316 ... ckerSearch

It should be interesting, since the mid-cap version (FOVL) has had one of the highest value factor exposures among the MCV funds. It's much more concentrated than SVAL will be, so it'll exciting to watch.
FOVL uses a very different weighting split between the fundamental ratios, giving 50% weight to dividend weighting (yuck), where-as SVAL doesn't use dividends at all and is majority P/CF with some P/E and P/B.

FOVL: 30% P/CF, 5% P/B, 50% P/D, 15% P/E

SVAL: 60% P/CF, 10% P/B, 30% P/E

Concentrated sure, but pretty terrifying to see how it handled the rebound from the March 2020 bottom; tracked VFVA and QVAL (much better methodology IMHO and equally concentrated but with more diverse sector distribution) leading into the drop, but has barely come off the lows since.

https://www.portfoliovisualizer.com/bac ... ion3_3=100
Also, the FOVL methodology has no constraint on sectors: it's over 50% financial services and over 20% in basic materials. Way more than double the market weights for those, which is just . . . . . odd.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
HippoSir
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Re: Small Cap Value heads Rejoice !!!

Post by HippoSir »

Another nice day for small value:

AVUV: +2.32%
VFMF: +2.28%
VTI: +1.04%
QQQ: +0.22%

https://twitter.com/SarahPonczek/status ... 2477063171

Maybe the start of a trend? Or did I just jinx it? :D
YRT70
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

I have a larger position in iShares IJS that I'm considering to move to Avantis AVUV. To give an idea it's around 100k USD.

How would you guys recommend I do this?

Transaction costs are very low (IBKR). I was considering splitting the order in pieces of 10k USD to avoid problems with liquidity.

My plan was to put in a limit sell order for IJS. Wait until it's fully executed, then put in a limit buy order for AVUV. Wait until it's fully executed and then repeat. Good idea?
Pawpatrol
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Re: Small Cap Value heads Rejoice !!!

Post by Pawpatrol »

YRT70 wrote: Tue Nov 03, 2020 8:39 am I have a larger position in iShares IJS that I'm considering to move to Avantis AVUV. To give an idea it's around 100k USD.

How would you guys recommend I do this?

Transaction costs are very low (IBKR). I was considering splitting the order in pieces of 10k USD to avoid problems with liquidity.

My plan was to put in a limit sell order for IJS. Wait until it's fully executed, then put in a limit buy order for AVUV. Wait until it's fully executed and then repeat. Good idea?
As been stated before ijs/viov regardless of vol/day have very good liquidity. I would just put in market orders (not in first 15m or so of trading day or right before the close) and you will be fine. At 100k i doubt it will make that bit of difference whether you sell it all at once or not. You will be +/- $200 of slippage doing this depending on the move of the market at the time. I would do this middle of trading day and try to avoid doing it on volatile days like today (options expiration, fed min days etc).
YRT70
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

Pawpatrol wrote: Tue Nov 03, 2020 8:51 am
YRT70 wrote: Tue Nov 03, 2020 8:39 am I have a larger position in iShares IJS that I'm considering to move to Avantis AVUV. To give an idea it's around 100k USD.

How would you guys recommend I do this?

Transaction costs are very low (IBKR). I was considering splitting the order in pieces of 10k USD to avoid problems with liquidity.

My plan was to put in a limit sell order for IJS. Wait until it's fully executed, then put in a limit buy order for AVUV. Wait until it's fully executed and then repeat. Good idea?
As been stated before ijs/viov regardless of vol/day have very good liquidity. I would just put in market orders (not in first 15m or so of trading day or right before the close) and you will be fine. At 100k i doubt it will make that bit of difference whether you sell it all at once or not. You will be +/- $200 of slippage doing this depending on the move of the market at the time. I would do this middle of trading day and try to avoid doing it on volatile days like today (options expiration, fed min days etc).
Thanks. I can see the point with the liquidity of IJS but how about AVUV?
z0r
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Re: Small Cap Value heads Rejoice !!!

Post by z0r »

the market maker will usually step in and provide liquidity even if it's above the normal amount traded that day. if you're not sure that'll happen at a good price you can use a limit order
caklim00
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Re: Small Cap Value heads Rejoice !!!

Post by caklim00 »

YRT70 wrote: Tue Nov 03, 2020 9:00 am
Pawpatrol wrote: Tue Nov 03, 2020 8:51 am
YRT70 wrote: Tue Nov 03, 2020 8:39 am I have a larger position in iShares IJS that I'm considering to move to Avantis AVUV. To give an idea it's around 100k USD.

How would you guys recommend I do this?

Transaction costs are very low (IBKR). I was considering splitting the order in pieces of 10k USD to avoid problems with liquidity.

My plan was to put in a limit sell order for IJS. Wait until it's fully executed, then put in a limit buy order for AVUV. Wait until it's fully executed and then repeat. Good idea?
As been stated before ijs/viov regardless of vol/day have very good liquidity. I would just put in market orders (not in first 15m or so of trading day or right before the close) and you will be fine. At 100k i doubt it will make that bit of difference whether you sell it all at once or not. You will be +/- $200 of slippage doing this depending on the move of the market at the time. I would do this middle of trading day and try to avoid doing it on volatile days like today (options expiration, fed min days etc).
Thanks. I can see the point with the liquidity of IJS but how about AVUV?
Never had an issue with AVUV liquidity. If it makes u feel better break it up into multiple sells and buys but its probably not going to matter at that small of an amount.
countmein
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Re: Small Cap Value heads Rejoice !!!

Post by countmein »

Anyone know why AVDV is +4.85% today while DLS is +2.02%?
caklim00
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Re: Small Cap Value heads Rejoice !!!

Post by caklim00 »

what the heck is going on this morning? uncertainty good for large cap and bad for small cap?
stocknoob4111
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Re: Small Cap Value heads Rejoice !!!

Post by stocknoob4111 »

Russell 2000 is positive, S&P 600 is getting crushed for some reason even when the S&P 500 is up a massive +2.5%. However, S&P 600 may recover as the day progresses. When will the S&P 600 finally get a break? It's been way too long.
totesmagotes
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Re: Small Cap Value heads Rejoice !!!

Post by totesmagotes »

caklim00 wrote: Wed Nov 04, 2020 9:38 am what the heck is going on this morning? uncertainty good for large cap and bad for small cap?
Can't get too political, but the narrative (perhaps confirming priors or trying to make up some story to make sense of the action) seems to be that a blue White House and red Senate means less stimulus, more "status quo" from the past 6-9 months. This also makes it less likely, it seems, for any major legislation to pass in the next 2 years, to include regulatory issues with the big social media companies and tax laws with some of the other large cap sectors. Note how treasury yields have plummeted too as expectations of large stimulus have reversed owing to the split between the Senate and the Presidency. Maybe that's why big tech is up huge and small cap is down big.

Or maybe that's just me and others trying to rationalize the split. Maybe things will reverse themselves after a day or week or month.

/ Nobody knows anything, as the saying goes
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