Small Cap Value heads Rejoice !!!

[rkhusky]

Almost recovered from the March sell off.

[caklim00]

AVUV is now up since Jan1. I see it down to 27.47 in March and now up to 55.26.

[Jags4186]

AVUV is now up since Jan1. I see it down to 27.47 in March and now up to 55.26.

As is VBR. Closed 2019 at 137.23. Is 138.00 right now. 2020 low was 78.23.

[Steve Reading]

I finished accumulating all of the value exposure I wanted. Made some big purchases on FNDF, FNDC, FNDE and even VFMF.

So for the first time, I'm actually rooting for value to outperform. No more rejoicing on down days to accumulate at cheaper prices.

That also means that, I am interested in value's outperformance from today onwards. Not since 1929. Not since 1993. But from Aug 17, 2020. If value outperforms from here on out, this whole endeavor will have been worth it.

Godspeed fellow SCV heads.

Fellow SCV heads,
Since the post above, a portfolio of SCV tilt (VFMF, VIOV, FNDF, FNDE etc) is up 10% while a BH portfolio (VTI, VEA and VWO) is up 9.4%. I've kept track ever since August 17 on Morningstar.

[rascott]

Rejoice!

[AZAttorney11]

AVUV is now up since Jan1. I see it down to 27.47 in March and now up to 55.26.

As is VBR. Closed 2019 at 137.23. Is 138.00 right now. 2020 low was 78.23.

I got some VBR at $78.48

But it looks like VBR hit an intraday low of $73.32 earlier this year.

[Massdriver]

This is the Way.

Rejoice.

[7th_Diagram]

This is the way.

[HippoSir]

My AVUV is doing amazingly well, but VFMF has suffered a bit (or at least, not done as well as pure value) since things are as much "anti-momentum" as "pro-value", so the momentum exposure in VFMF is not helping it. I guess diversifying across factors, much like across asset classes, means you'll always be a little disappointed.

[oneleaf]

Anyone guess when AVUV and AVDV ETF's at Vanguard will allow reinvestment of dividends and capital gains? Those are the only two holdings I have that don't have the option to do that The AUM and trading volume seem to be doing well now, so hopefully it is soon.

[fennewaldaj]

I bought some shares of VIOV at the intraday low on March 23rd to 2 decimal places. I had a limit order that triggered. It was only like 10 shares but it is still fun to hit it exactly like that.

[PennyWise7]

Greetings SC value heads! I was referred here from a thread on emerging market VWO as I am considering pairing VYMI vanguard International High Dividend Yield with VWO Vanguard Emerging Markets Stock Index Fund to get an emerging value tilt. VYMI appears to hold value sectors and low on growth companies. It is large cap though. I know this is a SC thread, but hey you know value so Turned here first. I was observing the US value rotation may apply globally and wondered if anyone here has experience doing VYMI or even VYMI/VWO?

[Steve Reading]

Greetings SC value heads! I was referred here from a thread on emerging market VWO as I am considering pairing VYMI vanguard International High Dividend Yield with VWO Vanguard Emerging Markets Stock Index Fund to get an emerging value tilt. VYMI appears to hold value sectors and low on growth companies. It is large cap though. I know this is a SC thread, but hey you know value so Turned here first. I was observing the US value rotation may apply globally and wondered if anyone here has experience doing VYMI or even VYMI/VWO?

I've looked into it a bit. I'll just tell you some of my thoughts:
1) Dividend yield tends to be a noisy proxy of value. That's because while it does carry "price" in the calculation (and nearly anything divided by price gives some estimate of value), it is also affected by dividend policy in a company (which really is irrelevant). I prefer funds that directly measure value (price/earnings, price/book, enterprise value/sales, etc).
2) I prefer funds that use multiple definitions of value (a composite) to rank stocks, instead of just one. Any one value measure always carries some noise so using multiple metrics is a bonus in my book.
3) A poster here earlier in the thread brought up an important point that International funds tend to be tax-inefficient, regardless of where you hold them. This is true. And doubly so for Int. value because it tends to have higher dividends. Now, I've looked through these numbers and felt OK with the higher tax inefficiency of my foreign value holdings. But it's not like I will go out of my way to look for high dividend funds either!

For large value, I like FNDF and AVDE. For Int. SCV, I like FNDC, AVDV and even ISCF.

Just my 2 cents.

[PennyWise7]

Greetings SC value heads! I was referred here from a thread on emerging market VWO as I am considering pairing VYMI vanguard International High Dividend Yield with VWO Vanguard Emerging Markets Stock Index Fund to get an emerging value tilt. VYMI appears to hold value sectors and low on growth companies. It is large cap though. I know this is a SC thread, but hey you know value so Turned here first. I was observing the US value rotation may apply globally and wondered if anyone here has experience doing VYMI or even VYMI/VWO?

I've looked into it a bit. I'll just tell you some of my thoughts:
1) Dividend yield tends to be a noisy proxy of value. That's because while it does carry "price" in the calculation (and nearly anything divided by price gives some estimate of value), it is also affected by dividend policy in a company (which really is irrelevant). I prefer funds that directly measure value (price/earnings, price/book, enterprise value/sales, etc).
2) I prefer funds that use multiple definitions of value (a composite) to rank stocks, instead of just one. Any one value measure always carries some noise so using multiple metrics is a bonus in my book.
3) A poster here earlier in the thread brought up an important point that International funds tend to be tax-inefficient, regardless of where you hold them. This is true. And doubly so for Int. value because it tends to have higher dividends. Now, I've looked through these numbers and felt OK with the higher tax inefficiency of my foreign value holdings. But it's not like I will go out of my way to look for high dividend funds either!

For large value, I like FNDF and AVDE. For Int. SCV, I like FNDC, AVDV and even ISCF.

Just my 2 cents.

Thanks for you thoughts I will definitely check out those funds. On the topic of large value, domestic, I am also thinking of adding VTV. Any thoughts on that one?

[Steve Reading]

Greetings SC value heads! I was referred here from a thread on emerging market VWO as I am considering pairing VYMI vanguard International High Dividend Yield with VWO Vanguard Emerging Markets Stock Index Fund to get an emerging value tilt. VYMI appears to hold value sectors and low on growth companies. It is large cap though. I know this is a SC thread, but hey you know value so Turned here first. I was observing the US value rotation may apply globally and wondered if anyone here has experience doing VYMI or even VYMI/VWO?

I've looked into it a bit. I'll just tell you some of my thoughts:
1) Dividend yield tends to be a noisy proxy of value. That's because while it does carry "price" in the calculation (and nearly anything divided by price gives some estimate of value), it is also affected by dividend policy in a company (which really is irrelevant). I prefer funds that directly measure value (price/earnings, price/book, enterprise value/sales, etc).
2) I prefer funds that use multiple definitions of value (a composite) to rank stocks, instead of just one. Any one value measure always carries some noise so using multiple metrics is a bonus in my book.
3) A poster here earlier in the thread brought up an important point that International funds tend to be tax-inefficient, regardless of where you hold them. This is true. And doubly so for Int. value because it tends to have higher dividends. Now, I've looked through these numbers and felt OK with the higher tax inefficiency of my foreign value holdings. But it's not like I will go out of my way to look for high dividend funds either!

For large value, I like FNDF and AVDE. For Int. SCV, I like FNDC, AVDV and even ISCF.

Just my 2 cents.

Thanks for you thoughts I will definitely check out those funds. On the topic of large value, domestic, I am also thinking of adding VTV. Any thoughts on that one?

VTV is good, it does just fine in all of the above metrics. But in general, large cap value funds that are purely cap-weighted (like VTV) don't have a whole lot of exposure to value. They'll behave roughly similar to total stock market funds.

[dml130]

For large value, I like FNDF and AVDE. For Int. SCV, I like FNDC, AVDV and even ISCF.

What are your thoughts on FNDX as a core large cap holding (with a value tilt) on the domestic side? I like that it reweights by economic footprint, rather than decapitating s&p 500 (as most large value funds do). Do you think this is reasonable as a core large cap holding?

[YRT70]

VTV is good, it does just fine in all of the above metrics. But in general, large cap value funds that are purely cap-weighted (like VTV) don't have a whole lot of exposure to value. They'll behave roughly similar to total stock market funds.

What do you think of IUSV?

Ben Felix' analysis makes it look pretty good for large value, on page 17: https://www.pwlcapital.com/wp-content/u ... -Final.pdf

[Steve Reading]

VTV is good, it does just fine in all of the above metrics. But in general, large cap value funds that are purely cap-weighted (like VTV) don't have a whole lot of exposure to value. They'll behave roughly similar to total stock market funds.

What do you think of IUSV?

Ben Felix' analysis makes it look pretty good for large value, on page 17: https://www.pwlcapital.com/wp-content/u ... -Final.pdf

It's good too. Based on the methodology, I would expect it to behave similar to VTV. Could go with either way, they make good tax pairs.

Ben seems to like it because it achieved identical value exposure to IJS (which is SCV). You should be immediately skeptical of that. When I regress it, I don't see what he's getting:
https://www.portfoliovisualizer.com/fac ... sion=false

Not sure why but any ways, similar enough to VTV probably.

For large value, I like FNDF and AVDE. For Int. SCV, I like FNDC, AVDV and even ISCF.

What are your thoughts on FNDX as a core large cap holding (with a value tilt) on the domestic side? I like that it reweights by economic footprint, rather than decapitating s&p 500 (as most large value funds do). Do you think this is reasonable as a core large cap holding?

FNDX is a fine fund. The issue is that I feel there are better options. At that expense ratio, you can opt instead for a multi-factor fund like VFMF or LRGF. They will have just as strong (maybe more so) value exposure in large caps, plus quality and other nifty things. VFMF especially gives you an all-in-one package since it also has mid and small caps.

At lower expenses, options are very good still. The GS ActiveBeta fund (GSLC) is also multifactor, cheap as heck (0.09 ER), and uses signal tilting for its weighting process. And I guess there's always good old VTV/IUSV, which should achieve similar value exposure, at rock-bottom fees.

Thankfully, we have plenty to choose from on the domestic side.

[stocknoob4111]

Spoke too soon? Looks like Small Caps are giving all their gains back...yikes! Hope this is just a 1 day pullback and not a trend...

[kolder]

Spoke too soon? Looks like Small Caps are giving all their gains back...yikes! Hope this is just a 1 day pullback and not a trend...

Man it's 1 bad day after like 2 weeks of straight domination.

Can't expect scv to beat the market by 2% every day lol. Day to day returns are just noise anyways.

[Nicolas]

Spoke too soon? Looks like Small Caps are giving all their gains back...yikes! Hope this is just a 1 day pullback and not a trend...

You exaggerate. My SCV has only given back half of yesterday’s gain. Just normal profit-taking.

[YRT70]

Spoke too soon? Looks like Small Caps are giving all their gains back...yikes! Hope this is just a 1 day pullback and not a trend...

1 day is noise. Try to look at >10 year performance. If you're unable to hold it for >10 years you probably shouldn't be investing in it. In fact 10 years is probably even too short.

[YRT70]

VTV is good, it does just fine in all of the above metrics. But in general, large cap value funds that are purely cap-weighted (like VTV) don't have a whole lot of exposure to value. They'll behave roughly similar to total stock market funds.

What do you think of IUSV?

Ben Felix' analysis makes it look pretty good for large value, on page 17: https://www.pwlcapital.com/wp-content/u ... -Final.pdf

It's good too. Based on the methodology, I would expect it to behave similar to VTV. Could go with either way, they make good tax pairs.

Ben seems to like it because it achieved identical value exposure to IJS (which is SCV). You should be immediately skeptical of that. When I regress it, I don't see what he's getting:
https://www.portfoliovisualizer.com/fac ... sion=false

Not sure why but any ways, similar enough to VTV probably.

Thanks. I don't know if this question can be answered easily but this is what I'm wondering: When someone holds say 75% total market and 25% SCV, what exactly does adding large value do?

Phrased another way: If you're already getting value exposure with SCV, why add large value?

[Steve Reading]

VTV is good, it does just fine in all of the above metrics. But in general, large cap value funds that are purely cap-weighted (like VTV) don't have a whole lot of exposure to value. They'll behave roughly similar to total stock market funds.

What do you think of IUSV?

Ben Felix' analysis makes it look pretty good for large value, on page 17: https://www.pwlcapital.com/wp-content/u ... -Final.pdf

It's good too. Based on the methodology, I would expect it to behave similar to VTV. Could go with either way, they make good tax pairs.

Ben seems to like it because it achieved identical value exposure to IJS (which is SCV). You should be immediately skeptical of that. When I regress it, I don't see what he's getting:
https://www.portfoliovisualizer.com/fac ... sion=false

Not sure why but any ways, similar enough to VTV probably.

Thanks. I don't know if this question can be answered easily but this is what I'm wondering: When someone holds say 75% total market and 25% SCV, what exactly does adding large value do?

Phrased another way: If you're already getting value exposure with SCV, why add large value?

To first order, it doesn't do much to add LCV if you already achieve sufficient value exposure via SCV.
To second order, to the extent you want value exposure, I think it makes sense to get it at all market caps from a diversity standpoint. One could answer this question by comparing FF long-only LCV+SCV portfolios vs just SCV portfolios, controlling for value exposure, and seeing just how much added alpha (or lower risk) the former is. My inclination is that it wouldn't make a big enough difference to spur me to own a LCV, MDV and a SCV fund. But if a fund like VFMF already comes like that, then I'll take it.

[caklim00]

Anyone guess when AVUV and AVDV ETF's at Vanguard will allow reinvestment of dividends and capital gains? Those are the only two holdings I have that don't have the option to do that The AUM and trading volume seem to be doing well now, so hopefully it is soon.

Didn't even realize Vanguard didn't allow that. I complained at M1 about 6 months ago that I wasn't able to use AVUV and they gave me some general spiel about how the fund was too new (I hold SLYV as a result there).

[YRT70]

VTV is good, it does just fine in all of the above metrics. But in general, large cap value funds that are purely cap-weighted (like VTV) don't have a whole lot of exposure to value. They'll behave roughly similar to total stock market funds.

What do you think of IUSV?

Ben Felix' analysis makes it look pretty good for large value, on page 17: https://www.pwlcapital.com/wp-content/u ... -Final.pdf

It's good too. Based on the methodology, I would expect it to behave similar to VTV. Could go with either way, they make good tax pairs.

Ben seems to like it because it achieved identical value exposure to IJS (which is SCV). You should be immediately skeptical of that. When I regress it, I don't see what he's getting:
https://www.portfoliovisualizer.com/fac ... sion=false

Not sure why but any ways, similar enough to VTV probably.

Thanks. I don't know if this question can be answered easily but this is what I'm wondering: When someone holds say 75% total market and 25% SCV, what exactly does adding large value do?

Phrased another way: If you're already getting value exposure with SCV, why add large value?

To first order, it doesn't do much to add LCV if you already achieve sufficient value exposure via SCV.
To second order, to the extent you want value exposure, I think it makes sense to get it at all market caps from a diversity standpoint. One could answer this question by comparing FF long-only LCV+SCV portfolios vs just SCV portfolios, controlling for value exposure, and seeing just how much added alpha (or lower risk) the former is. My inclination is that it wouldn't make a big enough difference to spur me to own a LCV, MDV and a SCV fund. But if a fund like VFMF already comes like that, then I'll take it.

Interesting. I do remember in the past you mentioned your target portfolio included LCV too. Do I understand it correctly that you changed your mind?

[HippoSir]

At lower expenses, options are very good still. The GS ActiveBeta fund (GSLC) is also multifactor, cheap as heck (0.09 ER), and uses signal tilting for its weighting process.

Are you sure about the signal tilting? My understanding of GSLC was that it was four static sleeves (value, quality, momentum, and low volatility), with very low factor tilts. The end result is essentially just the SP500, which is a selling point for them as tracking error is essentially nil.

A factor regression actually shows negative value exposure in GSLC:

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

[Steve Reading]

What do you think of IUSV?

Ben Felix' analysis makes it look pretty good for large value, on page 17: https://www.pwlcapital.com/wp-content/u ... -Final.pdf

It's good too. Based on the methodology, I would expect it to behave similar to VTV. Could go with either way, they make good tax pairs.

Ben seems to like it because it achieved identical value exposure to IJS (which is SCV). You should be immediately skeptical of that. When I regress it, I don't see what he's getting:
https://www.portfoliovisualizer.com/fac ... sion=false

Not sure why but any ways, similar enough to VTV probably.

Thanks. I don't know if this question can be answered easily but this is what I'm wondering: When someone holds say 75% total market and 25% SCV, what exactly does adding large value do?

Phrased another way: If you're already getting value exposure with SCV, why add large value?

To first order, it doesn't do much to add LCV if you already achieve sufficient value exposure via SCV.
To second order, to the extent you want value exposure, I think it makes sense to get it at all market caps from a diversity standpoint. One could answer this question by comparing FF long-only LCV+SCV portfolios vs just SCV portfolios, controlling for value exposure, and seeing just how much added alpha (or lower risk) the former is. My inclination is that it wouldn't make a big enough difference to spur me to own a LCV, MDV and a SCV fund. But if a fund like VFMF already comes like that, then I'll take it.

Interesting. I do remember in the past you mentioned your target portfolio included LCV too. Do I understand it correctly that you changed your mind?

And I do have VTV in my portfolio. If I did it all over again, I probably wouldn't have bothered, that's right.

At lower expenses, options are very good still. The GS ActiveBeta fund (GSLC) is also multifactor, cheap as heck (0.09 ER), and uses signal tilting for its weighting process.

Are you sure about the signal tilting?

Yes, GSLC for sure uses signal tilting (I just double checked). That means the under/overweight of a stock is dependent only on the factor score and not on the initial capitalization of the firm. This is in contrast to a fund like MTUM (cap-scaled), where constituent weights are a product of cap-weight and factor score. That means the over/underweight does depend on the capitalization of the firm.

So say ABC is 10% of TSM and DEF is 1% of TSM. Say they both have a factor score of 1.5. A cap-scaled fund (like MTUM) would hold ABC at 15% and DEF at 1.5%. So it overweights ABC by 5% and DEF by 0.5% (despite having the same factor score, it overweighs the larger one).
A signal-tilted fund like GSLC would just add 1.5*C, where 1.5 is the factor score and C is a constant. Say C is 4. So it would hold ABC at 16% and DEF at 7%. It overweighs them both by 6%, since they had the same factor score.

My understanding of GSLC was that it was four static sleeves (value, quality, momentum, and low volatility), with very low factor tilts. The end result is essentially just the SP500, which is a selling point for them as tracking error is essentially nil.

A factor regression actually shows negative value exposure in GSLC:

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

I don't disagree with your thoughts here (although a 5 year regression really isn't much). I don't like that the sleeves are done separately and then averaged together. My point was just that there are pretty good smart-beta products in the market to consider and FNDX is towards the bottom of my list. GSLC isn't a direct replacement by any means.

[HippoSir]

Yes, GSLC for sure uses signal tilting (I just double checked). That means the under/overweight of a stock is dependent only on the factor score and not on the initial capitalization of the firm. This is in contrast to a fund like MTUM (cap-scaled), where constituent weights are a product of cap-weight and factor score. That means the over/underweight does depend on the capitalization of the firm.

So say ABC is 10% of TSM and DEF is 1% of TSM. Say they both have a factor score of 1.5. A cap-scaled fund (like MTUM) would hold ABC at 15% and DEF at 1.5%. So it overweights ABC by 5% and DEF by 0.5% (despite having the same factor score, it overweighs the larger one).
A signal-tilted fund like GSLC would just add 1.5*C, where 1.5 is the factor score and C is a constant. Say C is 4. So it would hold ABC at 16% and DEF at 7%. It overweighs them both by 6%, since they had the same factor score.

Thank you very much for the explanation, makes sense! I very much appreciate all your posts in this thread and others, I've learned a lot.

[Francis42]

Dumped my annual bonus into VBR at the end of March 2020 and have contributed throughout the trough to get my small cap value AA to 10% of my portfolio. Best investment move I’ve made.

Rejoice!

[dml130]

What are your thoughts on FNDX as a core large cap holding (with a value tilt) on the domestic side? I like that it reweights by economic footprint, rather than decapitating s&p 500 (as most large value funds do). Do you think this is reasonable as a core large cap holding?

FNDX is a fine fund. The issue is that I feel there are better options. At that expense ratio, you can opt instead for a multi-factor fund like VFMF or LRGF. They will have just as strong (maybe more so) value exposure in large caps, plus quality and other nifty things. VFMF especially gives you an all-in-one package since it also has mid and small caps.

At lower expenses, options are very good still. The GS ActiveBeta fund (GSLC) is also multifactor, cheap as heck (0.09 ER), and uses signal tilting for its weighting process. And I guess there's always good old VTV/IUSV, which should achieve similar value exposure, at rock-bottom fees.

Thankfully, we have plenty to choose from on the domestic side.

I appreciate the reply. I guess, conceptually, the RAFI funds resonate a bit more with me than the idea of multifactor funds, since fundamental indexing strikes me as a bit more of a straightforward index, rather than active investing as the multifactor funds seem to do. I need to read a bit more about the multifactor funds though. Thank you for the suggestions.

[Random Musings]

Spoke too soon? Looks like Small Caps are giving all their gains back...yikes! Hope this is just a 1 day pullback and not a trend...

You are joking, right?

RM

[caklim00]

AVUV almost up to 500M in assets. Definitely well past any sort of closure risk by now. Happy to see it sure looks like Avantis succeeded when they definitely picked the absolute worst time to startup.

[rascott]

VTV is good, it does just fine in all of the above metrics. But in general, large cap value funds that are purely cap-weighted (like VTV) don't have a whole lot of exposure to value. They'll behave roughly similar to total stock market funds.

What do you think of IUSV?

Ben Felix' analysis makes it look pretty good for large value, on page 17: https://www.pwlcapital.com/wp-content/u ... -Final.pdf

It's good too. Based on the methodology, I would expect it to behave similar to VTV. Could go with either way, they make good tax pairs.

Ben seems to like it because it achieved identical value exposure to IJS (which is SCV). You should be immediately skeptical of that. When I regress it, I don't see what he's getting:
https://www.portfoliovisualizer.com/fac ... sion=false

Not sure why but any ways, similar enough to VTV probably.

Thanks. I don't know if this question can be answered easily but this is what I'm wondering: When someone holds say 75% total market and 25% SCV, what exactly does adding large value do?

Phrased another way: If you're already getting value exposure with SCV, why add large value?

Steve already explained it better than I can.... but I see it adding very little. My portfolio is almost entirely 75% Total Market + 25% SCV (IJS/SLYV). Certainly "good enough" in my view, and keeps things quite clean and simple.

[YRT70]

VTV is good, it does just fine in all of the above metrics. But in general, large cap value funds that are purely cap-weighted (like VTV) don't have a whole lot of exposure to value. They'll behave roughly similar to total stock market funds.

What do you think of IUSV?

Ben Felix' analysis makes it look pretty good for large value, on page 17: https://www.pwlcapital.com/wp-content/u ... -Final.pdf

It's good too. Based on the methodology, I would expect it to behave similar to VTV. Could go with either way, they make good tax pairs.

Ben seems to like it because it achieved identical value exposure to IJS (which is SCV). You should be immediately skeptical of that. When I regress it, I don't see what he's getting:
https://www.portfoliovisualizer.com/fac ... sion=false

Not sure why but any ways, similar enough to VTV probably.

Thanks. I don't know if this question can be answered easily but this is what I'm wondering: When someone holds say 75% total market and 25% SCV, what exactly does adding large value do?

Phrased another way: If you're already getting value exposure with SCV, why add large value?

Steve already explained it better than I can.... but I see it adding very little. My portfolio is almost entirely 75% Total Market + 25% SCV (IJS/SLYV). Certainly "good enough" in my view, and keeps things quite clean and simple.

Thanks. I'm starting to like clean & simple more and more.

[Uncorrelated]

VTV is good, it does just fine in all of the above metrics. But in general, large cap value funds that are purely cap-weighted (like VTV) don't have a whole lot of exposure to value. They'll behave roughly similar to total stock market funds.

What do you think of IUSV?

Ben Felix' analysis makes it look pretty good for large value, on page 17: https://www.pwlcapital.com/wp-content/u ... -Final.pdf

It's good too. Based on the methodology, I would expect it to behave similar to VTV. Could go with either way, they make good tax pairs.

Ben seems to like it because it achieved identical value exposure to IJS (which is SCV). You should be immediately skeptical of that. When I regress it, I don't see what he's getting:
https://www.portfoliovisualizer.com/fac ... sion=false

Not sure why but any ways, similar enough to VTV probably.

Thanks. I don't know if this question can be answered easily but this is what I'm wondering: When someone holds say 75% total market and 25% SCV, what exactly does adding large value do?

Phrased another way: If you're already getting value exposure with SCV, why add large value?

The argument can be extended. If you're already getting value exposure with micro cap value, why add large? Well, because that adds additional diversification.

The ideal portfolio, as least within the context of FF3 or FF5 is a portfolio that loads on the desired factors and has no idiosyncratic risk (R^2 of 100%). Of course this is not possible within low only-funds, but adding diversification within the HmL factor by targeting HmL across all cap sized reduces the tracking error relative to the model (FF3 or FF5).

In the DFA paper How Diversification Impacts Investment Outcomes: A Case Study on Global Large Caps, you can clearly see that adding additional diversification (moving from 50 stocks to 200 stocks. Or moving from 1000 stocks to 2000+ stocks) reduces tracking error, and reduces left tails. This is very difficult to measure with traditional backtests.

I think there are clear theoretical and empirical reasons to believe targeting value across all cap sizes is helpful. As such I believe this forum's focus on small cap value is somewhat misguided. The loading don't tell the whole story.

[Steve Reading]

Yes, GSLC for sure uses signal tilting (I just double checked). That means the under/overweight of a stock is dependent only on the factor score and not on the initial capitalization of the firm. This is in contrast to a fund like MTUM (cap-scaled), where constituent weights are a product of cap-weight and factor score. That means the over/underweight does depend on the capitalization of the firm.

So say ABC is 10% of TSM and DEF is 1% of TSM. Say they both have a factor score of 1.5. A cap-scaled fund (like MTUM) would hold ABC at 15% and DEF at 1.5%. So it overweights ABC by 5% and DEF by 0.5% (despite having the same factor score, it overweighs the larger one).
A signal-tilted fund like GSLC would just add 1.5*C, where 1.5 is the factor score and C is a constant. Say C is 4. So it would hold ABC at 16% and DEF at 7%. It overweighs them both by 6%, since they had the same factor score.

Thank you very much for the explanation, makes sense! I very much appreciate all your posts in this thread and others, I've learned a lot.

Thanks HippoSir, that's a very nice thing to say. I appreciate your thoughts here as well

[Pawpatrol]

Small Caps are shining... S&P 600 is within shouting distance of it's 2018 peak and R2000 futures are strongly up again, it's been a long wait (August 2018) but it does look like Small Caps are finally going to regain leadership...

This has been fun to watch. SCV are overbought so tomorrow might be a good time to rebalance. We will get those 2018 highs but we likely need to consolidate some after this great run.

Another big day today. SLYV up 24% in November. What a month!

The swing high was on tuesday but healthy consolidation the last two trading days. It might be healthier for the longrun if we are choppy and range bound through the next month or so but there are still a ton of small cap value bears that have not capitulated. Prior to the 11/9 gap, we would retrace 50% of the this move up but this time is different given the breakout. My guess is we go parabolic upwards in an epic short squeeze in the coming week or two. For those wanting to get out of scv after such a huge run here is a good article about performance of the russell 2000 after 10%+ months.

https://awealthofcommonsense.com/2020/ ... thly-gain/

[Pawpatrol]

Curious what people do with fixed income side of their portfolio who tilt mod to scv? Does tilting to scv vs tsm change the calculus? My aa is 1/3 muni fund 1/3 total bond 1/3 long term treasuries.

[Random Walker]

Curious what people do with fixed income side of their portfolio who tilt mod to scv? Does tilting to scv vs tsm change the calculus? My aa is 1/3 muni fund 1/3 total bond 1/3 long term treasuries.

I strongly believe in the idea of taking the risk on the equity side. I’m heavily tilted to SV. My bonds are all munis grade AA and above, of average maturity about 5-6 years. At the short end of my ladder I use CDs.

If growth stocks are considered longer duration investments and value stocks shorter duration, maybe the SV investor would want to add a little term risk to the bonds? My average 5-6 year maturity is more intermediate term than short term. Curious how others respond to this question.

Dave

[fennewaldaj]

I have emerging market bonds (local and hard currency), HY corporates, total international bond, Tips, G fund, treasuries, and some total bond. The EM and HY are a separate allocation from the low risk bonds( so basically a have 4 large scale allocations US stock, international stock, safe bonds, and risky bonds). Treasury obligations of various types are ~ 60% of my safe bonds.

[james22]

Now out of favor, but might still consider commodity futures.

http://raddr-pages.com/research/CommodityFutures.htm

[guppyguy]

Here's my equity allocation:
25% US Large Blend - VTI
25% US SCV - about 20% SLYV, 5% AVUV (slowly moving towards AVUV)
25% Developed - VEA
25% Emerging Markets - VWO

So question is, I'd like to add a SCV tilt on the international side. I think the options for intl SCV will improve as time goes on, but my current two picks are DLS vs AVDV.

Any thoughts on either? DLS holds more real estate. DLS ER is 58bp vs 36bp for AVDV. Both seem to have comparable factor loadings on portfolio visualizer, of course AVDV is only 13 months old. DLS is perhaps a little better value right now as it has not run up as much over the past few weeks.

My plan was to maybe split the difference. 5% in both for a total tilt of 10% (taken from VEA). Then see how AVDV behaves over the next 24 months and slowly transition phase out DLS.

[fennewaldaj]

Here's my equity allocation:
25% US Large Blend - VTI
25% US SCV - about 20% SLYV, 5% AVUV (slowly moving towards AVUV)
25% Developed - VEA
25% Emerging Markets - VWO

So question is, I'd like to add a SCV tilt on the international side. I think the options for intl SCV will improve as time goes on, but my current two picks are DLS vs AVDV.

Any thoughts on either? DLS holds more real estate. DLS ER is 58bp vs 36bp for AVDV. Both seem to have comparable factor loadings on portfolio visualizer, of course AVDV is only 13 months old. DLS is perhaps a little better value right now as it has not run up as much over the past few weeks.

My plan was to maybe split the difference. 5% in both for a total tilt of 10% (taken from VEA). Then see how AVDV behaves over the next 24 months and slowly transition phase out DLS.

I have trouble picking funds so I often end up just splitting between multiple products I like. For international small value I have DLS, AVDV, FNDC, EYLD and DGS

[Taylor Larimore]

I have trouble picking funds so I often end up just splitting between multiple products I like. For international small value I have DLS, AVDV, FNDC, EYLD and DGS

fennewaldaj:

Please read my "Simplicity" link below:

Best wishes.
Taylor

Jack Bogle's Words of Wisdom: "We ignore the real diamonds of simplicity, seeking instead the illusory rhinestones of complexity."

[nedsaid]

I have trouble picking funds so I often end up just splitting between multiple products I like. For international small value I have DLS, AVDV, FNDC, EYLD and DGS

My theory is that Value works better when combined with other factors particularly Momentum and Quality. No way to know what precise combination will work the best, as fund and ETF providers tweak their formulas the market adjusts making this a moving target. What I will say is that Deep Value has not been working too well.

I purchased DLS (Wisdom Tree International Small Cap Dividend ETF) for my International Small Value investment. When the Avantis product became available, I did not switch even though the Avantis ETF had the lower expense ratio. A big reason was that I didn't see much difference in factor exposure and Wisdom Tree had a track record and Avantis did not.

My approach is pick a good product and stick with it. One can endlessly obsess over what is "best."

[YRT70]

So question is, I'd like to add a SCV tilt on the international side. I think the options for intl SCV will improve as time goes on, but my current two picks are DLS vs AVDV.

Any thoughts on either? DLS holds more real estate. DLS ER is 58bp vs 36bp for AVDV. Both seem to have comparable factor loadings on portfolio visualizer, of course AVDV is only 13 months old. DLS is perhaps a little better value right now as it has not run up as much over the past few weeks.

My plan was to maybe split the difference. 5% in both for a total tilt of 10% (taken from VEA). Then see how AVDV behaves over the next 24 months and slowly transition phase out DLS.

I recently switched from DLS to AVDV. Main reasons for me where the lower expense ratio, lower dividend yield (better for me because I'm a European investor) and the (likely) higher factor loadings.

I'm not an expert but from what I've gathered AVDV is likely to have higher factor loadings, not just on value but also on the other factors. The amount of data isn't enough to have accurate factor regressions. DLS is optimised for high dividend. The value loading is more of a side effect.

The fact that guys like Swedroe, Merriman and Felix all seem to prefer Avantis also helps.

[klaus14]

The key is the lack of correlation between the factors. The relevant factors are market, size, value, profitability/quality, momentum, term.

Dave

Once again, straight from the brochure. In real life, this amounts to nothing.

For example, the correlation between QCELX (AQR multifactor) and VTI is 0.98.

Can you show us a live multifactor fund with a higher Sharpe ratio than TSM?

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Having that said, live performance accounts to nothing because I could have easily cherry picked a particular fund region (I did. But so did you, so we're even). Even if I didn't do that, DFA has changed their methodology a few times which makes the comparison meaningless for future expected return. Even if that wasn't true, combining two funds with low sharpe ratio's can result in a higher sharpe ratio, therefore a a low sharpe ratio does not imply it's not worth adding to your portfolio. Even if that wasn't true, sharpe ratio counts for nothing because it does not correspond well to any particular utility function, meaning it's completely useless. If you disagree with all of those, you're going to buy this sector bet with a higher sharpe ratio than TSM, right?

The only meaningful way to evaluate factor funds is to run a factor regression and then investigate the literature to determine expected returns. Backtests between different equity funds are meaningless unless you have at least 50 years of data to churn.

VPU = beta + term, so that's factor diversification that actually works.

That's nice but we already sourced term risk in our portfolios (bonds) to mix with beta.

The promise of "factor diversification" via "multifactor" funds is to do something similar within your equity fund (using factors you don't already have from bonds).

But, predictably, we've yet to see real life bear out this lovely idea for obvious reasons: 1) magnitude of the factors is too small in long only, 2) trading and fee frictions, 3) not actually that uncorrelated (e.g. value is highly correlated with mom and qual).

If DFEVX, with a 0.96 correlation to total market EM and a Sharpe that is only barely better, is the best we can do, so be it I guess.

Seems a far cry from what Dave thinks he's getting out of "factor diversification".

why do you say VPU = beta + term ?
Yes, regression shows term loading, but the highest R i was able to get was 50% in PV. This means its returns are not well explained by factors.

I hold VPU next to my VIOV instead of large/mid value. Its correlation to total market is low (unlike SCV), it is volatility is low (unlike SCV), it is on the value side (according to morningstar). What is not to like?

I think it is a good diversifier (just like SCV) to my US Large Cap core holding.

[Uncorrelated]

The key is the lack of correlation between the factors. The relevant factors are market, size, value, profitability/quality, momentum, term.

Dave

Once again, straight from the brochure. In real life, this amounts to nothing.

For example, the correlation between QCELX (AQR multifactor) and VTI is 0.98.

Can you show us a live multifactor fund with a higher Sharpe ratio than TSM?

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Having that said, live performance accounts to nothing because I could have easily cherry picked a particular fund region (I did. But so did you, so we're even). Even if I didn't do that, DFA has changed their methodology a few times which makes the comparison meaningless for future expected return. Even if that wasn't true, combining two funds with low sharpe ratio's can result in a higher sharpe ratio, therefore a a low sharpe ratio does not imply it's not worth adding to your portfolio. Even if that wasn't true, sharpe ratio counts for nothing because it does not correspond well to any particular utility function, meaning it's completely useless. If you disagree with all of those, you're going to buy this sector bet with a higher sharpe ratio than TSM, right?

The only meaningful way to evaluate factor funds is to run a factor regression and then investigate the literature to determine expected returns. Backtests between different equity funds are meaningless unless you have at least 50 years of data to churn.

VPU = beta + term, so that's factor diversification that actually works.

That's nice but we already sourced term risk in our portfolios (bonds) to mix with beta.

The promise of "factor diversification" via "multifactor" funds is to do something similar within your equity fund (using factors you don't already have from bonds).

But, predictably, we've yet to see real life bear out this lovely idea for obvious reasons: 1) magnitude of the factors is too small in long only, 2) trading and fee frictions, 3) not actually that uncorrelated (e.g. value is highly correlated with mom and qual).

If DFEVX, with a 0.96 correlation to total market EM and a Sharpe that is only barely better, is the best we can do, so be it I guess.

Seems a far cry from what Dave thinks he's getting out of "factor diversification".

why do you say VPU = beta + term ?
I hold VPU next to my VIOV instead of large/mid value. Its correlation to total market is low (unlike SCV), it is volatility is low, it is on the value side (according to morningstar). I think it is a good diversifier (just like SCV) to my US Large CAP core holding.

It is not a good diversifier in the same way roulette isn't: it's uncorrelated to the stock market, but you're not being compensated for that additional risk.

In practice all the return of VPU is explained by stock market and bond market factors. What you're left with is a highly concentrated, poorly diversified sector bet. Looking at correlations just doesn't work in a multi-factor world. The correlation between VPU and VTI is only low because VTI is over 50% long-term bonds. The correlation between tesla and the stock market is also low. Are you going to over-weight tesla as well just because it has a low correlation? Of course not, low correlation is not a sufficient condition for being a good investment.

See this research paper for more details: https://papers.ssrn.com/sol3/papers.cfm ... id=2965146 (the title says REIT's, but they also run regressions on utilities and the exact same mathematical methods are suitable for all sectors).

[klaus14]

It is not a good diversifier in the same way roulette isn't: it's uncorrelated to the stock market, but you're not being compensated for that additional risk.

In practice all the return of VPU is explained by stock market and bond market factors. What you're left with is a highly concentrated, poorly diversified sector bet. Looking at correlations just doesn't work in a multi-factor world. The correlation between VPU and VTI is only low because VTI is over 50% long-term bonds. The correlation between tesla and the stock market is also low. Are you going to over-weight tesla as well just because it has a low correlation? Of course not, low correlation is not a sufficient condition for being a good investment.

See this research paper for more details: https://papers.ssrn.com/sol3/papers.cfm ... id=2965146 (the title says REIT's, but they also run regressions on utilities and the exact same mathematical methods are suitable for all sectors).

- Why not? It performed better than SP500 with lower volatility?

- Yes, regression shows term loading, but the highest R i was able to get was 50% in PV. This means its returns are not well explained by factors.

- The paper you link has R=37% for UTIL. How can you say "all the return of VPU is explained by stock market and bond market factors" ?