examining index methods and market caps

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chem
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examining index methods and market caps

Post by chem »

Etsy is newly in the S&P 500, and thus Vanguard's VOO ETF (holding ~#325 by weight). Etsy is also in Vanguard's small-cap ETFs, such as VBK (small cap growth) and VB.

A "small-cap" S&P 500 stock. The relevant CRSP index and methodology is here:
http://www.crsp.org/files/crspscg1_quar ... er2020.pdf
http://www.crsp.org/files/Equity-Indexe ... uide_0.pdf

I don't have all the data they do, but if their methods don't have ETSY in at least the mid-cap fund if not split across lrg/small or mid/small, this seems... sub-optimal. Weird. It's a $19b company. But Etsy will not be found in Vanguard CRSP-indexed mid-cap or large-cap funds (based on the 9/31 portfolio holdings released today on Vanguard's website).

There are alternatives to CRSP indexing, see graphic here for some examples:
https://advisors.vanguard.com/VGApp/iip ... omparison/
(note that Etsy should be large-cap based on the # of US Equities cutoff in any of those indexes)

S&P seems like the best alternative, and ETSY is in their mid-cap indexes (and thus Vanguard's IVOO / IVOG mid-cap ETFs). Presumably it will eventually transition out of that exclusively to VOO.

Anyone partial to a particular index provider? Russell vs. CRSP vs. S&P vs. others? If so, why?
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David Jay
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Re: examining index methods and market caps

Post by David Jay »

Immunomedics, with just over a 20B market cap appears to be the largest company in VB, the Vanguard small cap ETF. So 20B appears to be their cutoff point. Etsy is #5, so it likely will also leave the small cap fund shortly if it continues to grow.

I think what is throwing you off is the SP500 index. Remember, the SP500 is not size restricted. It is not only a "large cap" index. Many SP500 companies are mid-cap sized firms.
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nisiprius
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Re: examining index methods and market caps

Post by nisiprius »

The total US market is something on the rough order (not bothering to look it up exactly) $35 trillion. Of that, again roughly, 5% is small-cap, 15% mid-cap, 80% large-cap. In dollars, $28 trillion large-cap, $5.25 trillion mid-cap, and $1.75 trillion small-cap.

If Etsy has a market capitalization of, oh, say, $20 billion = $0.02 trillion, that means that if Etsy were considered to be a mid-cap, 0.4% of the mid-caps. If a large-cap, 0.07%. Even if it were a small-cap, it would still only be 1.2% of the small-caps. It is unlikely to be hugely different in its behavior from stocks already in the index. It can't matter hugely where or when it gets entered into which index. On the other hand, it is important for index providers to be somewhat unpredictable as to exactly what they do when, in order to make front-running difficult.
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chem
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Re: examining index methods and market caps

Post by chem »

David Jay wrote: Thu Oct 15, 2020 3:09 pm Immunomedics, with just over a 20B market cap appears to be the largest company in VB, the Vanguard small cap ETF. So 20B appears to be their cutoff point. Etsy is #5, so it likely will also leave the small cap fund shortly if it continues to grow.

I think what is throwing you off is the SP500 index. Remember, the SP500 is not size restricted. It is not only a "large cap" index. Many SP500 companies are mid-cap sized firms.
If you look at their methodology PDF or the other CRSP market-cap based indexes, you'll see that they do not use a hard cutoff. The smallest company in the mid-cap index is only $1b, with a median of ~$13b:
http://www.crsp.org/files/crspmi1_quart ... er2020.pdf

The smallest company in the large-cap index is also $1b, with a median of $21b:
http://www.crsp.org/files/crsplc1_quart ... er2020.pdf

What I'm questioning is the appropriateness of an index which would let a company like Etsy stay in the small-cap index (and ONLY the small-cap index), where the median company is $2.3b and the market cap of Etsy is somewhere around the top-300 of *all* US companies. I understand that they have some criteria where they slowly change indexes over time (and I don't have the data on-hand to reproduce their calculations), but Etsy hasn't even made a partial packet into their mid-cap index (companies are sometimes split across CRSP indexes).

Thus, I'm wondering if the S&P market-cap indexes (where Etsy is considered mid-cap) may be more appropriate to use if trying to construct a portfolio that accurately reflects large/mid/small caps. I thought to raise the issue here as I'm sure other people have considered this portfolio construction question in much more detail than I.
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chem
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Re: examining index methods and market caps

Post by chem »

nisiprius wrote: Thu Oct 15, 2020 4:15 pm It is unlikely to be hugely different in its behavior from stocks already in the index. It can't matter hugely where or when it gets entered into which index. On the other hand, it is important for index providers to be somewhat unpredictable as to exactly what they do when, in order to make front-running difficult.
I mean, your argument here basically boils down to that having different market-cap indexes and faithfully reflecting that market segment doesn't matter. That might be right. Maybe people should just use VTSAX/VTI and forget it. But, it's not really the question that I'm concerned with in the OP. I'm trying to sniff out whether others have carefully analyzed market-cap index construction and formed any conclusions or preferences about the different, competing yet similar financial instruments out there.
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Tyler9000
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Re: examining index methods and market caps

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chem wrote: Thu Oct 15, 2020 5:03 pm Thus, I'm wondering if the S&P market-cap indexes (where Etsy is considered mid-cap) may be more appropriate to use if trying to construct a portfolio that accurately reflects large/mid/small caps. I thought to raise the issue here as I'm sure other people have considered this portfolio construction question in much more detail than I.
Not necessarily. All of the indices simply define the size breaks a little differently. Here's how several compare by market coverage:

Image


I personally like the free-float CRSP methodology (shared by MSCI) and think it does nice job of consistently tracking the different sized slices of the market. Note the different breakpoints and definitions. If you're looking to structure the stock portion of your portfolio by size using multiple funds, IMO the important thing is to choose funds that use consistent definitions to avoid too many gaps or overlaps. I wouldn't stress so much about individual companies along the boundaries.

BTW, for more info on how indices are constructed, you may find this interesting: Investing With Style: How Size and Value Actually Work
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Re: examining index methods and market caps

Post by 000 »

I greatly prefer the CRSP indices. I'm not sure if Russell front-running was ever fixed (maybe Russell 3000 doesn't have that problem?) and I have little interest in S&P's active management and relatively narrow holdings.
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Re: examining index methods and market caps

Post by JoMoney »

I like the S&P 500 index specifically, in part because it is the index that is most widely quoted and used as the proxy for the broad U.S. market.
There are broader 'total market' indices like the Russell 3000, WIlshire 5000, CRSP US Total Market, etc... but the S&P 500 is the most widely quoted and easy to find data on, and compare to my index fund to make sure it's tracking as it should, and comparing it to the many other fund providers that have a fund tracking the exact same index (not just something close).... It was the 'the first' index fund at Vanguard, and it's the one Warren Buffett mentions.

I also like S&P's methodology which is used in the 500, 400 mid-cap, and 600 small-cap indices as well. It's a slightly more selective methodology then just 'everything' in a market-cap range. To be included the company has to have a record of several quarters positive earnings, a seasoning requirement for new issues (no IPOs), a recent change excluding dual-class shares (impacting 'owners' voting rights), as well as some higher liquidity requirements... among others...
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chem
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Re: examining index methods and market caps

Post by chem »

Tyler9000 wrote: Thu Oct 15, 2020 5:22 pm BTW, for more info on how indices are constructed, you may find this interesting: Investing With Style: How Size and Value Actually Work
Nice link, thanks. I also like the link at the bottom of that page, https://portfoliocharts.com/stock-index-calculator/ , which discusses the issue.

For what it's worth, Blackrock (largest ETF provider by assets) has S&P indexed offerings as its largest AUM market-cap based ETFs.
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Re: examining index methods and market caps

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Tyler9000 wrote: Thu Oct 15, 2020 5:22 pm
chem wrote: Thu Oct 15, 2020 5:03 pm Thus, I'm wondering if the S&P market-cap indexes (where Etsy is considered mid-cap) may be more appropriate to use if trying to construct a portfolio that accurately reflects large/mid/small caps. I thought to raise the issue here as I'm sure other people have considered this portfolio construction question in much more detail than I.
Not necessarily. All of the indices simply define the size breaks a little differently. Here's how several compare by market coverage:

Image
The S&P column of this graph is misleading. The S&P 400 and 600 cover only a subset of the market, so much of the S&P's purple slice is in those ranges. The S&P 600 has a lower cap range than the MSCI and CRSP small-cap indexes, and about the same cap range as the Russell 2000. CRSP defines small-cap as 85%-98% of the market (with micro-cap the bottom 2%), and MSCI's index gets about the same range, while Russell and S&P are in the bottom 10%.
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Re: examining index methods and market caps

Post by dumbmoney »

nisiprius wrote: Thu Oct 15, 2020 4:15 pm On the other hand, it is important for index providers to be somewhat unpredictable as to exactly what they do when, in order to make front-running difficult.
If an index fund is going to trade a lot of stock all at once (not ideal), then you want to give the market as much advance warning as possible. Otherwise the price would be more affected by the trade.

Or is the idea that traders are somehow colluding in order to "corner the market"?
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