AVDV versus VSS

[brademac]

I've historically invested in VSS (Vanguards FTSE Ex US small cap) along with my VXUS (Vanguard Total International) just because I wanted to tilt to small cap.

I'm trying to decide if I should shift future contributions to AVDV (Avantis international small cap value) since it has two factors (small and value) versus just the small factor with VSS.

Has anyone done the analysis to see if AVDV is expected to outperform VSS based on Fama French modeling. I realized we don't know for sure what future will hold, but was just hoping to know difference between expected returns based on factor premiums.

This is a bit of a apples and oranges comparison as AVDV is truly a small cap fund while VSS teeters between a mid and small cap fund. Also, obviously AVDV is a value fund and VSS is a blend fund. In addition, VSS holds 23% emerging markets and AVDV hold no emerging markets.

I wonder how expense ratio affects this as well. VSS is essentially free to hold as the securities lending income it brings in offsets its 11 bps of expense. AVDV charges 36 bps and I don't know how much of the securities lending income is returned back to the fund. Also, AVDV has higher trading costs with 29% turnover versus 22% turnover of VSS.

So I guess I'm wondering if the extra expenses from AVDV are too much of a drag on its factor premiums for it to potentially outperform VSS in the future?

Also, wouldn't the fact that VSS holds emerging markets (more risky) increase the odds for outperformance over developed countries only because emerging markets are more risky so investors should be compensated for this over the long haul?

Maybe the extra emerging markets exposure of VSS balances out the small value premium of AVDV

Lastly, at most I will have 10% of my portfolio to this segment so I wonder even if it will really matter much in the long run either way because just a small slice of the overall portfolio.

PS. I didn't post this to debate whether factor based returns exist or not. This is directed towards those that believe in factor premiums, know how to do the Fama French analysis, or have an opinion in general. I know many on the forum prefer just Total International, but I just want to tilt some to small cap and maybe small value in the future depending on the feedback I get for the potential of a bit more of a return.

Thanks in advance

[David Jay]

Lastly, at most I will have 10% of my portfolio to this segment so I wonder even if it will really matter much in the long run either way because just a small slice of the overall portfolio.

Likely this.

[stan1]

Do you want to sip the Kool-Aid gingerly, gulp it down eagerly, or get plastered on it? There's an "I believe" button that you have to push. No data can help you on that.

[JamesDean44]

Either option is good. If you can't pick, then why not hold both? The added complexity would be incredibly minimal but obviously measuring that is very subjective. If I had to pick just one to complement VXUS and VTI, I'd probably pick AVDV.

[grabiner]

I hold both, consistent with my philosophy elsewhere. My allocation is 25% growth, 75% value, so I target equal amounts in blend and value funds. (I am not quite at that target yet, as I would have to sell VSS for a large capital gain to get there, but new money is going to value funds.)

I do this in each segment, with VFVA (Vanguard Factor Value ETF) for US large-cap and small-cap, IVLU (iShares MSCI EAFE Factor Value ETF) for foreign large-cap, and AVDV for foreign small-cap. I don't think AVEM gives enough value exposure to be worth it in emerging markets, so my emerging markets are all in VEMAX (Vanguard Emerging Markets Index) and VSS.

[brademac]

I hold both, consistent with my philosophy elsewhere. My allocation is 25% growth, 75% value, so I target equal amounts in blend and value funds. (I am not quite at that target yet, as I would have to sell VSS for a large capital gain to get there, but new money is going to value funds.)

I do this in each segment, with VFVA (Vanguard Factor Value ETF) for US large-cap and small-cap, IVLU (iShares MSCI EAFE Factor Value ETF) for foreign large-cap, and AVDV for foreign small-cap. I don't think AVEM gives enough value exposure to be worth it in emerging markets, so my emerging markets are all in VEMAX (Vanguard Emerging Markets Index) and VSS.

Thanks for the reply

I am believer in AVUV (Avantis Small Value) and combine it with the cheapest beta I can find (now VTI - Vanguard total stock market).

I guess I was leaning towards sticking with VSS because I thought the extra returns from emerging markets would counter the premium from the AVDV with its value factor premium.

I also agree with you that AVEM isn’t different enough from Vanguard Emerging Markets to be worth the higher price. Right now I use EFAE index fund (only international in 401k), Vanguard Emerging Market, and Vanguard FTSE ex US small cap for my international holding which are 30% of my portfolio.

[TSPballer]

I've been in the air about the exact same decision. Ultimately, I decided on VSS for now. AVDV is very new but thus far, they haven't proved worth the added expense over the past year as compared to VSS.

I was going to post a screen grab from google finance to show the performance of both side by side but apparently I don't have the ability. If you search AVDV in google and then add VSS to the comparison you'll see what I'm talking about.

I'd certainly invest in a low cost EM SCV if such a thing existed; but for now it's VSS for me.

[TheDoctor91]

Is there any point going international for SCV? DISVX hasn't done anything special.

[vineviz]

Lastly, at most I will have 10% of my portfolio to this segment so I wonder even if it will really matter much in the long run either way because just a small slice of the overall portfolio.

This is the mostly important sentence in the whole post: AVDV and VSS are so similar (their correlation so far has been 0.99) that with only 10% of the portfolio invested in this segment the difference between being homeless in retirement and having a beach house in Malibu SURELY does not depend on which fund you choose.

It would be very optimistic, IMHO, to expect the Avantis fund to beat the Vanguard fund by more than 100 bps per year on average. If it's only 10% of your portfolio, maybe that's an edge of 0.1% compounded over your holding period. I find that hard to get excited about, personally.