Is small caps necessary ?

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Topic Author
thibaulthib
Posts: 59
Joined: Mon Nov 12, 2018 8:46 am

Is small caps necessary ?

Post by thibaulthib » Thu Aug 08, 2019 1:15 am

Hi BH,

Just wondering if small caps should be mandatory in each lazy portfolio (As in WSML), because when looking at the SPDR MSCI World Small Cap (WDSC on the LSE), the annualized return since inception (november 2013) is only 6.75%...

Shall we just focus on IWDA + EIMI then ?

HawkeyePierce
Posts: 526
Joined: Tue Mar 05, 2019 10:29 pm
Location: Colorado

Re: Is small caps necessary ?

Post by HawkeyePierce » Thu Aug 08, 2019 1:40 am

I don't know what any of those acronyms are, but I have two comments:

1) Past is not prologue. All asset classes and subclasses have periods of underperformance and overperformance compared to the broader market. Judging any asset by recent performance, especially over a timeframe as short as 6 years, is a dangerous game.

2) If you just want to hold the total market, there's nothing wrong with that. Many Bogleheads and Mr. Bogle himself would agree it's the most prudent choice. Not because it's expected to outperform small cap (or underperform, or anything about relative performance) but because it is simple and cheap and lets you buy the entire market in a single fund.

Schlabba
Posts: 74
Joined: Sat May 11, 2019 9:14 am

Re: Is small caps necessary ?

Post by Schlabba » Thu Aug 08, 2019 2:09 am

thibaulthib wrote:
Thu Aug 08, 2019 1:15 am
Hi BH,

Just wondering if small caps should be mandatory in each lazy portfolio (As in WSML), because when looking at the SPDR MSCI World Small Cap (WDSC on the LSE), the annualized return since inception (november 2013) is only 6.75%...

Shall we just focus on IWDA + EIMI then ?
Not necessary. They would make up a small percentage of your investments and some years they outperform and some years they underperform.
Warren Buffet tells us to just buy the s&p500 and get back to work. If I translate that to non-US citizens I would translate it to just buying the MSCI World and getting back to work. All other things are not necessary (EM, Small caps, etc.) to succeed in building wealth.
The choice is yours.

msk
Posts: 1291
Joined: Mon Aug 15, 2016 10:40 am

Re: Is small caps necessary ?

Post by msk » Thu Aug 08, 2019 2:41 am

Seems that OP is interested in worldwide by market weight accumulating. Vanguard has just launched a single ETF, VWRA that covers roughly 3000 largest companies in the world, based in Ireland. How small is small? Beyond 3000? I have my largest account at the moment in IWDA/EIMI/WSML (started off at 76/12/12%) but henceforth I will be buying just VWRA and be done.

Topic Author
thibaulthib
Posts: 59
Joined: Mon Nov 12, 2018 8:46 am

Re: Is small caps necessary ?

Post by thibaulthib » Thu Aug 08, 2019 2:49 am

msk wrote:
Thu Aug 08, 2019 2:41 am
Seems that OP is interested in worldwide by market weight accumulating. Vanguard has just launched a single ETF, VWRA that covers roughly 3000 largest companies in the world, based in Ireland. How small is small? Beyond 3000? I have my largest account at the moment in IWDA/EIMI/WSML (started off at 76/12/12%) but henceforth I will be buying just VWRA and be done.
MSK you're spot on !

I had actually 2 years ago started with VWRD, but somehow found out later about IWDA+EIMI+WSML which have lower ER, so I went for them with 80/10/10 split. Reason I chose WSML is because EIMI has small cap, so I wanted to be consistent in my choice.

However, it is 3 ETFs to "maintain" so I was looking for the newest VWRA which Vanguard launched, as you said. The only drawback is the 0.25% ER...

My goal is not to overweight or underweight any cap, but rather have the simplest portfolio, with the lowest fees.

Any advise are welcome!

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whodidntante
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Joined: Thu Jan 21, 2016 11:11 pm
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Re: Is small caps necessary ?

Post by whodidntante » Thu Aug 08, 2019 11:07 pm

The size premium has been less pronounced in ex-USA markets.

Topic Author
thibaulthib
Posts: 59
Joined: Mon Nov 12, 2018 8:46 am

Re: Is small caps necessary ?

Post by thibaulthib » Fri Aug 09, 2019 12:12 am

whodidntante wrote:
Thu Aug 08, 2019 11:07 pm
The size premium has been less pronounced in ex-USA markets.
What do you mean?

Schlabba
Posts: 74
Joined: Sat May 11, 2019 9:14 am

Re: Is small caps necessary ?

Post by Schlabba » Fri Aug 09, 2019 1:18 am

thibaulthib wrote:
Fri Aug 09, 2019 12:12 am
whodidntante wrote:
Thu Aug 08, 2019 11:07 pm
The size premium has been less pronounced in ex-USA markets.
What do you mean?
‘Size premium’ is the term used for the extra return you get for small sized companies.

(I don’t believe in this)

Valuethinker
Posts: 38389
Joined: Fri May 11, 2007 11:07 am

Re: Is small caps necessary ?

Post by Valuethinker » Fri Aug 09, 2019 3:36 am

Schlabba wrote:
Thu Aug 08, 2019 2:09 am
thibaulthib wrote:
Thu Aug 08, 2019 1:15 am
Hi BH,

Just wondering if small caps should be mandatory in each lazy portfolio (As in WSML), because when looking at the SPDR MSCI World Small Cap (WDSC on the LSE), the annualized return since inception (november 2013) is only 6.75%...

Shall we just focus on IWDA + EIMI then ?
Not necessary. They would make up a small percentage of your investments and some years they outperform and some years they underperform.
Warren Buffet tells us to just buy the s&p500 and get back to work. If I translate that to non-US citizens I would translate it to just buying the MSCI World and getting back to work. All other things are not necessary (EM, Small caps, etc.) to succeed in building wealth.
The choice is yours.
Yes and Burton Malkiel changed his advice in successive editions of A Random Walk Down Wall Street.

From S&P 500 to Vanguard Total Stock Market.

The problem was the S&P 500 (which is arbitrarily chosen by a committee) was gameable. You could short the stocks most likely to exit (I think the redefinition is done quarterly) and long the stocks most likely to be admitted, and pick up excess return (until the actual announcement was made).

That's transferring performance from the index holders to the hedge funds doing this.

By attempting to be a *total* Stock Market index, the Vanguard fund prevents that (there are other issues around the size of the fund; and how it holds illiquid stocks - I gather using statistical sampling techniques).

DFA is also quite clever about how it manages its funds to minimize dealing and market impact costs. They "teach" the brokers not to do them over. That is why their funds are not "index" but "active" in the definitions.

I think Warren Buffett is short forming - avoids him having to name a fund and associate himself with that fund manager. S&P 500 everyone knows and it's easy to find an index fund for it.

I agree the international investor should seek as closely as possible to track the world index. I would argue for a modest underweighting of Emerging Markets, but in truth I probably can't make a good fact-based case for that - just a sense of risk v return.

The small cap effect is probably really there but smaller than was originally estimated. It is basically a reward for assuming liquidity risk. It also includes a lot of "lottery ticket" stocks with right skewed returns but an average return well below the average for the market as a whole (a lot of them go to zero).

Topic Author
thibaulthib
Posts: 59
Joined: Mon Nov 12, 2018 8:46 am

Re: Is small caps necessary ?

Post by thibaulthib » Tue Aug 13, 2019 1:02 am

Valuethinker wrote:
Fri Aug 09, 2019 3:36 am
Schlabba wrote:
Thu Aug 08, 2019 2:09 am
thibaulthib wrote:
Thu Aug 08, 2019 1:15 am
Hi BH,

Just wondering if small caps should be mandatory in each lazy portfolio (As in WSML), because when looking at the SPDR MSCI World Small Cap (WDSC on the LSE), the annualized return since inception (november 2013) is only 6.75%...

Shall we just focus on IWDA + EIMI then ?
Not necessary. They would make up a small percentage of your investments and some years they outperform and some years they underperform.
Warren Buffet tells us to just buy the s&p500 and get back to work. If I translate that to non-US citizens I would translate it to just buying the MSCI World and getting back to work. All other things are not necessary (EM, Small caps, etc.) to succeed in building wealth.
The choice is yours.
Yes and Burton Malkiel changed his advice in successive editions of A Random Walk Down Wall Street.

From S&P 500 to Vanguard Total Stock Market.

The problem was the S&P 500 (which is arbitrarily chosen by a committee) was gameable. You could short the stocks most likely to exit (I think the redefinition is done quarterly) and long the stocks most likely to be admitted, and pick up excess return (until the actual announcement was made).

That's transferring performance from the index holders to the hedge funds doing this.

By attempting to be a *total* Stock Market index, the Vanguard fund prevents that (there are other issues around the size of the fund; and how it holds illiquid stocks - I gather using statistical sampling techniques).

DFA is also quite clever about how it manages its funds to minimize dealing and market impact costs. They "teach" the brokers not to do them over. That is why their funds are not "index" but "active" in the definitions.

I think Warren Buffett is short forming - avoids him having to name a fund and associate himself with that fund manager. S&P 500 everyone knows and it's easy to find an index fund for it.

I agree the international investor should seek as closely as possible to track the world index. I would argue for a modest underweighting of Emerging Markets, but in truth I probably can't make a good fact-based case for that - just a sense of risk v return.

The small cap effect is probably really there but smaller than was originally estimated. It is basically a reward for assuming liquidity risk. It also includes a lot of "lottery ticket" stocks with right skewed returns but an average return well below the average for the market as a whole (a lot of them go to zero).
Thank you so much Valuethinker, so instead of 76/12/12 for IWDA/EIMI/WSML, what would you recommend? I currently have 80/10/10.

Thibault

ketchup
Posts: 13
Joined: Sat Dec 19, 2015 9:22 am

Re: Is small caps necessary ?

Post by ketchup » Thu Aug 15, 2019 11:18 am

I would like to expand this question to tilts in general. I have a five fund portfolio consisting of:
42% in VWRD | FTSE All-World UCITS ETF (USD) Distributing (0.25%)
14% in IWVL | iShares Edge MSCI World Value Factor UCITS (0.30%)
14% in WDSC | SPDR MSCI World Small Cap UCITS ETF (0.45%)
10% in VDEM |Vanguard FTSE Emerging Markets UCITS ETF (0.25%)
20% in SDIG |iShares $ Short Duration Corp Bond UCITS ETF (0.20%)

My question is how effective and necessary are tilts? My tilts make up 38% of my portfolio (value + EM + SC). Should I keep the tilts?... and if so, why?, and if not, why? The size of my portfolio is in low six figure digits and growing. :happy

Cheers

Pepper11
Posts: 43
Joined: Fri Jun 13, 2014 9:22 pm

Re: Is small caps necessary ?

Post by Pepper11 » Thu Aug 15, 2019 9:03 pm

I am selling them all. They are garbage. About to TLH on all my small caps, and there are plenty of losses! In the red since 2016. Bail while you can.

andrew99999
Posts: 452
Joined: Fri Jul 13, 2018 8:14 pm

Re: Is small caps necessary ?

Post by andrew99999 » Fri Aug 16, 2019 1:12 am

I am selling them all. They are garbage. About to TLH on all my small caps, and there are plenty of losses! In the red since 2016. Bail while you can.
If anything can be gained from this comment, it's that if you include or exclude small caps, make it a permanent decision so that you don't decided to sell after it has gone down, thereby doing worse than if you never bought it in the first place.
This is not only for small caps, but everything else - value, emerging markets, and equities in general.
Perpetually selling after it has gone down and buying after it has recovered leads to a drag on returns.

mariezzz
Posts: 763
Joined: Mon Oct 02, 2017 11:02 pm

Re: Is small caps necessary ?

Post by mariezzz » Fri Aug 16, 2019 12:38 pm

Pepper11 wrote:
Thu Aug 15, 2019 9:03 pm
I am selling them all. They are garbage. About to TLH on all my small caps, and there are plenty of losses! In the red since 2016. Bail while you can.
Buy high, sell low!

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