Foreign Small Cap ETFs

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DaveTH
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Foreign Small Cap ETFs

Post by DaveTH » Thu May 03, 2007 9:26 am

Here is a good article that compares the WisdomTree EFT (DLS) and the new ETF from SSGA (GWX). It also provides recommended allocations:

http://www.thestreet.com/pf/markets/act ... 54412.html

Dave

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Post by test » Thu May 03, 2007 9:30 am

I agree with using more than one ETF from different ETF providers in order to create a little more diversification.

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CyberBob
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Back-test baloney

Post by CyberBob » Thu May 03, 2007 9:42 am

The reason to go so heavily in DLS is the large performance dispersion that favors DLS in the back-test.
Oh, please.
A simulated back-test is a solid foundation on which to base your asset allocation?

Bob

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Post by yobria » Thu May 03, 2007 9:46 am

Thanks for the link. I'll stick with 100% DLS- slicing and dicing w/in international small equity is going a bit too far for me (plus I prefer the value weighting).

Nick

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GWX

Post by grok87 » Thu May 03, 2007 7:39 pm

is going to eat DLS's lunch!
:lol:

cheers
grok

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DaveTH
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Post by DaveTH » Thu May 03, 2007 8:06 pm

GWX is going to eat DLS's lunch!
Really? Based on what?

DLS
===
Volume = 99,820
Assets = $446.4M
YTD Return = 14.42%

GWX
===
Volume = 19,300
Assets = $14.4M
YTD Return = ??

Dave

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DLS For Me

Post by SoonerSunDevil » Thu May 03, 2007 8:11 pm

I'm sticking with DLS. It's served me well up to this point, and Rick Ferri likes this ETF. If Rick Ferri likes this ETF, then I like this ETF. :)

John

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Post by docneil88 » Thu May 03, 2007 8:44 pm

Value of Backtests

Hi all, CyberBob says,
Oh, please. A simulated back-test is a solid foundation on which to base your asset allocation?
The issue here is not so much asset allocation as it is sub-allocation within an asset class, namely international small-cap. A backtest can be very relevant when (1) it covers a sufficient # of years, (2) it covers a sufficent number of stocks, (3) the results seem to have a rational link to the strategy, and (4) similar results were achieved with similar stategies. (There may be other things worth adding to this list, so please chime in if you think there are.) (A violation of (3) might be a backtest that shows outperformance by a stategy that hold stocks only in years when the last published digit of the Dow close for the year before was an even number.) I say the DLS backtests satisfy each of the above criteria except for (1). 10 years is a fairly long period of time, but I'd like to see a longer backtest.

There is also the issue of tracking error; we have yet to see how WisdomTree does on that over more than a 10-month period, but most of its funds have done pretty well. Since inception on 6/16/06, DLS's return based on NAV is 35.2% vs. 34.6% for its corresponding index. Best, Neil

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Post by baw703916 » Thu May 03, 2007 9:03 pm

Yes backtesting should be taken with a grain of salt, but I think the question of "which is better?" misses the point.

Which is better, Vanguard Total Stock Market or Vanguard Value Index?

Probably depends whether you're looking for a value fund or a core fund...

DLS falls into the value category per M*. GWX doesn't have a style box assignment yet, but I'm almost certain it will be core.

I think if the author had just pointed out that they are constructed differently, so it might be worth buying both for a little more diversification in the IS space, and left it at that...that would have been preferable to putting in the silly line about who "gets the nod".

Probably which you should buy and how much depends on how much value tilting you might want, etc. etc.

Best wishes,
Brad

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DLS

Post by Gregory » Thu May 03, 2007 9:21 pm

I recall seeing a post where Rick Ferri listed DLS in a portolfio, and placed a crying face after DLS. :cry:
Pecuniae imperare oportet, non servire. | Fortuna vitrea est; tum cum splendit frangitur. -Syrus

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Re: DLS

Post by SoonerSunDevil » Thu May 03, 2007 9:37 pm

Gregory wrote:I recall seeing a post where Rick Ferri listed DLS in a portolfio, and placed a crying face after DLS. :cry:
Rick's issue with DLS is the expense ratio of .58% Although this ER isn't cheap, I also don't consider it exorbitant, especially for an international fund. Would I like the ER to be lower? Of course, but I think that I'm getting my money's worth with this ETF.

John

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Post by stratton » Thu May 03, 2007 10:37 pm

Rick's issue with DLS is the expense ratio of .58% Although this ER isn't cheap
Rick also considers it a spindex, but if thats what you can get... Hence, the :cry:

I'm not going to sell DLS to buy GWX. I appreciate that its Intl SV.

Paul :cry:

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Re: GWX

Post by yobria » Thu May 03, 2007 11:04 pm

grok87 wrote:GWX is going to eat DLS's lunch!
Don't forget to dock it 20% for not coming out on time and missing that big recent runup we DLS holders got...

Nick

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Post by test » Fri May 04, 2007 1:02 am

iShares FTSE Developed Small Cap ex-North America Index Fund

http://www.sec.gov/Archives/edgar/data/ ... 85apos.htm

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Post by test » Fri May 04, 2007 1:07 am

PowerShares FTSE RAFI Developed Markets ex-US Small Portfolio

http://www.secinfo.com/d11MXs.v26jd.htm

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Hey...

Post by Trev H » Fri May 04, 2007 6:39 am

Those of you that hold DLS or GWX or any type of Intl Small...

Eric (enels) on the other board.... mentioned a DFA article that suggested holding International (but avoid the general EAFE) type holding.

In other words...

ILV ISV ISB... but no ILB.

This was to complement a Small Value Tilted US Portfolio similar to 4x25... US (LV LB SV SB).

For those of you like Nick and others.... that are using DLS are you holding DLS to offset a ILB holding like Total International... ILB + ISV ?

Or are you holding the 4 corners in some fashon... ILB ILV ISB ISV.

I am considering moving my VG Rollover IRA to WF (100 free trades) and getting Intl Small via DLS...

I plan to continue to S&D the US Equities (coffeehouse style).

For those of you that do hold the 4 corners ILB ILV ISB ISV on the International side... do you us the WisdomTree Top 100 ILV ETF ?
Or one of the other Intl LV ETF's from WisdomTree or some other ETF provider. The Top 100 is all ILV... DLS is Small & MId... seems like the two would work well together for Value Tilting Large to Small.

Just wondering how some of you folks are using DLS and other Intl Components with your US Equity Holdings.

And... Another question.
My world has somewhat been limited (in my Rollover IRA at Vanguard) to Vanguard Funds only.

With the Move to WF... and ETF + Fund possibilities there... including Vanguard and Others... (the investing possibilities are much wider).

If I were perfectly happy with VIVAX for US LV (which I have been).... would you continue to use the FUND ... or change to the ETF ?
Or some other ETF like the S&P Pure Value fund for US LV.

What are the advantages (or disadvantages) of using the ETF vs FUND in a IRA type situation ?

I am not contributing to this IRA... I do that in my company plan. This is a Rollover IRA that I simply establish and rebalance yearly.

I know how funds work... no problem there. The question is ETF's.
I hear they are cheaper ER Wise... a good thing.
What are the down-sides to ETF's vs FUNDS in a IRA situation like mine.

Thanks

Trev H
Last edited by Trev H on Fri May 04, 2007 6:58 am, edited 1 time in total.

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Re: Hey...

Post by fire5soon » Fri May 04, 2007 6:54 am

Trev H wrote: For those of you like Nick and others.... that are using DLS are you holding DLS to offset a ILB holding like Total International... ILB + ISV ?

Or are you holding the 4 corners in some fashon... ILB ILV ISB ISV.
Currently I hold TM Intl in taxable and VTRIX in a roth. About half my stash is taxable, so avoiding EAFE type funds would really skew my equity allocation toward US only, hence the TM Intl.

I'm seriously considering DLS, but haven't decided if it will replace VTRIX, or if it will be in addition to. So I'm looking at either ILB/ILV/ISV -or- ILB/ISV. I tend to ponder these decisions for a long time so I haven't made a decision yet.

GWX is not in the picture for me. I don't want US SB, so I also avoid Intl SB.

-Jay
A man is a success if he gets up in the morning and gets to bed at night, and in between he does what he wants to do. - Bob Dylan

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Post by DaveTH » Fri May 04, 2007 7:45 am

are you holding the 4 corners in some fashon... ILB ILV ISB ISV.
Trev, here is how I have sliced the international portion of my portfolio:

Int'l Total Market - VEU ETF
Int'l Large Value - DODFX
Int'l Small Value - DLS

That's as far as I plan to take the slicing for international. I don't include a separate allocation to EM because VEU provides 15% and DODFX has 13%. I also don't see the need for GWX.

Dave

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Post by 4th&Goal » Fri May 04, 2007 8:04 am

DaveTH wrote:
are you holding the 4 corners in some fashon... ILB ILV ISB ISV.
Trev, here is how I have sliced the international portion of my portfolio:

Int'l Total Market - VEU ETF
Int'l Large Value - DODFX
Int'l Small Value - DLS


Dave
I don't really see DODFX as International Large Value because its stock style (as x-rayed by M*) is VERY similar to International Large Blend EAFE Index funds.

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Post by DaveTH » Fri May 04, 2007 8:15 am

I don't really see DODFX as International Large Value because its stock style (as x-rayed by M*) is VERY similar to International Large Blend EAFE Index funds.
Sorry, but I completely disagree. M* and Lipper both classify DODFX as Foreign Large Value and it is well known that D&C is a value-focused shop. The fund has consistently been in the Large Value category since launching and the major of the holdings (39%) are specifically Large Value. Not sure what you are looking at to come to your conclusion.

Dave

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Re: Hey...

Post by SoonerSunDevil » Fri May 04, 2007 8:29 am

Trev H wrote:Those of you that hold DLS or GWX or any type of Intl Small...

Eric (enels) on the other board.... mentioned a DFA article that suggested holding International (but avoid the general EAFE) type holding.

In other words...

ILV ISV ISB... but no ILB.

This was to complement a Small Value Tilted US Portfolio similar to 4x25... US (LV LB SV SB).

For those of you like Nick and others.... that are using DLS are you holding DLS to offset a ILB holding like Total International... ILB + ISV ?

Or are you holding the 4 corners in some fashon... ILB ILV ISB ISV.

I am considering moving my VG Rollover IRA to WF (100 free trades) and getting Intl Small via DLS...
Hi Trev,

The international side of my portfolio is comprised of only two funds. I hold DODFX, Dodge and Cox's International Large Value, and DLS. I'm only holding two of the four corners, ILV and ISV. I might add ILB later, but for now, I'm happy with DODFX and DLS making up roughly 30% of my portfolio.

I too plan to move to Wells Fargo in the near future, and I look forward to holding mutual funds when I must, and ETFs when I can.

John

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Post by Wagnerjb » Fri May 04, 2007 8:38 am

For those of you like Nick and others.... that are using DLS are you holding DLS to offset a ILB holding like Total International... ILB + ISV ?

Or are you holding the 4 corners in some fashon... ILB ILV ISB ISV.
Trev: here is what I do, which is influenced (and limited) by the choices I have in tax deferred plans.

VGTSX in 401k (about 70% of international)
EFV in IRA (about 15% of international)
VINEX in deferred comp (about 15% of international)

I am overweight in small domestically, but not internationally. I am overweight in value - domestically in Small and internationally in Large. For tax reasons, I am not overweight in LV domestically. Why don't I substitute DLS in place of EFV? I am satisfied with my value and small tilts, and am waiting and watching. I suspect I will add ISV some day, but it may be DLS or another ETF or a DFA fund. Personally, I don't like the Wisdom Tree emphasis on dividends but I realize that in a tax deferred account it is harmless, and the low cost is more important.

Best wishes.
Andy

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Post by stratton » Fri May 04, 2007 9:46 am

For those of you like Nick and others.... that are using DLS are you holding DLS to offset a ILB holding like Total International... ILB + ISV ?

Or are you holding the 4 corners in some fashon... ILB ILV ISB ISV.
Trev, I feel your pain. :)

I have one of Rick Ferri's intl allocations:

Code: Select all

3x Pacific, 3x Europe, 2x ISV, 2x EM
The more "aggressive" version is equal parts of each:

Code: Select all

1x Pacific, 1x Europe, 1x ISV, 1x EM
I added intl RE (RWX) too even though I might toss it since I think the others are more "valuable" and it would simpify the intl to only four funds and I'd probably shift to equal portions. I'd love to have a bit more value, but Pac, Eur, and EM are in taxable and I don't have room in tax advantage for ILV. So mine currently looks like this:

Code: Select all

3.5x Pacific, 3.5x Europe, 2.5x ISV, 2.5x EM, 2x Intl RE
I have Larry's _The_Only_Investement_Guide_... from the library and the international looks like this:

Code: Select all

 2x IV, 2x SV, 1x SB, 1x EM
The DFA peddler IFA uses as an example:

Code: Select all

5.5x ILV, 2.75x ISB, 2.75x ISV, 1.65x EM SB, 1.65x EM SV, 2.2x EM
Obviously they're milking all the DFA funds not available on the regular mutual fund market.

A simplified version I've seen is:

Code: Select all

1x ILV, 1x ISV, 1x EM
Then there's Paul Merrimans version:

Code: Select all

1x ILV, 1x ILB, 2x ISV, 1x EM
Of course, thats before GWX came out. If you follow Paul Merrimans usual divider to the "logical" :wink: extreme you could have:

Code: Select all

1x ILV, 1x ILB, 1x ISB (gwx), 1x ISV (dls), 1x EM, 1x IRE (rwx)
I'm kind of in the same situation you are. I'd love to slice it up more, but I like the advantage of holding different markets too and the pieces are getting really dinky. So its a toss up.

Paul

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Re: Hey...

Post by yobria » Fri May 04, 2007 10:07 am

Trev H wrote: For those of you like Nick and others.... that are using DLS are you holding DLS to offset a ILB holding like Total International... ILB + ISV?
Just using it to SV weight my intl port, which has equal amounts of Developed TSM, Emerging TSM, ILV, IS"V" (DLS). Also yields approximately equal Europe, Pacific, EM (though more Europe). I don't use SB or ISB.

Nick

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Post by 4th&Goal » Fri May 04, 2007 2:02 pm

DaveTH wrote:
I don't really see DODFX as International Large Value because its stock style (as x-rayed by M*) is VERY similar to International Large Blend EAFE Index funds.
Sorry, but I completely disagree. M* and Lipper both classify DODFX as Foreign Large Value and it is well known that D&C is a value-focused shop. The fund has consistently been in the Large Value category since launching and the major of the holdings (39%) are specifically Large Value. Not sure what you are looking at to come to your conclusion.

Dave
DaveTH .. I respectfully disagree with your disagreement. Below is M* percentage breakdown of DODFX and Fidelity's EAFE index fund (FSIIX). I just don't see DODFX as significantly more value oriented.

----------------------------- LCV --LCB --LCG --MCV --MCB --MCG
Dodge & Cox Internat 38.88 32.31 16.84 5.32 4.36 1.57
Fidelity Spartan Int---- 32.61 31.56 23.44 4.83 4.02 3.31

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Post by DaveTH » Fri May 04, 2007 4:09 pm

DaveTH .. I respectfully disagree with your disagreement. Below is M* percentage breakdown of DODFX and Fidelity's EAFE index fund (FSIIX). I just don't see DODFX as significantly more value oriented.
Well, there is certainly a significant difference in performance. But, if you still believe that they are essentially the same asset class that's okay with me.

Dave

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Post by baw703916 » Fri May 04, 2007 4:33 pm

Rick's issue with DLS is the expense ratio of .58%
I'll let Rick speak for himself on his opinions of DLS...but if .58 is too high an ER for ISV (DLS), then 0.60 is really too high for ISB.

Comparing blend and value ETFs from the same provider in the same market segment:

VV (LB) ER=0.07; VTV (LV) ER=0.11

EFA (ILB) ER=0.35; EFV (ILV) ER=0.40

IWM (SB) ER = 0.20; IWN (SV) ER =0.25

since in every case blend is 4-5 bp cheaper than value, it seems that GWX (at 2 bp more expensive than DLS) is at least 6-7 bp more expensive than it should be, relative to DLS.

Brad

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Post by SoonerSunDevil » Fri May 04, 2007 4:37 pm

baw703916 wrote:
Rick's issue with DLS is the expense ratio of .58%
I'll let Rick speak for himself on his opinions of DLS...but if .58 is too high an ER for ISV (DLS), then 0.60 is really too high for ISB.

Comparing blend and value ETFs from the same provider in the same market segment:

VV (LB) ER=0.07; VTV (LV) ER=0.11

EFA (ILB) ER=0.35; EFV (ILV) ER=0.40

IWM (SB) ER = 0.20; IWN (SV) ER =0.25

since in every case blend is 4-5 bp cheaper than value, it seems that GWX (at 2 bp more expensive than DLS) is at least 6-7 bp more expensive than it should be, relative to DLS.

Brad
This is Rick's quote from a previous conversation
In general, I am not a big fan of higher-cost WisdomTree ETFs (0.58% for DLS). But, because there are no other international small-cap value 'index' funds available to the public, DLS is okay.

Like I stated in a previous post, I'd like to see the ER of this ETF lowered some, but I don't think this is a terribly high price to pay for this asset class.

John

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Post by baw703916 » Fri May 04, 2007 4:45 pm

Hi John,

I didn't mean my post to sound like I disagreed with you...I have pretty much the same opinion as you that 0.58 isn't outrageous (at least not compared to the 1.61 ER for the active IS fund I owned before DLS came out!), and not having DFA access, I do own DLS.

I just wanted to point out that ER is hardly a reason to buy GWX instead of DLS. I was curious if anyone else had expected the ER of GWX to come out a bit lower.

Brad

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Post by DaveTH » Fri May 04, 2007 7:58 pm

From the Index Fund Investor site http://www.ifa.com/:

Average annualized returns (1957-2006)
==========================
Int'l Small Blend = 15.69%
Int'l Small Value = 17.51%

Dave

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Post by 4th&Goal » Fri May 04, 2007 8:16 pm

DaveTH wrote:
DaveTH Well, there is certainly a significant difference in performance. But, if you still believe that they are essentially the same asset class that's okay with me.

Dave
DaveTH,
I'm sure you know the difference in performance is caused by DODFX EM exposure. Also, I'm not "believing they are essentially the same asset class." only that the percentage of value holdings between DODFX and the EAFE Index are similar.

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Post by Latestarter » Fri May 04, 2007 8:47 pm

I'm a little surprised to find so many on this forum happy to own DLS and uninterested in trading it in for GWX now that the latter is available -- or at least wanting to have some of each. Apart from the larger dispute about styles of indexing (wih DLS representing the heterodox, non-Bogle position), I had read that DLS is overly focused on high dividend producing companies with the result that it's overweighted in industrials and financials and thus more at risk during periods of inflation.

Personally, I was planning to buy GWX just on the principle that a blend makes more sense because the value premium, at least for international, may not last forever. But I'm willing to reconsider this. Folks here would choose DLS over GWX today if they were just opening up a position in international SC?

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Post by DaveTH » Fri May 04, 2007 8:53 pm

Also, I'm not "believing they are essentially the same asset class." only that the percentage of value holdings between DODFX and the EAFE Index are similar.
Other than stating that the LV component of EAFE and DODFX are similar, are you disputing the fact that M* still classifies DODFX as Foreign Large Value and EAFE as Foreign Large Blend? Your argument really makes no sense and is not very convincing. DODFX IS a Foreign Large Value fund regardless of what you want to believe.

Dave

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Post by DaveTH » Fri May 04, 2007 9:00 pm

Personally, I was planning to buy GWX just on the principle that a blend makes more sense because the value premium, at least for international, may not last forever. But I'm willing to reconsider this. Folks here would choose DLS over GWX today if they were just opening up a position in international SC?
It may not last forever, but it has held true for the last 50 years. In case you missed it, I'll repeat it here:

Average annualized returns (1957-2006)
==========================
Int'l Small Blend = 15.69%
Int'l Small Value = 17.51%

Also, take a look at the average daily volume of the two:
DLS = 130,116 shares
GWX = 29,414 shares

DLS has nearly 4.5 times the trading activity.

Dave

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Post by Kenster1 » Fri May 04, 2007 9:12 pm

This'll also be an interesting one to keep an eye on...

PowerShares FTSE RAFI Developed Markets ex-U.S. Small Portfolio

The FTSE RAFI indexes in general are similar to the holdings found in a comprehensive market-cap index except that the weighting of the stocks are different (fundamental weighted) and making the index tilt to value.

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Post by 4th&Goal » Fri May 04, 2007 9:16 pm

DaveTH wrote:
Other than stating that the LV component of EAFE and DODFX are similar, are you disputing the fact that M* still classifies DODFX as Foreign Large Value and EAFE as Foreign Large Blend? Your argument really makes no sense and is not very convincing. DODFX IS a Foreign Large Value fund regardless of what you want to believe.

Dave
DaveTH,
Take a deep breath and look at the percentages for each invested in Large Cap Value and you will see the percentages are similar. I am not attempting to defame a fund you obviously feel the need to defend. Look beyond the M* style box and you will have to agree with me. Just because you say is it so does not mean it is so.

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I don't like DLS's country mix

Post by grok87 » Fri May 04, 2007 9:23 pm

DaveTH wrote:
GWX is going to eat DLS's lunch!
Really? Based on what?

Dave
I suppose I'm in the "DLS is a spindex" camp. I'm not oppposed to international small value, but I find the focus on dividends to the exclusion of all else gimmicky.

One of the consequences is that DLS's country mix is very skewed. For example, the EAFE regular large cap index has about 9% in Pacific ex Japan (Australia, etc.), DLS has 31%. Zeroing in on Australia, the EAFE has 5% while DLS has 20%- GWX has 9%.

cheers
grok

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Post by DaveTH » Fri May 04, 2007 9:35 pm

Just because you say is it so does not mean it is so.
It's not just my opinion. M* says it is so. It's interesting that you value the M* style boxes yet you ignore the M* fund classification. Hmm.

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Post by 4th&Goal » Fri May 04, 2007 9:55 pm

DaveTH wrote:
Just because you say is it so does not mean it is so.
It's not just my opinion. M* says it is so. It's interesting that you value the M* style boxes yet you ignore the M* fund classification. Hmm.
DaveTH,
DODFX holds 38.88% in Large Cap Value
FSIIX holds 32.61 in Large Cap Value

Once again, I am only saying that the LCV holdings percentages are similar. I read your posts and know you are a smart person. Why are you having so much trouble with this?

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4th&Goal

Post by DaveTH » Fri May 04, 2007 10:05 pm

Is there some other fund that you would consider as Foreign Large Value since 39% doesn't seem to be enough for you? What is your criteria? 50%? 100%? Apparently 39% is enough for M* to classify as LV and that's good enough for me.

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Re: 4th&Goal

Post by 4th&Goal » Fri May 04, 2007 10:15 pm

DaveTH wrote:Is there some other fund that you would consider as Foreign Large Value since 39% doesn't seem to be enough for you? What is your criteria? 50%? 100%? Apparently 39% is enough for M* to classify as LV and that's good enough for me.
DaveTH,
Please read each word of my last post. I said:

DODFX holds 38.88% in Large Cap Value
FSIIX holds 32.61 in Large Cap Value

Once again, I am only saying that the LCV holdings percentages are similar. I read your posts and know you are a smart person. Why are you having so much trouble with this?


You follow with a question unrelated to my statement. It is not a matter of a percentage "not being enough for me." Once again, especially for you, I simply state the percentages are similar. Try to stay focused.

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Post by Latestarter » Fri May 04, 2007 10:44 pm

DaveTH wrote:Also, take a look at the average daily volume of the two:
DLS = 130,116 shares
GWX = 29,414 shares

DLS has nearly 4.5 times the trading activity.

Dave
Could that be simply because it's been around longer?

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Robert T
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International

Post by Robert T » Fri May 04, 2007 10:45 pm

.
Trev H,

FWIW – here’s my take on a few of your questions. Apologies for the long post. I often find the best way to respond is reflect on what my thought process was to similar questions. Anyway hope these are useful.

1. The Sinquefield article on 'Where are the gains from international diversification?'

The key messages (at least for me) from the Sinquefield article were:

- The expected return for a given risk premium is the same worldwide with the exception of segmented markets (which I take to mean emerging markets).

- Foreign tax withholdings may increase the cost of holding EAFE: EAFE and S&P500 have the same expected return but the 15 percent withholding tax imposed by most EAFE countries reduce the expected return of EAFE – particularly for institutional investors as they don’t have taxable income to offset these foreign taxes. Individual investors can claim foreign tax credits so the cost is lower (provided a funds of funds approach is not used and the fund is held in a taxable account). Maybe implications to consider for your IRA account.

- International small caps provided a greater diversification benefit than international value to a S&P500 fund over the 1975-94 period (I found this to be an interesting result). Interestingly the international small cap correlations with EAFE and S&P500 were negative (close to zero) while that for US small caps was significantly positive – suggesting international small may be a better diversifier to both EAFE and S&P500 than US small. The US and Intl. size premium are arguably uncorrelated.

- At a global level the size and value premium were almost the same magnitude. The value premium was greater than the size premium in US markets while the reverse was true in international markets – over the period analyzed. (Table A-2; 1970-94).

Should the results impact portfolio decisions? These are the impacts they had on mine:

- The same expected risk premiums were used for both the US and Non-US Developed market to calculate my overall portfolio expected return. Allocation to these risks (market, value and small) was aligned to needed return (as well as willingness and ability to take risk).

- The case against holding an EAFE type fund is lower if foreign tax credits can be claimed and if international holdings are half an equity allocation (at least to me). I currently hold an EAFE type fund that allows claiming the foreign tax credit so the costs are lower. Following Sinquefield’s argument with a 50:50 US:Non-US allocation, the US allocation could be seen as providing diversification to my international holdings:) as much as the reverse e.g: ‘load up’ on value stocks on the US side as they are cheaper (lower expense ratios etc) versus the reverse suggested in the article for a 75 US: 25 Non-US allocation.

- Both an international small cap and value fund are included although I still overweight value relative to small (to match my portfolio factor loading targets). The article focused only on the impacts of Intl small and value on an S&P500 portfolio – not a more ‘diversified’ portfolio where the results may differ. But intl. small will likely still have a significant impact.

- The US value premium appears to be more robust than the size premium and has lower correlation to the overall market portfolio. [will provide more on this sometime].

2. International asset allocation

FWIW – here’s my target international allocation. I also include an emerging market allocation to ensure diversification across the main global markets. EM has higher expected returns (due to higher risk/cost of capital). I don’t currently tilt to small and value in EM (the earlier discussion on ‘submerging markets’ on M* may also be useful).

12.5% Intl. Large
50.0% Intl. Value
12.5% Intl. Small
25.0% Emerging Market

3. Security selection

Criteria: The criteria used for security selection were: factor exposure (preference for asset class index funds to minimum style drift), broad diversification, low cost and tax efficient, and fund company stewardship. Based on these – for better or worse – the funds I currently use are:

Vanguard Tax Managed Intl.
iShares EAFE Value
Vanguard International Explorer
Vanguard EM ETF

Open end mutual funds vs ETFs: I prefer to use the ishares ETF for value exposure due to expected greater tax efficiency over other open-end share class funds (and the WisdomTree high dividend paying funds). I am comfortable using mutual funds for large and small market exposure. As intl. small index fund alternatives become available (incl. small value) I will consider shifting from the actively managed int. explorer. I am also not sure if the Vanguard EM ETF is a superior product (at least to me) than the open ended share class. I current qualify for the admiral share class (with same expense ratio) so the ETF benefit is at best marginal. Based on my experience (mainly with ETFs in taxable accounts), I would expect the up and down side of ETF vs open end funds in an IRA to be:

Up – generally lower expense ratios (less work and less cost for fund company)
Down – commissions, bid-ask spreads, often can’t automatically reinvest dividends (if that’s what you want to do)

Robert
.

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Thanks..

Post by Trev H » Sat May 05, 2007 7:38 am

Thanks everyone for the responses to my questions.

Robert T... really appreciate all the details you included.

Couple of questions that I have not taken the time to dig into... but will if you folks don't already know.

EFV I-Shares MSCI EAFE Intl LV
DLS WisdomeTree ISV-IMV

Seem to be the best options for ILV ISV.

Considering my ability to handle TE..... I think I would include a slice of:

VEU Vanguards FTSE X-US for ILB.

VEU includes Emerging Markets (or so I understand from the fund version).

Does EFV and DLS include EM ?
If so... I don't see the need to hold additional EM slices.
Prefer to keep it simple if possible.

Equal Weight to VEU EFV DLS for equally weighting by Asset Class ILB ILV ISV.

While running the ETF screen on M* I also noticed a rather new International REIT ETF (RWX) Dow Jones Wilshire Intl REIT.
Now that interest me to.

I would like to hold 50/50 US/Intl

Considering this simple mix in this Rollover IRA

US
===
VV Vanguard Large Cap Index
IWD Russell 1000 Large Value
RZV Rydex S&P 600 Pure Value
VNQ Vanguard REIT

Intl
===
VEU Vanguard FTSE X-US
EFV I-Shares MSCI EAFE Large Value
DLS WisdomeTree Small/Mid Value
RWX DJ Wilshire International REIT

Best I can tell the ER of this mix would be 0.3075

That would seriously reduce my ER.

And in my Company Plan I have other more mainstream funds like S&P 600 Index for Small Blend that I use so I would not be totally eliminating US SCB.

Anyone using that Intl REIT Fund ?

And do you know if EFV DLS include EM ?

Thanks

Trev H

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Post by DaveTH » Sat May 05, 2007 7:57 am

Trev,

I don't believe that EFV or DLS have any EM exposure since both use MSCI EAFE as the starting point. I also looked at the country allocations for both funds and did not see any that were EM.

VEU has a 15.6% EM exposure according to FTSE and Vanguard sources.

Dave

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Post by Robert T » Sat May 05, 2007 10:50 am

.
Trev H,

Tracking error

I agree that TE is important to consider in asset allocation. It has certainly played a role in my decisions. As Larry Swedore put it in an earlier post:

“…it is the factor loadings that matter, not exposure to each asset class. However owning each often has benefit of keeping investors disciplined and practiced at rebalancing – a benefit IMO.”

I find that broad exposure to asset classes within the parameters of my factor loading targets helps me stay the course.

Does EFV and DLS include EM?

EFV, being a value sort of EAFE does not contain emerging markets but covers Europe, Australasia and Far East.

DLS also does not include EM. From WisdomTree - “The Index is comprised of the companies that compose the bottom 25% of the market capitalization of the WisdomTree DEFA Index after the 300 largest companies have been removed. Companies are weighted in the Index based on annual cash dividends paid.” The DEFA index is based on EAFE (as I understand it)

Is EM exposure necessary? Personal choice plays a role. I overweight EM relative to the market for higher expected return and diversification (the two points raised in the Sinquefield article), particularly diversification of human capital risk. I am comfortable with this exposure. However, I can understand why some people exclude EM. The higher expected return from your proposed intl. small and value tilt may be similar to the higher EM (total market) expected returns so you may not lose much on expected return?

Anyone using intl REIT fund?

I do not currently use REITS (for reasons provided in earlier posts). My understanding is there are some structure differences between US and Intl REITs and foreign tax effects for the latter which need to be considered. I haven’t looked into these issues in much detail so can’t add much more.

Robert
.

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Post by yobria » Sat May 05, 2007 11:10 am

Robert T wrote:Is EM exposure necessary? Personal choice plays a role. I overweight EM relative to the market for higher expected return and diversification (the two points raised in the Sinquefield article), particularly diversification of human capital risk. I am comfortable with this exposure. However, I can understand why some people exclude EM.
I urge anyone to have a healthy amount of EM exposure- it's just an awesome class. Consider this 1995-2004 Dimson-Marsh-Staunton data:

Avg correlation btw pairs of developed markets: .55
Avg correlation btw pairs of emerging markets: .27
Avg correlation btw developed and emerging markets: .31

So first your EM fund has a number of country level sub-classes with low correlations to each other- a diversified portfolio in itself.

Plus the class as a whole has a low correlation to the rest of your equity assets. Now that's diversification!

Nick

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international allocation

Post by tetractys » Sat May 05, 2007 11:35 am

Any opinions on this international allocation?

1/4 VDMIX developed markets
1/4 VTRIX large value
1/4 VWO emerging markets
1/4 DLS small value

Tet

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DaveTH
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Post by DaveTH » Sat May 05, 2007 11:45 am

Any opinions on this international allocation?

1/4 VDMIX developed markets
1/4 VTRIX large value
1/4 VWO emerging markets
1/4 DLS small value
You would be straying from a market-weighted allocation. But, splitting the international portion of your portfolio equally into those 4 asset classes seems like a reasonable approach. However, it's probably better to determine your allocations as a % of your total portfolio.

Dave

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Buying ETF's....

Post by Trev H » Sat May 05, 2007 12:52 pm

I called a bit ago and talked to a rep at WF and asked a bit about how a rollover to them of my IRA would work.

The guy I talked to said that if I had any VG funds I wanted to keep that I could do that and the shares would simply move over to WF.

I do like that Primcap CORE fund and would like to keep what I have in that. Then on the US LV side I may go with the R1000 LV ETF (IWD).

I noticed this when looking at the US LV ETF's this morning...

IWD has a AMC of 48,147
VTV has a AMC of 54,377
RPV has a AMC of 12,203

RPV being the Rydex S&P 500 Pure Value (listed as LV)
I guess when you go DEEP LV you go down in AMC seriously.

RZV has a AMC of 575

I asked him if it could be setup so that the Dividends were auto re-invested in the ETF's and he said Yes... no problem at all doing that in my IRA.

I asked what is involved with purchasing ETF's and he said you simply place a market order.

I keep hearing others here talking about bid ask spreads and limit orders or something like that ?

I have never invested outside of Mutual Funds so all that not at all understood yet.

What are the catches to look out for when buying shares of ETF's ?

Is there a good online article or post here on the board or on the M* board that covers investing in ETF's.

Thanks

Trev H

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