NAESX - is not really Small Cap?! [Vanguard Small-Cap Index]

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RamblinDoc
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NAESX - is not really Small Cap?! [Vanguard Small-Cap Index]

Post by RamblinDoc » Sat Apr 14, 2018 3:55 pm

After thinking about for awhile, I decided to have a small-cap tilt to my portfolio. NAESX (Vanguard Small-Cap Index Fund Investor Shares) seemed like a good option for me. According to the Vanguard website, it averaged to be Small-Cap Blend on their Style Box.

Recently, I checked my asset allocation (I use Personal Capital) and noticed only a small increase in Small Cap exposure, but a larger gain in Mid-Caps. I then checked Morningstar, and noticed that the Style Box for this fund changed this year and now emphasizes MId-caps.

http://portfolios.morningstar.com/fund/ ... ture=en-US

Is this a fluke? Or did the index change? Is this Vanguard mitigating risk?

Also, is there a better Vanguard fund that focuses on Small Cap blend if I want that tilt?

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Re: NAESX - is not really Small Cap?!

Post by SimpleGift » Sat Apr 14, 2018 4:05 pm

RamblinDoc wrote:
Sat Apr 14, 2018 3:55 pm
Also, is there a better Vanguard fund that focuses on Small Cap blend if I want that tilt?
You might check out Vanguard's Tax-managed Small Cap Fund (VTMSX). It's a true small cap fund, based on the S&P Small Cap 600 Index. The only drawback is that it's just offered in Admiral Shares now with a $10,000 minimum initial purchase.

Since its inception in 1999, it's been my favorite fund at Vanguard.
Last edited by SimpleGift on Sat Apr 14, 2018 4:14 pm, edited 1 time in total.
Cordially, Todd

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Re: NAESX - is not really Small Cap?!

Post by lack_ey » Sat Apr 14, 2018 4:14 pm

There have been a number of threads asking similar questions. The primary driving effect behind the difference is that Morningstar changed the breakpoints for what they consider mid and small.

What's a small cap in your estimation? Regardless of what anybody else thinks, there may be other funds that better fit what you're seeking.

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Re: NAESX - is not really Small Cap?!

Post by RamblinDoc » Sat Apr 14, 2018 4:15 pm

SimpleGift wrote:
Sat Apr 14, 2018 4:05 pm
RamblinDoc wrote:
Sat Apr 14, 2018 3:55 pm
Also, is there a better Vanguard fund that focuses on Small Cap blend if I want that tilt?
You might check out Vanguard's Tax-managed Small Cap Fund (VTMSX). It's a true small cap fund, based on the S&P Small Cap 600 Index. The only drawback is that it's just offered in Admiral Shares with a $10,000 minimum initial purchase.
Thanks!

I put NAESX in my Roth IRA. I'd prefer not to have a tax-managed fund in the Roth IRA since I don't care about minimizing capital gains in that account.

I suspect you put VTMSX in your taxable account?

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Re: NAESX - is not really Small Cap?!

Post by SimpleGift » Sat Apr 14, 2018 4:21 pm

RamblinDoc wrote:
Sat Apr 14, 2018 4:15 pm
I suspect you put VTMSX in your taxable account?
Yes. But even so, you may want to check out its long-term record. Even before taxes, it's been a fairly consistent outperformer in the small cap space over the last 15 years (versus its category average).
Cordially, Todd

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Re: NAESX - is not really Small Cap?!

Post by grabiner » Sat Apr 14, 2018 4:22 pm

RamblinDoc wrote:
Sat Apr 14, 2018 4:15 pm
SimpleGift wrote:
Sat Apr 14, 2018 4:05 pm
RamblinDoc wrote:
Sat Apr 14, 2018 3:55 pm
Also, is there a better Vanguard fund that focuses on Small Cap blend if I want that tilt?
You might check out Vanguard's Tax-managed Small Cap Fund (VTMSX). It's a true small cap fund, based on the S&P Small Cap 600 Index. The only drawback is that it's just offered in Admiral Shares with a $10,000 minimum initial purchase.
Thanks!

I put NAESX in my Roth IRA. I'd prefer not to have a tax-managed fund in the Roth IRA since I don't care about minimizing capital gains in that account.
The equivalent for an IRA is the Vanguard ETF VIOO, which tracks the S&P 600. (It's not displayed by default on Vanguard's ETF page; you have to click on "Filters" and then on "Other Indexes: Russell and S&P Indexes"). This does give you a lower cap range, but at a higher cost which may not be worthwhile.
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Re: NAESX - is not really Small Cap?!

Post by RamblinDoc » Sat Apr 14, 2018 4:26 pm

grabiner wrote:
Sat Apr 14, 2018 4:22 pm
RamblinDoc wrote:
Sat Apr 14, 2018 4:15 pm
SimpleGift wrote:
Sat Apr 14, 2018 4:05 pm
RamblinDoc wrote:
Sat Apr 14, 2018 3:55 pm
Also, is there a better Vanguard fund that focuses on Small Cap blend if I want that tilt?
You might check out Vanguard's Tax-managed Small Cap Fund (VTMSX). It's a true small cap fund, based on the S&P Small Cap 600 Index. The only drawback is that it's just offered in Admiral Shares with a $10,000 minimum initial purchase.
Thanks!

I put NAESX in my Roth IRA. I'd prefer not to have a tax-managed fund in the Roth IRA since I don't care about minimizing capital gains in that account.
The equivalent for an IRA is the Vanguard ETF VIOO, which tracks the S&P 600. (It's not displayed by default on Vanguard's ETF page; you have to click on "Filters" and then on "Other Indexes: Russell and S&P Indexes"). This does give you a lower cap range, but at a higher cost which may not be worthwhile.
Thank you!

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Re: NAESX - is not really Small Cap?!

Post by RamblinDoc » Sat Apr 14, 2018 4:32 pm

SimpleGift wrote:
Sat Apr 14, 2018 4:21 pm
RamblinDoc wrote:
Sat Apr 14, 2018 4:15 pm
I suspect you put VTMSX in your taxable account?
Yes. But even so, you may want to check out its long-term record. Even before taxes, it's been a fairly consistent outperformer in the small cap space over the last 15 years (versus its category average).
Good to know!

In your opinion, would it be dumb to have this fund in a Roth IRA? The "tax efficient" fund generally minimizes some gains, but there is no Vanguard fund that tracks the S&P Small Cap 600 index.

Perhaps, when my portfolio grows larger, I'll switch to that allocation to my taxable account.

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Re: NAESX - is not really Small Cap?!

Post by JoMoney » Sat Apr 14, 2018 4:42 pm

RamblinDoc wrote:
Sat Apr 14, 2018 4:32 pm
...there is no Vanguard fund that tracks the S&P Small Cap 600 index.
There is, as mentioned above, but it's in ETF form (VIOO)
https://personal.vanguard.com/us/funds/ ... irect=true
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Re: NAESX - is not really Small Cap?!

Post by nisiprius » Sat Apr 14, 2018 4:50 pm

NAESX; VTWO (Vanguard Russell 2000); VIOO (Vanguard S&P Small-cap 600); IJR (iShares Core S&P Small-Cap)

Image

Poor Vanguard NAESX. Looks like it landed just on the wrong side of Morningstar's arbitrary line.
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Re: NAESX - is not really Small Cap?!

Post by RamblinDoc » Sat Apr 14, 2018 4:58 pm

nisiprius wrote:
Sat Apr 14, 2018 4:50 pm
NAESX; VTWO (Vanguard Russell 2000); VIOO (Vanguard S&P Small-cap 600); IJR (iShares Core S&P Small-Cap)

Image

Poor Vanguard NAESX. Looks like it landed just on the wrong side of Morningstar's arbitrary line.
Thanks, Nisiprius.
I guess I need to re-evaluate if this matters to me. I suspect I'll just stick with NAESX for now since M* has an arbitrary line. It still tilts me to lower-caps a bit.

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Re: NAESX - is not really Small Cap?!

Post by Tyler9000 » Sat Apr 14, 2018 5:23 pm

lack_ey wrote:
Sat Apr 14, 2018 4:14 pm
The primary driving effect behind the difference is that Morningstar changed the breakpoints for what they consider mid and small.
I wasn't aware of that. Thanks for the info.

Yeah, one needs to be careful about using the Morningstar breakpoints for evaluating index funds that may use different construction methodologies. The same goes for the value/blend/growth scale, as Morningstar also uses definitions that differ from many index funds (including Vanguard).

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Re: NAESX - is not really Small Cap?!

Post by RamblinDoc » Sat Apr 14, 2018 5:29 pm

Tyler9000 wrote:
Sat Apr 14, 2018 5:23 pm
lack_ey wrote:
Sat Apr 14, 2018 4:14 pm
The primary driving effect behind the difference is that Morningstar changed the breakpoints for what they consider mid and small.
I wasn't aware of that. Thanks for the info.

Yeah, one needs to be careful about using the Morningstar breakpoints for evaluating index funds that may use different construction methodologies. The same goes for the value/blend/growth scale, as Morningstar also uses definitions that differ from many index funds (including Vanguard).
For what it’s worth, it appears Personal Capital also uses definitions similar to Morningstar. At least from what I can tell.

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Re: NAESX - is not really Small Cap?!

Post by jalbert » Sat Apr 14, 2018 5:31 pm

NAESX tracks a CRSP index that despite the name, is a small and midcap index, so NAESX is a small and midcap index fund.

You can get an S&P Smallcap 600 index ETF at very low cost, just not from Vanguard. Ishares IJR has an ER of .07%. I suspect it also is significantly more liquid than VIOO.
Last edited by jalbert on Sun Apr 15, 2018 2:21 am, edited 1 time in total.
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Re: NAESX - is not really Small Cap?!

Post by JoMoney » Sat Apr 14, 2018 5:41 pm

FWIW, NAESX follows the CRSP US Small Cap Index, CRSP sets the 'breakpoint' for small-caps as the bottom 15% of the market
http://www.crsp.com/files/breakpoints-c ... 180305.pdf

Morningstar appears to define it as the bottom 10%
https://admainnew.morningstar.com/direc ... points.htm
Giant-cap stocks are defined as the group that accounts for the top 40% of the capitalization of the style zone; large-cap stocks represent the next 30%; mid-cap stocks represent the next 20%; and small-cap stocks represent the balance.
Mid-caps are kind of a fuzzy concept... where the split should be for small-caps (or large-caps for that matter) isn't universal.
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Re: NAESX - is not really Small Cap?!

Post by lack_ey » Sat Apr 14, 2018 5:41 pm

jalbert wrote:
Sat Apr 14, 2018 5:31 pm
NAESX tracks a CRSP index that despite the name, is a small and midcap index, so NAESX is a small and midday index fund.

You can get an S&P Smallcap 600 index ETF at very low cost, just not from Vanguard. Ishares IJR has an ER of .07%. I suspect it also is significantly more liquid than VIOO.
Yes. Average daily volume is $239M to $4M. So while primary market liquidity is the same (same underlying securities), on most days it should be easier to trade IJR, as there's much more a market in the ETF shares themselves.

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Re: NAESX - is not really Small Cap?!

Post by RamblinDoc » Sat Apr 14, 2018 5:52 pm

I assumed the definitions of large, mid, and small were universal. This thread blew my mind!
:shock:

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Re: NAESX - is not really Small Cap?!

Post by tibbitts » Sat Apr 14, 2018 6:07 pm

RamblinDoc wrote:
Sat Apr 14, 2018 5:52 pm
I assumed the definitions of large, mid, and small were universal. This thread blew my mind!
:shock:
Maybe if the definitions really mattered, they would be.

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Re: NAESX - is not really Small Cap?!

Post by RamblinDoc » Sat Apr 14, 2018 6:21 pm

tibbitts wrote:
Sat Apr 14, 2018 6:07 pm
RamblinDoc wrote:
Sat Apr 14, 2018 5:52 pm
I assumed the definitions of large, mid, and small were universal. This thread blew my mind!
:shock:
Maybe if the definitions really mattered, they would be.
Touché

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Re: NAESX - is not really Small Cap?!

Post by jalbert » Mon Apr 16, 2018 2:37 am

RamblinDoc wrote:
Sat Apr 14, 2018 5:52 pm
I assumed the definitions of large, mid, and small were universal. This thread blew my mind!
:shock:
Dive into the taxonomy of CRSP indices and you will find it much more surprising than just drawing lines in different places.

They have a megacap index, largecap index, midcap index, and smallcap index.

The large cap index corresponds to the combination of the midcap and megacap indices. This means that all stocks in the midcap index are contained in the largecap index. The largecap index contains just a little over 600 stocks, so 90% if it is the S&P500.

The smallcap index is a completion index for the largecap index, giving you an idea of the extent of its mid midcap holdings with respect to the S&P midcap taxonomy.

The concept of midcaps is newer than the concept of largecaps or smallcaps, likely reflecting the overall capitalization growth of the largest companies.
Last edited by jalbert on Mon Apr 16, 2018 4:55 pm, edited 1 time in total.
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Re: NAESX - is not really Small Cap?!

Post by RamblinDoc » Mon Apr 16, 2018 2:54 am

jalbert wrote:
Mon Apr 16, 2018 2:37 am
RamblinDoc wrote:
Sat Apr 14, 2018 5:52 pm
I assumed the definitions of large, mid, and small were universal. This thread blew my mind!
:shock:
Dive into the taxonomy of CRSP indices and you will find it much more surprising than just drawing lines in different places.
Will do - thanks!

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Re: NAESX - is not really Small Cap?!

Post by Doc » Mon Apr 16, 2018 6:49 am

FWIW VTMSX, Vanguard Tax Managed, tends to be a little more "growthy" than the others being discussed. Probably because tax managed would tend to avoid dividend paying funds.

Also when looking at ETF alternatives make sure you look at trading volume and premium/discount as well as e/r.
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Re: NAESX - is not really Small Cap?!

Post by nisiprius » Mon Apr 16, 2018 7:08 am

Tyler9000 wrote:
Sat Apr 14, 2018 5:23 pm
...Yeah, one needs to be careful about using the Morningstar breakpoints for evaluating index funds that may use different construction methodologies. The same goes for the value/blend/growth scale, as Morningstar also uses definitions that differ from many index funds (including Vanguard).
JoMoney wrote:Mid-caps are kind of a fuzzy concept... where the split should be for small-caps (or large-caps for that matter) isn't universal.
All asset class categories are kind of fuzzy, and you need to be careful about all of them.

People argue endlessly about basis-point differences in statistics for emerging versus developed markets, and yet there is no objective agreement about which countries are "emerging" and which are "developed." There are something like six or seven different categorizations. Morningstar says Total International Stock Index is 17.89% emerging markets as of 02/28/2018. Vanguard says it is 21.50% as of 3/31/2018. No, Vanguard didn't buy twelve billion dollars worth of emerging markets stock in one month, it's just that Vanguard and Morningstar don't agree on which countries are emerging markets.

DFA fans sometimes say that the "proper" definition of "small value" should exclude utilities, and therefore funds and indexes that include utilities merely because they meet the criteria for "small" and "value" are using the wrong index.

Even something as basic as whether something is a "US stock" turns out to be surprisingly fuzzy. The S&P 500 index is about 1% international, "only" 99% US. Yes. Really. It includes Irish, British, Swiss, and Dutch companies. True, Mohawk Industries is in Amsterdam, New York--but Mylan is in Amsterdam, The Netherlands. True, Cardinal Health is in Dublin, Ohio--but Eaton Corporation is in Dublin, Ireland.

Image
Last edited by nisiprius on Mon Apr 16, 2018 7:10 am, edited 2 times in total.
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Re: NAESX - is not really Small Cap?!

Post by Doc » Mon Apr 16, 2018 8:32 am

nisiprius wrote:
Mon Apr 16, 2018 7:08 am
All asset class categories are kind of fuzzy, and you need to be careful about all of them.
For the purpose of ensuring consistency I use Morningstar's methodology. That way you are at least comparing different funds using the same yardstick even if that yardstick is a meter long.
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Re: NAESX - is not really Small Cap?!

Post by grabiner » Mon Apr 16, 2018 11:03 pm

Doc wrote:
Mon Apr 16, 2018 6:49 am
FWIW VTMSX, Vanguard Tax Managed, tends to be a little more "growthy" than the others being discussed. Probably because tax managed would tend to avoid dividend paying funds.
Tax-Managed Small-Cap doesn't do this; you can check that its portfolio statatistics are essentially the same as those of VIOO, which tracks the same index.

Tax-Managed Capital Appreciation does choose stocks to reduce dividend yield, so it has a slight growth bias compared to VONE.
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Re: NAESX - is not really Small Cap?!

Post by Doc » Tue Apr 17, 2018 9:08 am

grabiner wrote:
Mon Apr 16, 2018 11:03 pm
Doc wrote:
Mon Apr 16, 2018 6:49 am
FWIW VTMSX, Vanguard Tax Managed, tends to be a little more "growthy" than the others being discussed. Probably because tax managed would tend to avoid dividend paying funds.
Tax-Managed Small-Cap doesn't do this; you can check that its portfolio statatistics are essentially the same as those of VIOO, which tracks the same index.

Tax-Managed Capital Appreciation does choose stocks to reduce dividend yield, so it has a slight growth bias compared to VONE.
"Tracking" the same index is a little "squishy" for an active fund.

That said the portfolio statistics are very similar except for dividend yield which is still much the same.

Dividend Yield %* VTMSX 1.37; VIOO 1.45

In any case if the tax management doesn't come from "avoiding" dividend paying stocks how do they get "tax management"?

There is a difference in the Russell 2000 and the S&P Small cap on the value/growth spectrum. Both of the funds you mentioned are sitting on the blend/growth line on M*'s style box. VTMSX actually drifted into the small growth category in early 2017 earning it a place on my watch list for several months.
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Re: NAESX - is not really Small Cap?!

Post by nedsaid » Tue Apr 17, 2018 9:13 am

jalbert wrote:
Mon Apr 16, 2018 2:37 am
RamblinDoc wrote:
Sat Apr 14, 2018 5:52 pm
I assumed the definitions of large, mid, and small were universal. This thread blew my mind!
:shock:
Dive into the taxonomy of CRSP indices and you will find it much more surprising than just drawing lines in different places.

They have a megacap index, largecap index, midcap index, and smallcap index.

The large cap index corresponds to the combination of the midcap and megacap indices. This means that all stocks in the midcap index are contained in the largecap index. The largecap index contains just a little over 600 stocks, so 90% if it is the S&P500.

The smallcap index is a completion index for the largecap index, giving you an idea of the extent of its mid midcap holdings with respect to the S&P midcap taxonomy.

The concept of midcaps is newer than the concept of largecaps or smallcaps, likely reflecting the overall capitalization growth of the largest companies.
Yes, this is what you find. Small-Cap mutual funds and indexes often contain a lot of Mid-Caps.
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Re: NAESX - is not really Small Cap?!

Post by Doc » Tue Apr 17, 2018 10:07 am

nedsaid wrote:
Tue Apr 17, 2018 9:13 am
Yes, this is what you find. Small-Cap mutual funds and indexes often contain a lot of Mid-Caps.
Here's Morningstar's style box for a Dow Jones US Total Stock Market (formerly Wilshire 5000) index fund:

Image

So if a fund had 51% small cap and 49% mid cap it would be considered a small cap fund by Morningstar. But the small cap break point is determined by the total stock market index and is therefore the bottom 9% of the total market.

Using "priority" index sources like CRSP for comparisons can be misleading at times.
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Re: NAESX - is not really Small Cap?!

Post by nisiprius » Tue Apr 17, 2018 11:37 am

jalbert wrote:
Mon Apr 16, 2018 2:37 am
...[CRSP has] a megacap index, largecap index, midcap index, and smallcap index.

The large cap index corresponds to the combination of the midcap and megacap indices. This means that all stocks in the midcap index are contained in the largecap index. The largecap index contains just a little over 600 stocks, so 90% if it is the S&P500.

The smallcap index is a completion index for the largecap index, giving you an idea of the extent of its mid midcap holdings with respect to the S&P midcap taxonomy...
Amazing. I had no idea. Thank you for pointing this out.
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Re: NAESX - is not really Small Cap?!

Post by Tyler9000 » Tue Apr 17, 2018 11:50 am

jalbert wrote:
Mon Apr 16, 2018 2:37 am
Dive into the taxonomy of CRSP indices and you will find it much more surprising than just drawing lines in different places.

They have a megacap index, largecap index, midcap index, and smallcap index.

The large cap index corresponds to the combination of the midcap and megacap indices. This means that all stocks in the midcap index are contained in the largecap index. The largecap index contains just a little over 600 stocks, so 90% if it is the S&P500.

The smallcap index is a completion index for the largecap index, giving you an idea of the extent of its mid midcap holdings with respect to the S&P midcap taxonomy.

The concept of midcaps is newer than the concept of largecaps or smallcaps, likely reflecting the overall capitalization growth of the largest companies.
Technically CRSP has separate mid and small cap indices that do not overlap. The breakpoints are at 70%-85% for mid and 85%-98% for small. That said, their small cap index does hold a lot of mid caps because of how they set trading bands to not get whipsawed in trades when the larger small caps drift into mid cap territory as they grow. They hold onto them for a while and have a "packeting" system of slowly transitioning out. https://www.bogleheads.org/wiki/CRSP_equity_indexes

Your point about the large cap index including mid caps is absolutely true.

For reference, here's how the capitalization breakpoints compare for different index providers:

Image
Source

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Re: NAESX - is not really Small Cap?!

Post by Doc » Tue Apr 17, 2018 12:29 pm

Tyler9000 wrote:
Tue Apr 17, 2018 11:50 am

For reference, here's how the capitalization breakpoints compare for different index providers:

Image
Source
Very interesting but somewhat different from Morningstar.

I think the charts and the text in the link infer that all four of these methods depend on the number of stocks in each group.

From the referenced link:
On the other hand, many index providers offer a second approach that carves out mid-cap securities as a distinct asset class. In this paradigm, three indexes are used to capture the full market-cap spectrum (MSCI Large + Mid + Small and S&P 500 + S&P 400 + S&P 600). This strategy aligns nicely with Morningstar’s nine-box approach to mutual fund classification.
But I don't think it does align nicely.
The Vertical Axis
Rather than a fixed number of "large cap"or "small cap" stocks, Morningstar uses a flexible system that isn't adversely affected by overall movements in the market. Large-cap stocks are defined as the group that accounts for the top 70% of the capitalization of each geographic area; mid-cap stocks represent the next 20%; and small-cap stocks represent the balance.
http://www.morningstar.com/InvGlossary/ ... e_box.aspx

So if we think of the Russell 1000 for example as large cap Morningstar might have the top 800 or 1200 in the large cap group.

Large cap probably matters little but when you get down to the smallest captialoations there could be a lot of difference.
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Re: NAESX - is not really Small Cap?!

Post by Tyler9000 » Tue Apr 17, 2018 12:38 pm

Doc wrote:
Tue Apr 17, 2018 12:29 pm

I think the charts and the text in the link infer that all four of these methods depend on the number of stocks in each group.
Yeah, the CRSP link over-simplifies a bit. I've read their full methodology documents and they definitely use capitalization percentage and not company count. FTSE is the same way. I believe the others use company count, although the counts are all different and some align with the capitalization percentages better than others.

Here's some more info from the wiki. https://www.bogleheads.org/wiki/Stock_market_indexing

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Re: NAESX - is not really Small Cap?!

Post by grabiner » Tue Apr 17, 2018 6:58 pm

Doc wrote:
Tue Apr 17, 2018 9:08 am
grabiner wrote:
Mon Apr 16, 2018 11:03 pm
Doc wrote:
Mon Apr 16, 2018 6:49 am
FWIW VTMSX, Vanguard Tax Managed, tends to be a little more "growthy" than the others being discussed. Probably because tax managed would tend to avoid dividend paying funds.
Tax-Managed Small-Cap doesn't do this; you can check that its portfolio statatistics are essentially the same as those of VIOO, which tracks the same index.

Tax-Managed Capital Appreciation does choose stocks to reduce dividend yield, so it has a slight growth bias compared to VONE.
"Tracking" the same index is a little "squishy" for an active fund.

That said the portfolio statistics are very similar except for dividend yield which is still much the same.

Dividend Yield %* VTMSX 1.37; VIOO 1.45

In any case if the tax management doesn't come from "avoiding" dividend paying stocks how do they get "tax management"?
This fund pre-dates the development of ETFs, so it had to find other forms of tax management. It is allowed to deviate from the index as needed to maintain tax efficiency, harvesting losses on stocks in the index, or holding onto stocks which have left the index rather than selling them from capital gains. It also makes an effort to have 100% qualified dividends, which most other small-cap funds do not.
Wiki David Grabiner

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nedsaid
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Re: NAESX - is not really Small Cap?!

Post by nedsaid » Tue Apr 17, 2018 8:32 pm

If your Small-Cap fund or ETF has a bunch of Mid-Caps in it, no reason to panic. Those of you who believe in factor tilting, Mid-Caps give you most of the returns of Small-Caps with less volatility. Some people, Mel Lindauer included, believe that Mid-Caps are the "Sweet Spot" of the stock market. Just as there are differences in opinions of which countries should be considered Emerging Markets, there are differences in definition of Large-Cap, Mid-Cap, and Small-Cap. There is a point where close enough is close enough. I just wouldn't sweat this too much.
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Re: NAESX - is not really Small Cap?!

Post by jalbert » Tue Apr 17, 2018 10:39 pm

Tyler9000 wrote:
Tue Apr 17, 2018 11:50 am
jalbert wrote:
Mon Apr 16, 2018 2:37 am
Dive into the taxonomy of CRSP indices and you will find it much more surprising than just drawing lines in different places.

They have a megacap index, largecap index, midcap index, and smallcap index.

The large cap index corresponds to the combination of the midcap and megacap indices. This means that all stocks in the midcap index are contained in the largecap index. The largecap index contains just a little over 600 stocks, so 90% if it is the S&P500.

The smallcap index is a completion index for the largecap index, giving you an idea of the extent of its mid midcap holdings with respect to the S&P midcap taxonomy.

The concept of midcaps is newer than the concept of largecaps or smallcaps, likely reflecting the overall capitalization growth of the largest companies.
Technically CRSP has separate mid and small cap indices that do not overlap. The breakpoints are at 70%-85% for mid and 85%-98% for small. That said, their small cap index does hold a lot of mid caps because of how they set trading bands to not get whipsawed in trades when the larger small caps drift into mid cap territory as they grow. They hold onto them for a while and have a "packeting" system of slowly transitioning out. https://www.bogleheads.org/wiki/CRSP_equity_indexes

Your point about the large cap index including mid caps is absolutely true.

For reference, here's how the capitalization breakpoints compare for different index providers:

Image
Source
The bar graph is visually misleading. The CRSP large cap index contains about 600 stocks (vs. about 500 for the S&P500). This means that the CRSP small cap index contains about 300 of the 400 stocks that are in the S&P400 midcap index.
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Re: NAESX - is not really Small Cap?!

Post by grabiner » Tue Apr 17, 2018 11:09 pm

jalbert wrote:
Tue Apr 17, 2018 10:39 pm
Tyler9000 wrote:
Tue Apr 17, 2018 11:50 am
For reference, here's how the capitalization breakpoints compare for different index providers:

Image
Source
The bar graph is visually misleading. The CRSP large cap index contains about 600 stocks (vs. about 500 for the S&P500). This means that the CRSP small cap index contains about 300 of the 400 stocks that are in the S&P400 midcap index.
The reason the graph is misleading is that the S&P doesn't cover the whole market. The S&P 500 is close to the 500 largest companies, but the 400 and 600 are chosen to be representative of the market segment; note that the purple bar for companies not in the S&P indexes covers about 10% of the market. In the bar graph, corporations are ordered by index (mega/mid/small/none), not by size, which makes the S&P mid-cap index look like it has a higher market cap than it actually does. This doesn't apply to any of the other indexes, which contain all eligible stocks by size; the only stocks not in the Russell/MSCI/CRSP indexes are those outside the top 3000/top 2500/top 98% (with some buffers).

M* says that VO (Mid-Cap ETF) is 40% large-cap, 60% mid-cap, while IVOO (S&P 400 Mid-Cap ETF) is 84% mid-cap, 15% small-cap; this shows the difference between the mid-cap definitions.
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Re: NAESX - is not really Small Cap?!

Post by RamblinDoc » Tue Apr 17, 2018 11:19 pm

nedsaid wrote:
Tue Apr 17, 2018 8:32 pm
If your Small-Cap fund or ETF has a bunch of Mid-Caps in it, no reason to panic. Those of you who believe in factor tilting, Mid-Caps give you most of the returns of Small-Caps with less volatility. Some people, Mel Lindauer included, believe that Mid-Caps are the "Sweet Spot" of the stock market. Just as there are differences in opinions of which countries should be considered Emerging Markets, there are differences in definition of Large-Cap, Mid-Cap, and Small-Cap. There is a point where close enough is close enough. I just wouldn't sweat this too much.
Good point!

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Re: NAESX - is not really Small Cap?!

Post by siamond » Wed May 02, 2018 6:23 am

Personally, I couldn't care less about whatever dubious methodology Morningstar uses, or changes from/to. Between the star system, the P/E computation and more, Morningstar clearly proved their strong shortcomings when it comes to methodology. Morningstar should be used to obtain factual and historical data about indices, funds and stocks, but NOT for any of their analytical data.

Differences between indices are interesting from an intellectual standpoint, but I don't find them actionable either. What matters to me is TO STAY ON A CONSISTENT COURSE. I decided to invest with a given Vanguard fund tracking a given index for mid-caps (value, actually) and another fund for small-caps (also value), and I am just going to stick to it. Actually, the differences between indices are significant enough that this demonstrates that one really shouldn't hop around. It's already annoying enough that, in the past, Vanguard meandered on the indices they tracked. I hope they are going to stick to CRSP for good now. Which seems to have a robust methodology, as Tyler explained.

Morningstar X-Ray, Personal Capital and so on are entirely irrelevant to me. When I decided that my AA would include 10% Small-Cap-Value, what I really meant was 10% Vanguard Small-Cap Value Index Fund (VSIAX). Plain and simple.

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Re: NAESX - is not really Small Cap?!

Post by heyyou » Wed May 02, 2018 5:54 pm

As usual, the intersection of theory and the real world is messy and imprecise.

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Nicolas
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Re: NAESX - is not really Small Cap?!

Post by Nicolas » Wed May 02, 2018 10:00 pm

lack_ey wrote:
Sat Apr 14, 2018 5:41 pm
jalbert wrote:
Sat Apr 14, 2018 5:31 pm
NAESX tracks a CRSP index that despite the name, is a small and midcap index, so NAESX is a small and midday index fund.

You can get an S&P Smallcap 600 index ETF at very low cost, just not from Vanguard. Ishares IJR has an ER of .07%. I suspect it also is significantly more liquid than VIOO.
Yes. Average daily volume is $239M to $4M. So while primary market liquidity is the same (same underlying securities), on most days it should be easier to trade IJR, as there's much more a market in the ETF shares themselves.
I favor IJR (iShares Core S&P Small-Cap ETF) over VIOO (Vanguard S&P Small-Cap 600 ETF) for the reasons already given, same index, greater liquidity, and lower ER. In fact I sold all of my VIOO a while ago and used the funds to buy IJR.
De gustibus non est disputandum.

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Re: NAESX - is not really Small Cap?!

Post by Dead Man Walking » Wed May 02, 2018 11:50 pm

heyyou wrote:
Wed May 02, 2018 5:54 pm
As usual, the intersection of theory and the real world is messy and imprecise.
+1 :sharebeer

I prefer to judge every market segment by the retail mutual funds which claim to invest in them.

DMW

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Alexa9
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Re: NAESX - is not really Small Cap?! [Vanguard Small-Cap Index]

Post by Alexa9 » Thu May 03, 2018 7:06 am

A little off topic but US small caps are highly correlated with US large caps (and therefore international large caps).
This is why I like international small cap funds like VSS (although I wish it was more value tilted).

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