Tilt / Overweight -- what percentage?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
RetiredCSProf
Posts: 226
Joined: Tue Feb 28, 2017 4:59 pm

Tilt / Overweight -- what percentage?

Post by RetiredCSProf » Sun Feb 03, 2019 4:06 pm

I've read posts in the forum regarding overweight of a style (e.g., small value).

What percentage (style or sector) is considered an "overweight" versus "noise"? For example, given that US equities are 80% large-cap, is 70% in large-cap considered an overweight in mid- and small-caps? I hold iShares Core MSCI International ex-US(IXUS), which is characterized as overweight in EM. How much in EM would be considered an overweight?

How large does the gap need to be to call it an overweight? Is a "tilt" the same as an overweight? Or is it smaller?

I'm planning to take an RMD soon, which will result in re-balancing, so I'm looking at the slices, as as well as the big picture.

[Note: I editted the Subject Line to reduce confusion]
Last edited by RetiredCSProf on Sat Feb 09, 2019 5:47 pm, edited 1 time in total.

averagedude
Posts: 469
Joined: Sun May 13, 2018 3:41 pm

Re: Overweight -- what percentage?

Post by averagedude » Sun Feb 03, 2019 4:57 pm

I wouldn't classify IXUS as overweight in emerging markets and having 70% in large cap is a small tilt but there will be little difference in returns. I have some tilts(not huge), but i believe if you are retired and are making distributions from your portfolio, you shouldn't have any massive tilts in your stock portfolio.

samsdad
Posts: 531
Joined: Sat Jan 02, 2016 6:20 pm

Re: Overweight -- what percentage?

Post by samsdad » Sun Feb 03, 2019 8:01 pm

I think anything other than market weight is considered overweight. I also think it’s synonymous with tilting.

Someone around here said recently that anything less than 30% of your portfolio is not really going to make a huge difference in the end. Look at the difference in returns between the total stock market (80%ish large cap, 15%ish mid, and 5%ish small) vs the S&P 500. The difference is very small. Is this 20% “tilt” considered “noise?” I’d don’t know. Maybe. It also happens to be the market weight.

drk
Posts: 1059
Joined: Mon Jul 24, 2017 10:33 pm
Location: Seattle

Re: Overweight -- what percentage?

Post by drk » Sun Feb 03, 2019 8:10 pm

RetiredCSProf wrote:
Sun Feb 03, 2019 4:06 pm
I hold iShares Core MSCI International ex-US(IXUS), which is characterized as overweight in EM.
By whom? As a total International fund, IXUS (like VXUS) aims to hold EM at market-weight.

Topic Author
RetiredCSProf
Posts: 226
Joined: Tue Feb 28, 2017 4:59 pm

Re: Overweight -- what percentage?

Post by RetiredCSProf » Sun Feb 03, 2019 11:56 pm

I read one review that described the IXUS ETF as "overweight in EM," but gave no specifics. The Morningstar report states:
The portfolio’s [IXUS] sector weightings are comparable to its average Morningstar Category peer, and it allocates 10% more than the category average to emerging-markets stocks. But this modest gap shouldn’t affect the fund’s category-relative performance.
I've not found a reference to the composition of IXUS by EM weight. In comparison, the Vanguard Total Intn'l Stock ETF (VXUS) states that it holds market cap in EM and specifies holding 21.80% in EM at end of 2018.

Does "category average" mean the same as "market cap weight"? Is 10% more than average considered an overweight?

averagedude
Posts: 469
Joined: Sun May 13, 2018 3:41 pm

Re: Overweight -- what percentage?

Post by averagedude » Mon Feb 04, 2019 12:15 am

RetiredCSProf wrote:
Sun Feb 03, 2019 11:56 pm
I read one review that described the IXUS ETF as "overweight in EM," but gave no specifics. The Morningstar report states:
The portfolio’s [IXUS] sector weightings are comparable to its average Morningstar Category peer, and it allocates 10% more than the category average to emerging-markets stocks. But this modest gap shouldn’t affect the fund’s category-relative performance.
I've not found a reference to the composition of IXUS by EM weight. In comparison, the Vanguard Total Intn'l Stock ETF (VXUS) states that it holds market cap in EM and specifies holding 21.80% in EM at end of 2018.

Does "category average" mean the same as "market cap weight"? Is 10% more than average considered an overweight?
The way i see this, if VXUS has 10% more in EM and EM is 20% of international, than VXUS has 22% in EM. Hardly no difference at all.

livesoft
Posts: 65086
Joined: Thu Mar 01, 2007 8:00 pm

Re: Overweight -- what percentage?

Post by livesoft » Mon Feb 04, 2019 12:20 am

Here is how I would calculate degree of overweight for small-value:

I would use Morningstar.com to look at a 9-box style grid.

1. Determine what 9-box style grid for Total US Stock Market index is.

2. Determine what 9-box-style grid for Small Value index is.

Look at the element of the matrix that is Small-Value (lower left). You have a number from 1 and a number from 2. The number from 1 is 0% weight (or tilt) and the number from 2 is the 100% weight (or tilt).

I'm too tired to show a formula.
Wiki This signature message sponsored by sscritic: Learn to fish.

snailderby
Posts: 147
Joined: Thu Jul 26, 2018 11:30 am

Re: Overweight -- what percentage?

Post by snailderby » Mon Feb 04, 2019 8:23 am

RetiredCSProf wrote:
Sun Feb 03, 2019 11:56 pm
I read one review that described the IXUS ETF as "overweight in EM," but gave no specifics. The Morningstar report states:
The portfolio’s [IXUS] sector weightings are comparable to its average Morningstar Category peer, and it allocates 10% more than the category average to emerging-markets stocks. But this modest gap shouldn’t affect the fund’s category-relative performance.
I've not found a reference to the composition of IXUS by EM weight. In comparison, the Vanguard Total Intn'l Stock ETF (VXUS) states that it holds market cap in EM and specifies holding 21.80% in EM at end of 2018.

Does "category average" mean the same as "market cap weight"? Is 10% more than average considered an overweight?
Many funds in Morningstar's "Foreign Large Blend" category don't hold any emerging stocks, let alone market weight. So it's unlikely that the category average will be the same as market weight.

IXUS's underlying MSCI ACWI ex USA IMI index "is a free float-adjusted market capitalization index designed to measure the combined equity market performance of developed and emerging markets countries, excluding the U.S." https://www.ishares.com/us/literature/s ... f-7-31.pdf; see also https://www.msci.com/documents/10199/f2 ... 7dcc44536c.

2015
Posts: 2690
Joined: Mon Feb 10, 2014 2:32 pm

Re: Overweight -- what percentage?

Post by 2015 » Mon Feb 04, 2019 12:20 pm

I saw this thread and thought of what I saw this morning that just under 40% of Americans are obese and 8% are morbidly obese.

User avatar
Sandtrap
Posts: 5927
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳 Retired.

Re: Overweight -- what percentage?

Post by Sandtrap » Mon Feb 04, 2019 12:23 pm

2015 wrote:
Mon Feb 04, 2019 12:20 pm
I saw this thread and thought of what I saw this morning that just under 40% of Americans are obese and 8% are morbidly obese.
+1
"Overweight -- what percentage?"

. . . immediate thought . . . . . . 10 - 15 % over allocation. Rebalancing band increasing. :shock:

Topic Author
RetiredCSProf
Posts: 226
Joined: Tue Feb 28, 2017 4:59 pm

Re: Tilt / Overweight -- what percentage?

Post by RetiredCSProf » Sat Feb 09, 2019 6:22 pm

[Note: I'm the OP and I changed the subject line to avoid confusion with reports about increased obesity in the US]

OK. Then 10-15% more (or less) than the market index is an overweight (or underweight).

I am invested in the FMI International Fund (FMIJX), which states the following in their 4th quarter report:
-- the fund benefited from its overweight in the UK, at approx 26.3% of the portfolio vs the MSCI EAFE index at 17.4% (about 9% overweight).

The report goes on to say:
-- many of these UK companies are multinational and generate little revenue in the UK. Thus, the fund's UK exposure is only about 10.3% of the portfolio vs the MSCI EAFE index at 6.6% (about 4% overweight)

This suggests that comparing weights against the market index tells only part of the story.

My goal is to reduce my exposure to EM to (hopefully) reduce volatility in my portfolio. If EM is about 22% of the MSCI EAFE index, then I'd like to reduce my exposure to be 12-15% of my international funds.

User avatar
Taylor Larimore
Advisory Board
Posts: 27842
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: Tilt / Overweight -- what percentage?

Post by Taylor Larimore » Sat Feb 09, 2019 6:46 pm

Post by RetiredCSProf » Sun Feb 03, 2019 4:06 pm

I've read posts in the forum regarding overweight of a style (e.g., small value).

RetiredCSProf:

In the opinion of many authorities, owning the the total market in stocks is the "efficient portfolio" (highest return with the least risk). Last year, "small value" had the WORST return of all fourteen Morningstar style categories. This is risk and complexity that investors, especially retirees, should avoid.
"The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- In my view, owning the market and holding it forever is the ultimate strategy for winners." -- Jack Bogle
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

heyyou
Posts: 3303
Joined: Tue Feb 20, 2007 4:58 pm

Re: Tilt / Overweight -- what percentage?

Post by heyyou » Sun Feb 10, 2019 1:38 am

...but with increased exposure to the most overvalued mega-stocks. Facebook is not similar to Berkshire Hathaway. An investor needs to decide if that last bit of extra reward, is worth all of its extra risk.
Written by a veteran of the 2000 Large Cap Crash of overvalued computer stocks.

A Callan Periodic Table shows that Small Value is expected to have significant volatility relative to Large Caps, either direction each year. TSM is not perfect, it just has a cheaper ER than all of the other choices, which is important, but not the only criteria for choosing a portfolio. Some of us had employment risk at an S&P500 business.

bltn
Posts: 314
Joined: Mon Feb 20, 2017 9:32 pm

Re: Tilt / Overweight -- what percentage?

Post by bltn » Sun Feb 10, 2019 6:04 am

Taylor Larimore wrote:
Sat Feb 09, 2019 6:46 pm
Post by RetiredCSProf » Sun Feb 03, 2019 4:06 pm

I've read posts in the forum regarding overweight of a style (e.g., small value).

RetiredCSProf:

In the opinion of many authorities, owning the the total market in stocks is the "efficient portfolio" (highest return with the least risk). Last year, "small value" had the WORST return of all fourteen Morningstar style categories. This is risk and complexity that investors, especially retirees, should avoid.
"The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- In my view, owning the market and holding it forever is the ultimate strategy for winners." -- Jack Bogle
Best wishes.
Taylor
The quote from Jack Bogle is so appropriate.
It took me a number of years to realize this. Consistent doubles were much better than strikeouts and homeruns. I found I couldn't t hit enough homers.

Valuethinker
Posts: 37277
Joined: Fri May 11, 2007 11:07 am

Re: Tilt / Overweight -- what percentage?

Post by Valuethinker » Sun Feb 10, 2019 7:39 am

RetiredCSProf wrote:
Sun Feb 03, 2019 4:06 pm
I've read posts in the forum regarding overweight of a style (e.g., small value).

What percentage (style or sector) is considered an "overweight" versus "noise"? For example, given that US equities are 80% large-cap, is 70% in large-cap considered an overweight in mid- and small-caps? I hold iShares Core MSCI International ex-US(IXUS), which is characterized as overweight in EM. How much in EM would be considered an overweight?

How large does the gap need to be to call it an overweight? Is a "tilt" the same as an overweight? Or is it smaller?

I'm planning to take an RMD soon, which will result in re-balancing, so I'm looking at the slices, as as well as the big picture.

[Note: I editted the Subject Line to reduce confusion]

It totally depends on what you are doing - the volatility of the asset class (and the expected returns, which also happen to be unknowable ex ante). Historic returns and volatility will tell you little about future returns and volatility, especially for equities.

So rules of thumb:

- think of the percentage of overweighting not the multiple. E.g. 11% is market weight (5%) + 6% *not* 2.2x market weight. It's the actual percentage which will drive returns

- Unless it's an extremely volatile asset class, anything less than 10% will have no meaningful impact on final portfolio value. The contribution to out or underperformance will be quite small

- the real driver of risk-return is the equity-bond split. Unless you get esoteric in bonds (High Yield; Emerging Market debt) what bond fund you buy is unlikely to make a lot of difference. Similarly being 10% in small cap value in a 60-40 portfolio is less important than the fact that you are 60% in equities

It's really St. Augustine, here, "Lord make me chaste. But not yet".

Valuethinker
Posts: 37277
Joined: Fri May 11, 2007 11:07 am

Re: Tilt / Overweight -- what percentage?

Post by Valuethinker » Sun Feb 10, 2019 7:56 am

RetiredCSProf wrote:
Sat Feb 09, 2019 6:22 pm
[Note: I'm the OP and I changed the subject line to avoid confusion with reports about increased obesity in the US]

OK. Then 10-15% more (or less) than the market index is an overweight (or underweight).

I am invested in the FMI International Fund (FMIJX), which states the following in their 4th quarter report:
-- the fund benefited from its overweight in the UK, at approx 26.3% of the portfolio vs the MSCI EAFE index at 17.4% (about 9% overweight).

The report goes on to say:
-- many of these UK companies are multinational and generate little revenue in the UK. Thus, the fund's UK exposure is only about 10.3% of the portfolio vs the MSCI EAFE index at 6.6% (about 4% overweight)

This suggests that comparing weights against the market index tells only part of the story.

My goal is to reduce my exposure to EM to (hopefully) reduce volatility in my portfolio. If EM is about 22% of the MSCI EAFE index, then I'd like to reduce my exposure to be 12-15% of my international funds.
It's not clear to me that EM as a whole are more volatile than developed markets. Not since 2000, at least?

In any case are there not funds/ ETFs that are developed market only? Just add some of that to your equity weightings?

harvestbook
Posts: 594
Joined: Sat Mar 18, 2017 7:12 pm

Re: Tilt / Overweight -- what percentage?

Post by harvestbook » Sun Feb 10, 2019 8:20 am

US Small cap value up 11.24% YTD
US total market value 8.59% YTD

I guess we could play this game all day.
I'm not smart enough to know, and I can't afford to guess.

User avatar
David Jay
Posts: 6252
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Tilt / Overweight -- what percentage?

Post by David Jay » Sun Feb 10, 2019 8:36 am

harvestbook wrote:
Sun Feb 10, 2019 8:20 am
US Small cap value up 11.24% YTD
US total market value 8.59% YTD

I guess we could play this game all day.
Yep, is the last 5 years (10 years, 2 years, etc), one sector has outperformed all others. What exactly does that tell us about the future?

[insert Callen Periodic Table here]
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

stan1
Posts: 6390
Joined: Mon Oct 08, 2007 4:35 pm

Re: Overweight -- what percentage?

Post by stan1 » Sun Feb 10, 2019 8:45 am

RetiredCSProf wrote:
Sun Feb 03, 2019 11:56 pm
I read one review that described the IXUS ETF as "overweight in EM," but gave no specifics. The Morningstar report states:
The portfolio’s [IXUS] sector weightings are comparable to its average Morningstar Category peer, and it allocates 10% more than the category average to emerging-markets stocks. But this modest gap shouldn’t affect the fund’s category-relative performance.
I've not found a reference to the composition of IXUS by EM weight. In comparison, the Vanguard Total Intn'l Stock ETF (VXUS) states that it holds market cap in EM and specifies holding 21.80% in EM at end of 2018.

Does "category average" mean the same as "market cap weight"? Is 10% more than average considered an overweight?
I will guess that you've discovered the fact that there are many definitions of emerging markets. Most notably some definitions include South Korea as an emerging Market and others do not.

IXUS is a market weight ex-US fund that includes Canada, emerging markets, and smaller capitalization stocks. IXUS and VXUS are the gold standards right now in my opinion for international investing due to broadest coverage and low cost.

Finally I would caution against using Morningstar as a primary source for data. The examples you've quoted don't mean anything. With index investing you get exactly what the index is defined to give you. Given your user name I expect you would enjoy reading the indexing methodologies at S&P, MSCI, CRSP, FTSE, etc. such as:
https://www.msci.com/index-methodology
http://www.crsp.com/indexes-pages/crsp- ... logy-guide

pward
Posts: 67
Joined: Fri Dec 21, 2018 8:18 pm

Re: Tilt / Overweight -- what percentage?

Post by pward » Sun Feb 10, 2019 9:28 am

harvestbook wrote:
Sun Feb 10, 2019 8:20 am
US Small cap value up 11.24% YTD
US total market value 8.59% YTD

I guess we could play this game all day.
Comparing SCV to TSM is an apples to oranges comparison, and I hate how often this is done here. Now comparing apples to apples, I'm showing SCV up 11.19% year to date, but small caps as a whole up 11.83%. It's small caps in general that are out performing, the value factor is just tagging along for the ride. Of course, to add the full context, small caps also fell much harder than large caps in late 2018, so even that very short term small cap "out performance" is basically erased if you go increase your date range a couple of months.

User avatar
alpenglow
Posts: 742
Joined: Tue May 31, 2011 12:02 pm

Re: Tilt / Overweight -- what percentage?

Post by alpenglow » Sun Feb 10, 2019 9:37 am

What percentage (style or sector) is considered an "overweight" versus "noise"? For example, given that US equities are 80% large-cap, is 70% in large-cap considered an overweight in mid- and small-caps? I hold iShares Core MSCI International ex-US(IXUS), which is characterized as overweight in EM. How much in EM would be considered an overweight?
There are epic threads here arguing about discussing tilts. You will find people advocating for a straight 3-fund market weight portfolio all the way to a Larry-style portfolio that goes all-in on tilts (balanced with more quality bonds) and everywhere in-between. Ultimately, pick something you are comfortable with and stick to it. If you tilt, you need to stay with it and not everyone can. To keep life simple, I don't tilt.

User avatar
Sandtrap
Posts: 5927
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳 Retired.

Re: Tilt / Overweight -- what percentage?

Post by Sandtrap » Sun Feb 10, 2019 9:38 am

David Jay wrote:
Sun Feb 10, 2019 8:36 am
harvestbook wrote:
Sun Feb 10, 2019 8:20 am
US Small cap value up 11.24% YTD
US total market value 8.59% YTD

I guess we could play this game all day.
Yep, is the last 5 years (10 years, 2 years, etc), one sector has outperformed all others. What exactly does that tell us about the future?

[insert Callen Periodic Table here]
This might help. :happy

Callan periodic table of investment returns + (Wiki)
https://www.bogleheads.org/wiki/Callan ... nt_returns
https://www.callan.com/wp-content/uploa ... d_2018.pdf
Image

User avatar
ruralavalon
Posts: 14713
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Tilt / Overweight -- what percentage?

Post by ruralavalon » Sun Feb 10, 2019 10:43 am

RetiredCSProf wrote:
Sun Feb 03, 2019 4:06 pm
I've read posts in the forum regarding overweight of a style (e.g., small value).

What percentage (style or sector) is considered an "overweight" versus "noise"? For example, given that US equities are 80% large-cap, is 70% in large-cap considered an overweight in mid- and small-caps? I hold iShares Core MSCI International ex-US(IXUS), which is characterized as overweight in EM. How much in EM would be considered an overweight?

How large does the gap need to be to call it an overweight? Is a "tilt" the same as an overweight? Or is it smaller?

I'm planning to take an RMD soon, which will result in re-balancing, so I'm looking at the slices, as as well as the big picture.

[Note: I editted the Subject Line to reduce confusion]
Rick Ferri has suggested 25% Small-cap Value and 75% total stock market, for a small-cap value tilt. R. Ferri, ETF.com (7/21/2014), "To Tilt or not toTilt?"
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

User avatar
Wiggums
Posts: 151
Joined: Thu Jan 31, 2019 8:02 am

Re: Tilt / Overweight -- what percentage?

Post by Wiggums » Sun Feb 10, 2019 10:56 am

Taylor Larimore wrote:
Sat Feb 09, 2019 6:46 pm
Post by RetiredCSProf » Sun Feb 03, 2019 4:06 pm

I've read posts in the forum regarding overweight of a style (e.g., small value).

RetiredCSProf:

In the opinion of many authorities, owning the the total market in stocks is the "efficient portfolio" (highest return with the least risk). Last year, "small value" had the WORST return of all fourteen Morningstar style categories. This is risk and complexity that investors, especially retirees, should avoid.
"The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- In my view, owning the market and holding it forever is the ultimate strategy for winners." -- Jack Bogle
Best wishes.
Taylor
+1000

User avatar
Wiggums
Posts: 151
Joined: Thu Jan 31, 2019 8:02 am

Re: Overweight -- what percentage?

Post by Wiggums » Sun Feb 10, 2019 11:06 am

samsdad wrote:
Sun Feb 03, 2019 8:01 pm
I think anything other than market weight is considered overweight. I also think it’s synonymous with tilting.
Agree.

Overweight as part of a three-tiered rating system, along with "underweight" and "equal weight. This could apply to Individual
stocks, your entire portfolio or something in between.

Post Reply