Small Cap Value heads Rejoice !!!

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manlymatt83
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Re: Small Cap Value heads Rejoice !!!

Post by manlymatt83 »

MotoTrojan wrote: Thu Sep 17, 2020 7:27 pm Point is the decision on which fund is less critical than you are making it out to be, the real question is how much do you want to tilt? Once you decide that, using VBR, SLYV, VIOV, or AVUV really won't matter much, you just may want to adjust how much of each you hold to get you that tilt.
Hmm.

I was 50% VTI/VXUS and 50% SLYV/DLS/DGS. Now using AVUV and AVDV in lieu of SLYV and DLS which makes me think I probably want to be more like 55/45 now.
nzahir
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Re: Small Cap Value heads Rejoice !!!

Post by nzahir »

MotoTrojan wrote: Thu Sep 17, 2020 7:27 pm
nzahir wrote: Thu Sep 17, 2020 6:22 pm So from doing some light studying about SCV I have some questions and conclusions:

1. It seems like S&P600>Russell 2000 b/c of the extra screening process, right?
2. VBR/VSIAX have a lot of mid cap, about half, way too much for the purpose of scv.

I have a few questions though.

1. What are the difference between IJS/VIOV/SLYV (very similar results) and VIOO/SPSM (very similar results, SPSM .05% ER)?
2. Do you guys use one of the cheaper funds because of ER, such as SPSM, or do you focus on trying to use Vanguard/iShares or largest mkt cap
3. I have also been looking into AVUV, but I can not tell if it is worth using over the others. Is their screening process really much better than the S&P600 and is it worth paying a higher fee (.25% is not awful though)?

If anyone can help/give useful info, would be greatly appreciated
Russell 2000 is a bit junkier because it doesn't have the earnings screen of the S&P600, yes. I do prefer S&P600 funds over R2K.

VIOO and SPSM are not value funds, they are S&P600 blend funds which is why they are cheaper (but they will have far less value factor exposure, and thus lower expected return); just because returns have been similar for a recent period doesn't mean they are the same. If you want value, you want IJS/VIOV/SLYV which are all near-identical. I would go with VIOV or SLYV personally because of the lower expense ratio.

VBR/VSIAX has a lot of mid-caps which reduces it's SMB (small factor) but it has had pretty similar HML (value factor) exposure to SLYV/VIOV/IJS over it's history, so it is still a perfectly acceptable fund to capture SCV. I used to preach pretty hard about just the point you bring up, but have since opened my eyes to the real impact of it's softer tilt via it's mid-cap exposure (just need to hold a little more of it).

AVUV has some great features that should improve profitability exposure and reduce negative momentum while tilting a bit more than VBR/SLYV/etc... whether it is worth it to you depends on your desired factor exposure. Let's presume it is equivalent to DFSVX which is DFA's longterm SCV fund.

I've tried to make this point a few times to you, but you can get the same exposure with different amounts of these. For example:

If you are okay with 75% VFINX and 25% VBR, you could get the same exposure with these options:

80/20 VFINX/SLYV:

https://www.portfoliovisualizer.com/mat ... tion2_1=75

82/18 VFINX/DFSVX (which is probably similar to VFINX/AVUV):

https://www.portfoliovisualizer.com/mat ... tion2_1=75

Showing you all three of these together, can you really tell the difference? The only one that really stands out to me is the one with DFSVX which underperformed, likely because DFSVX has such a high expense ratio that even at only 18% it drags things down:

https://www.portfoliovisualizer.com/bac ... tion4_3=18

Point is the decision on which fund is less critical than you are making it out to be, the real question is how much do you want to tilt? Once you decide that, using VBR, SLYV, VIOV, or AVUV really won't matter much, you just may want to adjust how much of each you hold to get you that tilt.
Thank you

I edited my post, realized SPSM wasn't value and you taught me that VIOO wasn't either

I think I prefer SLYV over VIOV because its market cap is about 4x the size and ER is the same

IJS mkt cap is over 2x of SLYV, but a higher ER and I think a 2B mkt cap is fine, but not sure if anyone wants to clatify

Still got some more Qs:
1. Why are there no S&P600 index funds that are available to easily buy instead of having to buy shares? I see there is VSMVX I believe, but not available to me?
2. Why use VBR if it has so much mid cap? Not a bad fund at all though and for some periods of time it has done just as well as SCV if not better, but not when you go back to a longer 50 year period.
3. Any way to read on what Avuv does in a clear and simple manner? Do they just screen for profitability similar to the S&P600 and then try to avoid negative momentum? I don't know much about negative momentum though. Don't you want to not sell low or do they somehow aboid that negative momentum before it happens?
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Steve Reading
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Re: Small Cap Value heads Rejoice !!!

Post by Steve Reading »

nzahir wrote: Thu Sep 17, 2020 8:19 pm 2. Why use VBR if it has so much mid cap? Not a bad fund at all though and for some periods of time it has done just as well as SCV if not better, but not when you go back to a longer 50 year period.
How do you have 50 years worth of data for VBR?
nzahir wrote: Thu Sep 17, 2020 8:19 pm 3. Any way to read on what Avuv does in a clear and simple manner? Do they just screen for profitability similar to the S&P600 and then try to avoid negative momentum? I don't know much about negative momentum though. Don't you want to not sell low or do they somehow aboid that negative momentum before it happens?
Yeah, their methodology is free and available for everyone to see, on their website :)
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
nzahir
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Re: Small Cap Value heads Rejoice !!!

Post by nzahir »

Steve Reading wrote: Thu Sep 17, 2020 8:37 pm
nzahir wrote: Thu Sep 17, 2020 8:19 pm 2. Why use VBR if it has so much mid cap? Not a bad fund at all though and for some periods of time it has done just as well as SCV if not better, but not when you go back to a longer 50 year period.
How do you have 50 years worth of data for VBR?
nzahir wrote: Thu Sep 17, 2020 8:19 pm 3. Any way to read on what Avuv does in a clear and simple manner? Do they just screen for profitability similar to the S&P600 and then try to avoid negative momentum? I don't know much about negative momentum though. Don't you want to not sell low or do they somehow aboid that negative momentum before it happens?
Yeah, their methodology is free and available for everyone to see, on their website :)
I don't, but I was talking about mid caps in general (its basically a 50-50 mid and small mix)

I will take a look, thanks

Anyone else want to chime in a bit more? Looking like I have narrowed down to SLYV or AVUV for US small cap
manlymatt83
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Re: Small Cap Value heads Rejoice !!!

Post by manlymatt83 »

nzahir wrote: Thu Sep 17, 2020 9:39 pm
Steve Reading wrote: Thu Sep 17, 2020 8:37 pm
nzahir wrote: Thu Sep 17, 2020 8:19 pm 2. Why use VBR if it has so much mid cap? Not a bad fund at all though and for some periods of time it has done just as well as SCV if not better, but not when you go back to a longer 50 year period.
How do you have 50 years worth of data for VBR?
nzahir wrote: Thu Sep 17, 2020 8:19 pm 3. Any way to read on what Avuv does in a clear and simple manner? Do they just screen for profitability similar to the S&P600 and then try to avoid negative momentum? I don't know much about negative momentum though. Don't you want to not sell low or do they somehow aboid that negative momentum before it happens?
Yeah, their methodology is free and available for everyone to see, on their website :)
I don't, but I was talking about mid caps in general (its basically a 50-50 mid and small mix)

I will take a look, thanks

Anyone else want to chime in a bit more? Looking like I have narrowed down to SLYV or AVUV for US small cap
I had 100% SLYV, and then 50% SLYV and 50% AVUV. Then I simplified to AVUV. YMMV but AVUV/AVDV/DGS is my combo and I'm happy with it.
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Steve Reading
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Re: Small Cap Value heads Rejoice !!!

Post by Steve Reading »

nzahir wrote: Thu Sep 17, 2020 9:39 pm I don't, but I was talking about mid caps in general (its basically a 50-50 mid and small mix)
What makes you say that? My estimate tell me it's closer to 80-20 small-mid.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
nzahir
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Re: Small Cap Value heads Rejoice !!!

Post by nzahir »

Steve Reading wrote: Thu Sep 17, 2020 9:59 pm
nzahir wrote: Thu Sep 17, 2020 9:39 pm I don't, but I was talking about mid caps in general (its basically a 50-50 mid and small mix)
What makes you say that? My estimate tell me it's closer to 80-20 small-mid.
https://www.etrade.wallst.com/v1/stocks ... symbol=VBR

Is E*TRADE wrong?
MotoTrojan
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

manlymatt83 wrote: Thu Sep 17, 2020 8:19 pm
MotoTrojan wrote: Thu Sep 17, 2020 7:27 pm Point is the decision on which fund is less critical than you are making it out to be, the real question is how much do you want to tilt? Once you decide that, using VBR, SLYV, VIOV, or AVUV really won't matter much, you just may want to adjust how much of each you hold to get you that tilt.
Hmm.

I was 50% VTI/VXUS and 50% SLYV/DLS/DGS. Now using AVUV and AVDV in lieu of SLYV and DLS which makes me think I probably want to be more like 55/45 now.
Simplicity is nice too so if you are okay with the extra tilt, could stick with it. The difference between SLYV and AVUV is likely more subtle than VBR and SLYV so you aren't terribly far off.
Last edited by MotoTrojan on Fri Sep 18, 2020 7:13 am, edited 1 time in total.
MotoTrojan
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

Glad to hear you are starting to narrow things down! Few more answers to hopefully get you to the finish line.
nzahir wrote: Thu Sep 17, 2020 8:19 pm
I think I prefer SLYV over VIOV because its market cap is about 4x the size and ER is the same

IJS mkt cap is over 2x of SLYV, but a higher ER and I think a 2B mkt cap is fine, but not sure if anyone wants to clatify
SLYV is a perfectly fine choice but just some background here. Fund AUM (assets under management, like market cap) can sometimes matter, but trading volume is probably more important for liquidity (I am sure SLYV has more than VIOV though). Having said that, liquidity is really based off the underlying assets; if they are liquid, then an ETF can still maintain a small bid-ask spread. If SLYV was more efficient (better priced) than VIOV, then market arbitragers could simply buy one, redeem it for the underlying, create the other, and profit off it, but in doing that they drive the pricing of the two together.

SLYV and other State Street funds were very poor choices in taxable accounts up until recent as they had capital-gains distributions, but have since reported that they have that fixed so should be a fine choice now.
nzahir wrote: Thu Sep 17, 2020 8:19 pm
1. Why are there no S&P600 index funds that are available to easily buy instead of having to buy shares? I see there is VSMVX I believe, but not available to me?
See below, but if you are a mutual fund user rather than ETFs, I strongly advise you to just go with VSIAX for simplicity; you are not giving anything up factor wise if you adjust allocation accordingly.
nzahir wrote: Thu Sep 17, 2020 8:19 pm
2. Why use VBR if it has so much mid cap? Not a bad fund at all though and for some periods of time it has done just as well as SCV if not better, but not when you go back to a longer 50 year period.
Again, the only thing that really matters with these diverse funds is factor exposure. VBR does a perfectly fine job at getting exposure to HML relative to say SLYV, and still gets most of the SMB exposure. By holding a little more VBR you can get the same exposure while reducing your overall weighted expense ratio, so unless you need a deeper fund to meet your target exposure, no need for anything more. Take a long look at the final Portfolio Visualizer post I made in the previous reply, you really cannot tell the difference between the VFINX/SLYV and VFINX/VBR portfolios.

In my view, HML matters more than SMB. I believe people associate small-value as the winner because smaller companies better achieve HML exposure, but with a deep value fund like VFVA which is 1/3 large, 1/3 mid, and 1/3 small I’d wager you actually have even higher expected returns (and risk) than SLYV. So the small is more a tool to easily access the value exposure than anything (it on its own has less excess return).
nzahir wrote: Thu Sep 17, 2020 8:19 pm
3. Any way to read on what Avuv does in a clear and simple manner? Do they just screen for profitability similar to the S&P600 and then try to avoid negative momentum? I don't know much about negative momentum though. Don't you want to not sell low or do they somehow aboid that negative momentum before it happens?
Here is a great read-up on the Avantis process. Avoiding negative momentum has nothing to do with selling low, it has to do with letting winners run a little longer, and waiting to add new stocks that are falling into the value-screen with the assumption that their momentum will have them keep falling a bit more. If you run a factor analysis on VBR or SLYV you'll see that they don't have that much negative momentum to begin with, it is a bigger problem with more aggressive funds like VFVA or QVAL.

https://www.avantisinvestors.com/conten ... esting.pdf

The S&P600 "screen" is only for inclusion to the S&P indexes (4 quarters of profitability) so it is a very light effect but has helped relative to the Russell 2000. A company that gets in though won't be kicked out for having profitability deteriorate, while Avantis is constantly screening (and weighting) for this. Macy's for example is a high-profile company that has had some bad luck lately and fallen into the S&P600, even though they are quite distressed I would presume.


Most important thing is to pick something that speaks to you and that you have conviction in. While AVUV may not end up being the most efficient choice due to the higher expense ratio, it also won't have a drastic tracking-error relative to an equivalent allocation to VBR.
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Steve Reading
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Re: Small Cap Value heads Rejoice !!!

Post by Steve Reading »

MotoTrojan wrote: Fri Sep 18, 2020 7:11 am VBR does a perfectly fine job at getting exposure to HML relative to say SLYV, and still gets most of the SMB exposure. By holding a little more VBR you can get the same exposure while reducing your overall weighted expense ratio, so unless you need a deeper fund to meet your target exposure, no need for anything more. Take a long look at the final Portfolio Visualizer post I made in the previous reply, you really cannot tell the difference between the VFINX/SLYV and VFINX/VBR portfolios.
Just FYI, I also used to tell people to hold a little more VBR just to get their exposure back up over VIOV. But, at least thus far, that has not been needed. Vanguard switched VBR and VSIAX to the CRSP index back in 2013. Since then, VBR has had basically the same load as the S&P 600 cousin VIOV:
https://www.portfoliovisualizer.com/fac ... sion=false

If you regress the index since inception (2001), you find an HmL load of 0.25 vs 0.29 for S&P 600 value. And actually higher profitability and investment. This most likely is all noise.

So nowadays, I don't even bother to tell other to hold a little more VBR. Just a 1-for-1 switch with SLYV is likely to result in the same thing.

That also brings me to a second point:
Careful with using the factor-matching PV tool, and using VBR before 2013. You'll catch many of the years when it tracked the MSCI USA Small Value, which might or might not be as representative for VBR going forward.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Steve Reading
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Re: Small Cap Value heads Rejoice !!!

Post by Steve Reading »

nzahir wrote: Fri Sep 18, 2020 1:51 am
Steve Reading wrote: Thu Sep 17, 2020 9:59 pm
nzahir wrote: Thu Sep 17, 2020 9:39 pm I don't, but I was talking about mid caps in general (its basically a 50-50 mid and small mix)
What makes you say that? My estimate tell me it's closer to 80-20 small-mid.
https://www.etrade.wallst.com/v1/stocks ... symbol=VBR

Is E*TRADE wrong?
It's not wrong, just probably a little misleading if you don't know what you're doing.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
MotoTrojan
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

Steve Reading wrote: Fri Sep 18, 2020 8:07 am
MotoTrojan wrote: Fri Sep 18, 2020 7:11 am VBR does a perfectly fine job at getting exposure to HML relative to say SLYV, and still gets most of the SMB exposure. By holding a little more VBR you can get the same exposure while reducing your overall weighted expense ratio, so unless you need a deeper fund to meet your target exposure, no need for anything more. Take a long look at the final Portfolio Visualizer post I made in the previous reply, you really cannot tell the difference between the VFINX/SLYV and VFINX/VBR portfolios.
Just FYI, I also used to tell people to hold a little more VBR just to get their exposure back up over VIOV. But, at least thus far, that has not been needed. Vanguard switched VBR and VSIAX to the CRSP index back in 2013. Since then, VBR has had basically the same load as the S&P 600 cousin VIOV:
https://www.portfoliovisualizer.com/fac ... sion=false

If you regress the index since inception (2001), you find an HmL load of 0.25 vs 0.29 for S&P 600 value. And actually higher profitability and investment. This most likely is all noise.

So nowadays, I don't even bother to tell other to hold a little more VBR. Just a 1-for-1 switch with SLYV is likely to result in the same thing.

That also brings me to a second point:
Careful with using the factor-matching PV tool, and using VBR before 2013. You'll catch many of the years when it tracked the MSCI USA Small Value, which might or might not be as representative for VBR going forward.
Ah thanks for that, I thought the break-point was closer to inception of VBR (which is predated by VISVX).

Even in your 2013-present regression though you'll note that VBR has a much lower SMB loading than SLYV so my comment to hold a little more is mainly applicable to someone who also cares about the small-factor exposure although as I noted I personally care more about the value load.

Lot more negative alpha in VBR from 2013-present too, but I presume noise at such a short regression length.
nzahir
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Re: Small Cap Value heads Rejoice !!!

Post by nzahir »

Steve Reading wrote: Fri Sep 18, 2020 8:09 am
nzahir wrote: Fri Sep 18, 2020 1:51 am
Steve Reading wrote: Thu Sep 17, 2020 9:59 pm
nzahir wrote: Thu Sep 17, 2020 9:39 pm I don't, but I was talking about mid caps in general (its basically a 50-50 mid and small mix)
What makes you say that? My estimate tell me it's closer to 80-20 small-mid.
https://www.etrade.wallst.com/v1/stocks ... symbol=VBR

Is E*TRADE wrong?
It's not wrong, just probably a little misleading if you don't know what you're doing.
Why is it misleading, I actually don't know

Thanks for more info guys

I could just use VSIAX and add more exposure, but then that takes away from other holdings.

I think I want to use 3 funds to consistently add to once I have created my plan.

Total Mkt-VTI/VTSAX
Small Value- Still deciding
International- Still deciding

I will probably have a couple individual stocks for a small allocation of my money, but this 3 fund portfolio should make up about 90% of my portfolio. I am very young, so I do not want bonds to limit volatility, I will just add more cash during big drops
MotoTrojan
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

nzahir wrote: Fri Sep 18, 2020 10:55 am
Steve Reading wrote: Fri Sep 18, 2020 8:09 am
nzahir wrote: Fri Sep 18, 2020 1:51 am
Steve Reading wrote: Thu Sep 17, 2020 9:59 pm
nzahir wrote: Thu Sep 17, 2020 9:39 pm I don't, but I was talking about mid caps in general (its basically a 50-50 mid and small mix)
What makes you say that? My estimate tell me it's closer to 80-20 small-mid.
https://www.etrade.wallst.com/v1/stocks ... symbol=VBR

Is E*TRADE wrong?
It's not wrong, just probably a little misleading if you don't know what you're doing.
Why is it misleading, I actually don't know

Thanks for more info guys

I could just use VSIAX and add more exposure, but then that takes away from other holdings.

I think I want to use 3 funds to consistently add to once I have created my plan.

Total Mkt-VTI/VTSAX
Small Value- Still deciding
International- Still deciding

I will probably have a couple individual stocks for a small allocation of my money, but this 3 fund portfolio should make up about 90% of my portfolio. I am very young, so I do not want bonds to limit volatility, I will just add more cash during big drops
Large, mid, and small are entirely subjective. There is no global standard on what counts for what. CRSP uses bottom 15% of market for small while S&P600/Russell 2000 use bottom 10%. Factor load on SMB is the only true way to compare 1-1.

I like your plan. As Steve mentioned, VBR vs. SLYV is a very subtle difference (per unit expense ratio, VBR certainly wins). If you are okay with ETFs just pick whichever feels right to you, or even AVUV. If you like mutual funds then I would 110% just go with VSIAX. My portfolio is 100% in value funds and I still use VSIAX/VBR so I don't think having room for funds is an issue (would just be less VTI, but that is all accounted for).

For International it seems like a no-brainer to use VXUS unless you have some moral hazard against emerging markets, in which case VEA would be the way to go (or their complimenting mutual funds).
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Steve Reading
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Re: Small Cap Value heads Rejoice !!!

Post by Steve Reading »

nzahir wrote: Fri Sep 18, 2020 10:55 am
Steve Reading wrote: Fri Sep 18, 2020 8:09 am
nzahir wrote: Fri Sep 18, 2020 1:51 am
Steve Reading wrote: Thu Sep 17, 2020 9:59 pm
nzahir wrote: Thu Sep 17, 2020 9:39 pm I don't, but I was talking about mid caps in general (its basically a 50-50 mid and small mix)
What makes you say that? My estimate tell me it's closer to 80-20 small-mid.
https://www.etrade.wallst.com/v1/stocks ... symbol=VBR

Is E*TRADE wrong?
It's not wrong, just probably a little misleading if you don't know what you're doing.
Why is it misleading, I actually don't know
For many reasons. VBR might be buying the smallest of the midcaps while a midcap fund like IVOV might be buying the largest of the midcaps. They look the same in the box, but are very different in deciles and factor loadings.
Moreover, what is "small" and "mid" in those style boxes might or might not correspond to "small" and "mid" FF. So you can't even connect historical premia to those boxes.

Perhaps most importantly, the size premium historically has been negligible in the 20-60% size deciles. So FF mid caps have performed very similarly to FF small caps. It's not that the premium comes only from micro-caps but that's not too far off either.

All of that to say:
VBR has a very similar HmL load to SLYV. It has greater market cap but, historically, that hasn't resulted in lower performance.

If you understand the things above, and carefully think about the information, then you'll be fine. But it sounds like your conclusion was the over the past 50 years, VBR would've underperformed VIOV. I'm not sure that's true.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
Robot Monster
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Re: Small Cap Value heads Rejoice !!!

Post by Robot Monster »

Interesting Economist article about value investing that concludes:
It is possible that investors are simply overvaluing glitzy growth firms. Value stocks have been trampled before. They also severely underperformed growth stocks in the late 1990s and early 2000s, during the dotcom boom. Established firms simply did not hold the same allure as up-and-comers like Yahoo and Cisco, which seemed destined to take over the world, until they didn’t. Tech stocks gyrated wildly earlier this month, suggesting that investors are getting antsy about their high valuations. Redemption for the value-investing faithful may yet come.
nzahir
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Re: Small Cap Value heads Rejoice !!!

Post by nzahir »

Steve Reading wrote: Fri Sep 18, 2020 11:49 am
nzahir wrote: Fri Sep 18, 2020 10:55 am
Steve Reading wrote: Fri Sep 18, 2020 8:09 am
nzahir wrote: Fri Sep 18, 2020 1:51 am
Steve Reading wrote: Thu Sep 17, 2020 9:59 pm

What makes you say that? My estimate tell me it's closer to 80-20 small-mid.
https://www.etrade.wallst.com/v1/stocks ... symbol=VBR

Is E*TRADE wrong?
It's not wrong, just probably a little misleading if you don't know what you're doing.
Why is it misleading, I actually don't know
For many reasons. VBR might be buying the smallest of the midcaps while a midcap fund like IVOV might be buying the largest of the midcaps. They look the same in the box, but are very different in deciles and factor loadings.
Moreover, what is "small" and "mid" in those style boxes might or might not correspond to "small" and "mid" FF. So you can't even connect historical premia to those boxes.

Perhaps most importantly, the size premium historically has been negligible in the 20-60% size deciles. So FF mid caps have performed very similarly to FF small caps. It's not that the premium comes only from micro-caps but that's not too far off either.

All of that to say:
VBR has a very similar HmL load to SLYV. It has greater market cap but, historically, that hasn't resulted in lower performance.

If you understand the things above, and carefully think about the information, then you'll be fine. But it sounds like your conclusion was the over the past 50 years, VBR would've underperformed VIOV. I'm not sure that's true.
For now the performance hasn't made a difference, even the past 20 years, but when I look at a longer time frame, SCV has done better than MCV. And I thought some of the studies had proven the value premium of scv

Are mid and small caps not defined by mkt cap (2B or less small cap, 2-10B mid cap)?

Being able to use VSIAX does make things easier from a dca perspective of being able to put aside a fixed dollar amount though
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

nzahir wrote: Fri Sep 18, 2020 3:34 pm
Steve Reading wrote: Fri Sep 18, 2020 11:49 am
nzahir wrote: Fri Sep 18, 2020 10:55 am
Steve Reading wrote: Fri Sep 18, 2020 8:09 am
nzahir wrote: Fri Sep 18, 2020 1:51 am
https://www.etrade.wallst.com/v1/stocks ... symbol=VBR

Is E*TRADE wrong?
It's not wrong, just probably a little misleading if you don't know what you're doing.
Why is it misleading, I actually don't know
For many reasons. VBR might be buying the smallest of the midcaps while a midcap fund like IVOV might be buying the largest of the midcaps. They look the same in the box, but are very different in deciles and factor loadings.
Moreover, what is "small" and "mid" in those style boxes might or might not correspond to "small" and "mid" FF. So you can't even connect historical premia to those boxes.

Perhaps most importantly, the size premium historically has been negligible in the 20-60% size deciles. So FF mid caps have performed very similarly to FF small caps. It's not that the premium comes only from micro-caps but that's not too far off either.

All of that to say:
VBR has a very similar HmL load to SLYV. It has greater market cap but, historically, that hasn't resulted in lower performance.

If you understand the things above, and carefully think about the information, then you'll be fine. But it sounds like your conclusion was the over the past 50 years, VBR would've underperformed VIOV. I'm not sure that's true.
For now the performance hasn't made a difference, even the past 20 years, but when I look at a longer time frame, SCV has done better than MCV. And I thought some of the studies had proven the value premium of scv

Are mid and small caps not defined by mkt cap (2B or less small cap, 2-10B mid cap)?

Being able to use VSIAX does make things easier from a dca perspective of being able to put aside a fixed dollar amount though
There is no such thing as a SCV premium, there is SMB (small minus big) and HML (high minus low). Smaller-cap stocks tend to more easily load up on HML so small-value funds tend to have higher value load, plus whatever premium (positive or negative) small gets you.

Steve's point is that just looking at raw percent of companies in small vs. mid category doesn't tell you how close to the border they are so it is a weak indicator, while SMB factor-load tells you a discrete value for how much exposure you have with no guessing.

I imagine you are looking at Portfolio Visualizer's small-value asset class which is based on Fama French data. That includes some smaller caps than any of these funds have exposure to, and also doesn't include any transaction costs on trading these illiquid stocks.

QVAL's index for what it is worth has outperformed that Fama-French data set even if you remove 2% for expense ratio and trading costs (since inception of QVAL it has beaten that by close to 1.75%, so trading costs were far lower than that); QVAL has a weighted market-cap >$14B. You don't need small to get value.
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Re: Small Cap Value heads Rejoice !!!

Post by nzahir »

MotoTrojan wrote: Fri Sep 18, 2020 11:31 am
nzahir wrote: Fri Sep 18, 2020 10:55 am
Steve Reading wrote: Fri Sep 18, 2020 8:09 am
nzahir wrote: Fri Sep 18, 2020 1:51 am
Steve Reading wrote: Thu Sep 17, 2020 9:59 pm

What makes you say that? My estimate tell me it's closer to 80-20 small-mid.
https://www.etrade.wallst.com/v1/stocks ... symbol=VBR

Is E*TRADE wrong?
It's not wrong, just probably a little misleading if you don't know what you're doing.
Why is it misleading, I actually don't know

Thanks for more info guys

I could just use VSIAX and add more exposure, but then that takes away from other holdings.

I think I want to use 3 funds to consistently add to once I have created my plan.

Total Mkt-VTI/VTSAX
Small Value- Still deciding
International- Still deciding

I will probably have a couple individual stocks for a small allocation of my money, but this 3 fund portfolio should make up about 90% of my portfolio. I am very young, so I do not want bonds to limit volatility, I will just add more cash during big drops
Large, mid, and small are entirely subjective. There is no global standard on what counts for what. CRSP uses bottom 15% of market for small while S&P600/Russell 2000 use bottom 10%. Factor load on SMB is the only true way to compare 1-1.

I like your plan. As Steve mentioned, VBR vs. SLYV is a very subtle difference (per unit expense ratio, VBR certainly wins). If you are okay with ETFs just pick whichever feels right to you, or even AVUV. If you like mutual funds then I would 110% just go with VSIAX. My portfolio is 100% in value funds and I still use VSIAX/VBR so I don't think having room for funds is an issue (would just be less VTI, but that is all accounted for).

For International it seems like a no-brainer to use VXUS unless you have some moral hazard against emerging markets, in which case VEA would be the way to go (or their complimenting mutual funds).
Are mid and small caps not defined by mkt cap (2B or less small cap, 2-10B mid cap)?

I will probably just have 1 small cap value holding for US. Deciding between SLYV, VBR/VSIAX, and AVUV. Leaning SLYV or AVUV. Going to read a bit more

Avantis is just so new and I know the DFA has good track history (has done worse though in the past 20 years though vs SLYV).

I don't mind just using SLYV because it does a decent job of filtering out some companies, but also watching Avuv closely

I don't mind investing emerging markets, especially because EU is more correlated to the US than Emerging and Pacific Companies. I don't really trust China too much with their government and the ability to lie about numbers, but I feel like it would be dumb to not be invested there as well.

Need to do a lot more research on international. Either doing total market or small cap, but I don't want to make it overly complex and have multiple international funds. Thanks for the help btw
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Re: Small Cap Value heads Rejoice !!!

Post by Massdriver »

Robot Monster wrote: Fri Sep 18, 2020 3:27 pm Interesting Economist article about value investing that concludes:
It is possible that investors are simply overvaluing glitzy growth firms. Value stocks have been trampled before. They also severely underperformed growth stocks in the late 1990s and early 2000s, during the dotcom boom. Established firms simply did not hold the same allure as up-and-comers like Yahoo and Cisco, which seemed destined to take over the world, until they didn’t. Tech stocks gyrated wildly earlier this month, suggesting that investors are getting antsy about their high valuations. Redemption for the value-investing faithful may yet come.
Very interesting! Thank you for the quote. Let's hope that good times are ahead for us SCV tilters this decade!
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Re: Small Cap Value heads Rejoice !!!

Post by Steve Reading »

nzahir wrote: Fri Sep 18, 2020 3:34 pm Are mid and small caps not defined by mkt cap (2B or less small cap, 2-10B mid cap)?
No, that's not how FF defines it. But it is how some style boxes might.

So again, it's a non-issue as long as you know what you're doing and are careful.
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

nzahir wrote: Fri Sep 18, 2020 3:55 pm
Avantis is just so new and I know the DFA has good track history (has done worse though in the past 20 years though vs SLYV).
As shown, DFA really hasn't done much worse (outside of higher expense ratio) than SLYV, it just has higher factor loading and the factors have done worse. See below how 75/25 VFINX/DFSVX compares to 70/30 VFINX/SLYV (need more SLYV to get same exposure). So for the millionth time, the funds really aren't all that different, you just have to hold different amounts to be apples-to-apples. It really sounds like VBR/VSIAX would be great for you given your affinity to mutual funds.

https://www.portfoliovisualizer.com/mat ... tion2_1=75


So even if AVUV outperforms VBR outright, that doesn't mean it was the smart choice. You could've held a little more VBR to get the same factor exposure, paid less in expenses, and actually outperformed the portfolio which uses AVUV.

nzahir wrote: Fri Sep 18, 2020 3:55 pm
Need to do a lot more research on international. Either doing total market or small cap, but I don't want to make it overly complex and have multiple international funds. Thanks for the help btw
I only hold ex-US small-cap value (FNDC) and mid-cap deep-value (IVAL). FNDC is a fundamental index fund so it still holds some growth companies, just tilts to value as it weights on economic scale rather than market-cap. Still gets great factor-loading. If you wanted to go bold I think FNDC could be your entire ex-US holding. It does not include emerging markets. Just be ready for periods of awful performance like any factor fund (asset class was flat for most of a decade in the 1990's while ex-US large did fine):

https://www.portfoliovisualizer.com/bac ... ion1_1=100

If you want to hold some total market ex-US though then I think just using US small-value is A-okay.
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Re: Small Cap Value heads Rejoice !!!

Post by caklim00 »

nzahir wrote: Fri Sep 18, 2020 3:55 pm I will probably just have 1 small cap value holding for US. Deciding between SLYV, VBR/VSIAX, and AVUV. Leaning SLYV or AVUV. Going to read a bit more
Just used both if you are going to hold in taxable. Pick one and then use the other one as tax loss harvest partner. I hold both AVUV and SLYV as a result.
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

Thought you all may enjoy this comparison of VOO, VBR, and SLYV showing percentile scales (top 1000 US stocks) on Size & Book/Price.

Image

And here is SLYV vs. AVUV (pretty subtle):

Image

Here is all 3 again but instead of size, gross profitability (not seeing any huge differences):

Image

One more before I run... VFVA, VBR, AVUV with E/P and B/P. Can really see how well VFVA loads up even with it's larger cap ranges.

Image
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Re: Small Cap Value heads Rejoice !!!

Post by caklim00 »

delete
Last edited by caklim00 on Fri Sep 18, 2020 7:58 pm, edited 1 time in total.
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Re: Small Cap Value heads Rejoice !!!

Post by caklim00 »

MotoTrojan wrote: Fri Sep 18, 2020 6:52 pm Thought you all may enjoy this comparison of VOO, VBR, and SLYV showing percentile scales (top 1000 US stocks) on Size & Book/Price.

And here is SLYV vs. AVUV (pretty subtle):

Here is all 3 again but instead of size, gross profitability (not seeing any huge differences):

One more before I run... VFVA, VBR, AVUV with E/P and B/P. Can really see how well VFVA loads up even with it's larger cap ranges.
Nice work! Looks like AVUV has some slightly larger cap holdings (hopefully these are positive momentum) and a few more smaller cap holdings. Looks like both should be fairly interchangeable though. VBR definitely looks totally different.


Fairly low overlap though...
166
Number of overlapping holdings
31.4%
% of AVUV's 531 holdings also in SLYV
36.8%
% of SLYV's 452 holdings also in AVUV
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

caklim00 wrote: Fri Sep 18, 2020 7:57 pm
MotoTrojan wrote: Fri Sep 18, 2020 6:52 pm Thought you all may enjoy this comparison of VOO, VBR, and SLYV showing percentile scales (top 1000 US stocks) on Size & Book/Price.

And here is SLYV vs. AVUV (pretty subtle):

Here is all 3 again but instead of size, gross profitability (not seeing any huge differences):

One more before I run... VFVA, VBR, AVUV with E/P and B/P. Can really see how well VFVA loads up even with it's larger cap ranges.
Nice work! Looks like AVUV has some slightly larger cap holdings (hopefully these are positive momentum) and a few more smaller cap holdings.
10 points for caklim00!

Image
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Steve Reading
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Re: Small Cap Value heads Rejoice !!!

Post by Steve Reading »

MotoTrojan wrote: Fri Sep 18, 2020 6:52 pm Thought you all may enjoy this comparison of VOO, VBR, and SLYV showing percentile scales (top 1000 US stocks) on Size & Book/Price.

Image

And here is SLYV vs. AVUV (pretty subtle):

Image

Here is all 3 again but instead of size, gross profitability (not seeing any huge differences):

Image

One more before I run... VFVA, VBR, AVUV with E/P and B/P. Can really see how well VFVA loads up even with it's larger cap ranges.

Image
Very cool!
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Re: Small Cap Value heads Rejoice !!!

Post by bog007 »

value best month since 2001 vs growth

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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

New post be Asness on the (lack of a) size effect.

https://www.aqr.com/Insights/Perspectiv ... ly-Edition

Summary is that illiquidity causes beta to come in low (sometimes well under 1) on small-caps, resulting in the marginally statistically significant premium (alpha). In reality when adjusted, the alpha from small caps is actually negative!

In practical terms I’d say if you hold any bonds at all it’s more efficient to just increase your equity exposure by holding more beta (total market) than tilting small. I agree with this and really only use small myself to get better exposure to value.
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Re: Small Cap Value heads Rejoice !!!

Post by vineviz »

Has anyone taken a close look at Vident Core U.S. Equity Fund (VUSE)? I haven't paid much attention to it because it fails my expense ratio screens, but it seems to have a slightly unusual methodology. And pretty decent value exposure for the amount of small cap exposure.
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Re: Small Cap Value heads Rejoice !!!

Post by Taylor Larimore »

vineviz wrote: Sat Sep 19, 2020 5:35 pm Has anyone taken a close look at Vident Core U.S. Equity Fund (VUSE)? I haven't paid much attention to it because it fails my expense ratio screens, but it seems to have a slightly unusual methodology. And pretty decent value exposure for the amount of small cap exposure.
vineviz:

Fund companies are continually bringing out new funds hoping to entice buyers. When we moved to Vanguard in 1986 I immediately bought 16 "no-load" Vanguard funds that I thought could "beat the market" and add "diversification." Big mistake.

Out of curiosity I went to Google, typed FUSE, and found this:
Shop Vuse Vapor and re-imagine your vaping experience. Discover top-quality e-cigarettes with un-matched flavor when you use Vuse.
No thanks.

Best wishes.
Taylor
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Re: Small Cap Value heads Rejoice !!!

Post by LadyGeek »

Here's the fund info: VUSE - Vident Funds

From the fact sheet, it slices across cap weightings:

large cap - 30.9%
mid cap - 41.9%
small cap - 27.1%

The fund tracks the Vident Core U.S. Stock IndexTM. How does that index track against other indices?
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Re: Small Cap Value heads Rejoice !!!

Post by kolder »

Is foreign tax drag a concern for anyone? Considering small value typically pays out higher dividends, you end up taking a bigger hit especially in a tax advantaged account. I've seen numbers thrown around of about 20-50 bps loss due to this which could be even higher in SCV funds. I do want to hold international but that is quite the price to pay for diversification IMO.

I was considering using DGS or DEM for EM but the dividends are so high that it doesn't even seem worth it, despite the strong value exposure.
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

kolder wrote: Sun Sep 20, 2020 6:03 am Is foreign tax drag a concern for anyone? Considering small value typically pays out higher dividends, you end up taking a bigger hit especially in a tax advantaged account. I've seen numbers thrown around of about 20-50 bps loss due to this which could be even higher in SCV funds. I do want to hold international but that is quite the price to pay for diversification IMO.

I was considering using DGS or DEM for EM but the dividends are so high that it doesn't even seem worth it, despite the strong value exposure.
Perhaps AVEM is interesting for you. Larger value with dividend yield around 3.75%, much lower than those Wisdom Tree Dividend ETFs.
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Re: Small Cap Value heads Rejoice !!!

Post by kolder »

YRT70 wrote: Sun Sep 20, 2020 7:19 am
kolder wrote: Sun Sep 20, 2020 6:03 am Is foreign tax drag a concern for anyone? Considering small value typically pays out higher dividends, you end up taking a bigger hit especially in a tax advantaged account. I've seen numbers thrown around of about 20-50 bps loss due to this which could be even higher in SCV funds. I do want to hold international but that is quite the price to pay for diversification IMO.

I was considering using DGS or DEM for EM but the dividends are so high that it doesn't even seem worth it, despite the strong value exposure.
Perhaps AVEM is interesting for you. Larger value with dividend yield around 3.75%, much lower than those Wisdom Tree Dividend ETFs.
Yeah I like AVEM and I'll probably end up going with it. Not a market timer but I can't deny that EM value sure "looks" attractive these days.

But sometimes I wonder if international is even worth it considering the unrecoverable tax withholdings.
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Re: Small Cap Value heads Rejoice !!!

Post by Steve Reading »

kolder wrote: Sun Sep 20, 2020 9:15 am But sometimes I wonder if international is even worth it considering the unrecoverable tax withholdings.
Whenever I've used triceratops tax efficiency calculator, I've found that US and Ex-USA funds are perfectly fine from a tax perspective for me. Actually quite close. I hold FNDE in my taxable account for instance.
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Re: Small Cap Value heads Rejoice !!!

Post by kolder »

Steve Reading wrote: Sun Sep 20, 2020 9:22 am
kolder wrote: Sun Sep 20, 2020 9:15 am But sometimes I wonder if international is even worth it considering the unrecoverable tax withholdings.
Whenever I've used triceratops tax efficiency calculator, I've found that US and Ex-USA funds are perfectly fine from a tax perspective for me. Actually quite close. I hold FNDE in my taxable account for instance.
Would you hold it in a tax-advantaged account, if taxable was out of the question?
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

Steve Reading wrote: Sun Sep 20, 2020 9:22 am
kolder wrote: Sun Sep 20, 2020 9:15 am But sometimes I wonder if international is even worth it considering the unrecoverable tax withholdings.
Whenever I've used triceratops tax efficiency calculator, I've found that US and Ex-USA funds are perfectly fine from a tax perspective for me. Actually quite close. I hold FNDE in my taxable account for instance.
In taxable you can recover the foreign tax credit, does the same apply to holdings in tax-advantaged? I guess I never really thought about foreign tax-drag in my IRA before but kolder brings up an interesting point.

Still no EM in my portfolio... hope I'm not missing out on anything. I plan to watch The China Hustle later today, looks like that should reinforce my conviction... (I would hold some EM if my ex-US funds included it, but don't see a need to go out of my way to get exposure).
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

LadyGeek wrote: Sat Sep 19, 2020 7:06 pm Here's the fund info: VUSE - Vident Funds

From the fact sheet, it slices across cap weightings:

large cap - 30.9%
mid cap - 41.9%
small cap - 27.1%

The fund tracks the Vident Core U.S. Stock IndexTM. How does that index track against other indices?
Some more info here but still a bit vague: https://www.videntfunds.com/docs/VUSE_F ... ry.pdf?v=2

Sounds similar to VFMF (targets quality and momentum too); not sure I would be willing to pay that delta in expense ratio for similar funds. Similar ER to QVAL which is far more concentrated at ~40 holdings. Performance in their short lives has been similar it seems:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Super short regression but also looks like it failed to get any momentum exposure which VFMF does well:

https://www.portfoliovisualizer.com/fac ... sion=false
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Re: Small Cap Value heads Rejoice !!!

Post by Steve Reading »

kolder wrote: Sun Sep 20, 2020 9:34 am
Steve Reading wrote: Sun Sep 20, 2020 9:22 am
kolder wrote: Sun Sep 20, 2020 9:15 am But sometimes I wonder if international is even worth it considering the unrecoverable tax withholdings.
Whenever I've used triceratops tax efficiency calculator, I've found that US and Ex-USA funds are perfectly fine from a tax perspective for me. Actually quite close. I hold FNDE in my taxable account for instance.
Would you hold it in a tax-advantaged account, if taxable was out of the question?
I would and I do. My numbers work out such that FNDE is much more tax-inefficient but it's got the tax credit to bring it right around in line with USA holdings. That means that whether I hold FNDE in tax-advantaged and VTI in taxable, or the other way around, it comes out to around the same.

Again, that's my personal circumstance. If your tax bracket was lower, then FNDE would get a slight edge in taxable and vice-versa.
MotoTrojan wrote: Sun Sep 20, 2020 9:36 am In taxable you can recover the foreign tax credit, does the same apply to holdings in tax-advantaged?
No, I don't think you can in tax-advantaged. I don't even get 1099s from my 401k.
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Re: Small Cap Value heads Rejoice !!!

Post by kolder »

Steve Reading wrote: Sun Sep 20, 2020 9:47 am

I would and I do. My numbers work out such that FNDE is much more tax-inefficient but it's got the tax credit to bring it right around in line with USA holdings. That means that whether I hold FNDE in tax-advantaged and VTI in taxable, or the other way around, it comes out to around the same.
Am I missing something here? Tax efficiency shouldn't matter in a tax-advantaged account so foreign holdings are always going to be inferior to US holdings because you can't get the tax credit, yes?
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Re: Small Cap Value heads Rejoice !!!

Post by Steve Reading »

kolder wrote: Sun Sep 20, 2020 9:55 am
Steve Reading wrote: Sun Sep 20, 2020 9:47 am

I would and I do. My numbers work out such that FNDE is much more tax-inefficient but it's got the tax credit to bring it right around in line with USA holdings. That means that whether I hold FNDE in tax-advantaged and VTI in taxable, or the other way around, it comes out to around the same.
Am I missing something here? Tax efficiency shouldn't matter in a tax-advantaged account so foreign holdings are always going to be inferior to US holdings because you can't get the tax credit, yes?
Say both VTI and FNDE had a return of 6%. If I held them in taxable, I'd pay about 0.5% worth of dividend taxes for VTI and about 1% dividend taxes for FNDE. But FNDE has a 0.5% foreign tax credit. I can hold VTI in taxable, FNDE in tax-advantaged (producing a 5.5% and 6% return respectively), or the other way (also producing a 5.5% and 6% return respectively).

I suppose you could make the argument FNDE's stocks are paying dividends taxes in their foreign countries which VTI wouldn't. So all else equal, FNDE shouldn't have an equal investor return to VTI in the first place. And holding in taxable, while recovering that, then suffers from the higher tax inefficiency in the USA itself. Is this what you're referring to?
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Re: Small Cap Value heads Rejoice !!!

Post by kolder »

Steve Reading wrote: Sun Sep 20, 2020 10:21 am
kolder wrote: Sun Sep 20, 2020 9:55 am
Steve Reading wrote: Sun Sep 20, 2020 9:47 am

I would and I do. My numbers work out such that FNDE is much more tax-inefficient but it's got the tax credit to bring it right around in line with USA holdings. That means that whether I hold FNDE in tax-advantaged and VTI in taxable, or the other way around, it comes out to around the same.
Am I missing something here? Tax efficiency shouldn't matter in a tax-advantaged account so foreign holdings are always going to be inferior to US holdings because you can't get the tax credit, yes?
Say both VTI and FNDE had a return of 6%. If I held them in taxable, I'd pay about 0.5% worth of dividend taxes for VTI and about 1% dividend taxes for FNDE. But FNDE has a 0.5% foreign tax credit. I can hold VTI in taxable, FNDE in tax-advantaged (producing a 5.5% and 6% return respectively), or the other way (also producing a 5.5% and 6% return respectively).

I suppose you could make the argument FNDE's stocks are paying dividends taxes in their foreign countries which VTI wouldn't. So all else equal, FNDE shouldn't have an equal investor return to VTI in the first place. And holding in taxable, while recovering that, then suffers from the higher tax inefficiency in the USA itself. Is this what you're referring to?
No, I'm saying lets completely disregard taxable as an option. So I guess my question doesn't really have much to do with SCV and is just the ol "Why even hold International at all" debate (but it is amplified as SCV generally pays higher dividends). Lets say both the US market and International market have 10% return over the next x years. As a US investor, assuming 25 bps tax drag, you only get 9.75% since that 25 bps is unrecoverable in a tax-advantaged account. So the additional price you pay for diversification is 25 bps, and is essentially a "hidden" 25 bps increase to a funds ER, when held in a tax-advantaged account.

Considering International funds often have higher ER to begin with, I find it hard to convince myself to have a significant international holding but also don't want all my eggs in just the US market as factor performance can vary greatly across countries.
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Re: Small Cap Value heads Rejoice !!!

Post by Steve Reading »

kolder wrote: Sun Sep 20, 2020 10:38 am As a US investor, assuming 25 bps tax drag, you only get 9.75% since that 25 bps is unrecoverable in a tax-advantaged account.
What tax drag are you referring to here?
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Re: Small Cap Value heads Rejoice !!!

Post by kolder »

Steve Reading wrote: Sun Sep 20, 2020 10:43 am
kolder wrote: Sun Sep 20, 2020 10:38 am As a US investor, assuming 25 bps tax drag, you only get 9.75% since that 25 bps is unrecoverable in a tax-advantaged account.
What tax drag are you referring to here?
Foreign withholdings on dividends
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Re: Small Cap Value heads Rejoice !!!

Post by Steve Reading »

kolder wrote: Sun Sep 20, 2020 10:51 am
Steve Reading wrote: Sun Sep 20, 2020 10:43 am
kolder wrote: Sun Sep 20, 2020 10:38 am As a US investor, assuming 25 bps tax drag, you only get 9.75% since that 25 bps is unrecoverable in a tax-advantaged account.
What tax drag are you referring to here?
Foreign withholdings on dividends
How's that different from what I just said?
Steve Reading wrote: Sun Sep 20, 2020 10:21 am I suppose you could make the argument FNDE's stocks are paying dividends taxes in their foreign countries which VTI wouldn't. So all else equal, FNDE shouldn't have an equal investor return to VTI in the first place.
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Re: Small Cap Value heads Rejoice !!!

Post by YRT70 »

Trying to learn more about PV. I'm doing a factor regression on an int. ex. US portfolio with 50% VEA and 50% DISVX. I choose 5 factor Fama & French (good choice?).

Market (Rm-Rf) 1.08 0.017 62.373 0.000 1.050...1.118
Size (SMB) 0.14 0.043 3.375 0.001 0.060...0.229
Value (HML) 0.19 0.054 3.530 0.001 0.083...0.295
Profitability (RMW) 0.14 0.077 1.749 0.082 -0.018...0.288
Investment (CMA) 0.12 0.063 1.843 0.067 -0.008...0.240
Alpha (α) -6.62bps 0.001 -0.906 0.366 -0.21%...0.08%
Annualized Alpha (α) -0.79%
https://www.portfoliovisualizer.com/fac ... tion2_1=50

Can someone explain what the Alpha (α) -6.62bps and Annualized Alpha (α) -0.79% mean, in simple terms?
And how important are they?
thank you
Last edited by YRT70 on Sun Sep 20, 2020 11:07 am, edited 1 time in total.
kolder
Posts: 42
Joined: Mon Sep 07, 2020 3:54 pm

Re: Small Cap Value heads Rejoice !!!

Post by kolder »

Steve Reading wrote: Sun Sep 20, 2020 10:53 am
kolder wrote: Sun Sep 20, 2020 10:51 am
Steve Reading wrote: Sun Sep 20, 2020 10:43 am
kolder wrote: Sun Sep 20, 2020 10:38 am As a US investor, assuming 25 bps tax drag, you only get 9.75% since that 25 bps is unrecoverable in a tax-advantaged account.
What tax drag are you referring to here?
Foreign withholdings on dividends
How's that different from what I just said?
Steve Reading wrote: Sun Sep 20, 2020 10:21 am I suppose you could make the argument FNDE's stocks are paying dividends taxes in their foreign countries which VTI wouldn't. So all else equal, FNDE shouldn't have an equal investor return to VTI in the first place.
Apologies I had misread that part of your post.

My question was just if small/value tilters took extra consideration and/or had a strong home-country bias due to the slightly amplified drawbacks of having international small/value in a tax-advantaged portfolio. Or do people think it is even more important (than a non-tilted portfolio) for factor tilters to diversify internationally considering the potential for varying premia across countries.
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Steve Reading
Posts: 2483
Joined: Fri Nov 16, 2018 10:20 pm

Re: Small Cap Value heads Rejoice !!!

Post by Steve Reading »

kolder wrote: Sun Sep 20, 2020 11:04 am
Steve Reading wrote: Sun Sep 20, 2020 10:53 am
kolder wrote: Sun Sep 20, 2020 10:51 am
Steve Reading wrote: Sun Sep 20, 2020 10:43 am
kolder wrote: Sun Sep 20, 2020 10:38 am As a US investor, assuming 25 bps tax drag, you only get 9.75% since that 25 bps is unrecoverable in a tax-advantaged account.
What tax drag are you referring to here?
Foreign withholdings on dividends
How's that different from what I just said?
Steve Reading wrote: Sun Sep 20, 2020 10:21 am I suppose you could make the argument FNDE's stocks are paying dividends taxes in their foreign countries which VTI wouldn't. So all else equal, FNDE shouldn't have an equal investor return to VTI in the first place.
Apologies I had misread that part of your post.

My question was just if small/value tilters took extra consideration and/or had a strong home-country bias due to the slightly amplified drawbacks of having international small/value in a tax-advantaged portfolio. Or if people think it is still worth it to diversify internationally considering the potential for varying premia across countries.
Ok now I understand better what you mean. It's a good point you bring up. I pondered that couple years ago and came to the conclusion it was OK.

Revisiting my notes, I wrote for FNDC, this international tax cost comes out to ~22 bps. VEA's is closer to 16 bps. It's not ideal of course but it's a small number (certainly the ER difference is bigger to swallow). The diversification of factors globally seems to me much more worthwhile, as factors like value and size have correlations of 0.5-0.8 in USA vs Ex-USA. Not a crazy difference but easily worth the additional 6 bps to spread my SCV tilt to Ex-USA.

With EM, FNDE's tax cost over VWO is bigger (about 20 bps), but EM factors have even lower correlation (about 0.35 to USA and Ex-USA separately).
The above numbers were analysis with 2018 numbers so things might've changed.

Not to mention, if I wanted the amount of tilt I have with just using USA, I'd need a very concentrated portfolio in the USA. So there are other diversification advantages (that are much harder to quantify) from spreading factor exposure to Ex-USA.

Just my 2 cents. You could come to the opposite conclusion and I couldn't fault you :)
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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