Author Topic: SMALL CAP TILTING  (Read 2056 times)

xnyjets80x

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SMALL CAP TILTING
« on: January 13, 2019, 03:20:14 PM »
I wanted to get opinions on small cap tilting in general. I am a semi-new investor and currently have 15% of my portfolio tilted towards small cap. Currently I am in VSIAX (Small cap Value) and I am thinking of moving that into VTMSX (Vanguard Tax Managed Small Cap). I am a young investor and plan on holding the position for at least 20 years. My questions are:

1. Which fund do you recommend to hold long term VSIAX or VTMSX?
2. In general from a long term position is it better to hold small cap value fund, small cap growth, or blend.
3. What small cap funds in general do you recommend for long term investing?

Thank you in advance and I appreciate everyones insight.
« Last Edit: January 13, 2019, 03:48:12 PM by xnyjets80x »

Heckler

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Re: SMALL CAP TILTING
« Reply #1 on: January 13, 2019, 03:45:10 PM »
since you mention BH, please see rule 4 and 5.

https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy#Diversify

https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy#Never_try_to_time_the_market

The links won't work, because of %C2%AE should be a circled R symbol.  please google it.

ILikeDividends

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« Last Edit: January 13, 2019, 09:44:47 PM by ILikeDividends »

Radagast

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Re: SMALL CAP TILTING
« Reply #3 on: January 13, 2019, 05:54:06 PM »
1. VTMSX might be better in taxed accounts, while VSIAX might be better in sheltered accounts. S&P has gotten good small cap fund returns because they only accept companies with positive earnings. But small cap growth has done very well recently, which might make it better to look at VSIAX. Who knows, really.

2. Who knows, really. There is a theory that small cap value will do better, or at least be less correlated with the total market. If you don't want to test this then maybe you should also avoid overweighting small caps.

3. Low expenses, persistent strategy, not likely to disappear.

Rob_bob

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Re: SMALL CAP TILTING
« Reply #4 on: January 13, 2019, 06:45:25 PM »
Personally I used blend funds for Large, Mid and small cap.

Car Jack

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Re: SMALL CAP TILTING
« Reply #5 on: January 15, 2019, 01:51:12 PM »
My answers, which you won't like:

1: Neither.  VTSAX
2: No, see #1
3: Only those that you'd own within VTSAX

Watch:  https://www.youtube.com/watch?v=T71ibcZAX3I

bacchi

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Re: SMALL CAP TILTING
« Reply #6 on: January 15, 2019, 03:01:13 PM »
F&F recommend small cap value. It did shitty last year but is doing well this year (so far).

If you believe in it, don't try to time the market. Stick to your allocation %.

https://www.bogleheads.org/wiki/Fama_and_French_three-factor_model

Andy R

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Re: SMALL CAP TILTING
« Reply #7 on: January 15, 2019, 07:15:24 PM »
Currently I am in VSIAX (Small cap Value) and I am thinking of moving that into VTMSX (Vanguard Tax Managed Small Cap).

What is your reason to change from small value to small blend?

Overweighting small caps or small caps value is ok, but you need to have a strong enough opinion to keep it when it can under perform for a decade or more otherwise you will sell after it has under performed making sure you earn less than if you simply did not overweight it in the first place. Going by your post you do not have an opinion strongly enough to tilt, which means a total market fund be much more useful to you in my opinion.

MustacheAndaHalf

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Re: SMALL CAP TILTING
« Reply #8 on: January 15, 2019, 09:12:09 PM »
Larry Swedroe's "The Only Guide to a Winning Investment Strategy You'll Ever Need" provides a lot of data on small cap value beating the larger cap stocks.  But you can find long periods when that's not the case, so it helps to see historical data.  It helps to have the knowledge you should stick with a small cap value tilt.

Libraries often have that book, but you could order a used copy from Amazon as well:
https://www.amazon.com/Guide-Winning-Investment-Strategy-Youll/dp/0312339879

While Vanguard has a lot of great low-cost index funds, for small cap I would use something besides VSIAX.  Take a look at the morningstar breakdown of that fund into it's large, mid and small cap parts:
http://portfolios.morningstar.com/fund/summary?t=VSIAX&region=usa&culture=en_US

That "small cap" fund holds 53% mid caps.  Vanguard's fund is simply too big.  If you're willing to buy ETFs instead of mutual funds, Vanguard allows you to trade ~1800 ETFs at $0/trade.  So you could buy ETFs from other providers like iShares, SPDR, USAA, etc.

bacchi

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Re: SMALL CAP TILTING
« Reply #9 on: January 15, 2019, 10:33:33 PM »

flipboard

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Re: SMALL CAP TILTING
« Reply #10 on: January 15, 2019, 11:47:27 PM »
VIOV or IJS fit the bill.

http://portfolios.morningstar.com/fund/summary?t=viov&region=usa&culture=en_US
Those are actually small-cap value funds, but indeed: small-cap value tilt has shown to improve performance. (I use VIOV for my US SCV - it's harder to find true SCV for international, I can't remember off the top of my head what I use there.)

Given the higher risk, I would probably move away from the SCV tilt when approaching whatever my investment goal is, but IMHO it's stupid not to tilt when starting.

(I'll try to find the relevant sources later.)

xnyjets80x

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Re: SMALL CAP TILTING
« Reply #11 on: January 16, 2019, 01:58:38 PM »
Why would one tilt to small cap value such as VIOV or VSIAX instead of small cap blend such as VTMSX? I know past performance is not a measure of future success but I ran all three of the above funds through portfolio visualizer and could not see any time period where the small cap value funds outperformed small cap blend fund?

effigy98

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Re: SMALL CAP TILTING
« Reply #12 on: January 16, 2019, 02:12:20 PM »
I like IJS, trades for free at fidelity... have 20% in small cap value in a diversified asset allocation that has been working great for me over the years.

MaaS

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Re: SMALL CAP TILTING
« Reply #13 on: January 16, 2019, 02:31:39 PM »
I understand where you're coming from on wanting to tilt small caps.

But.. a disproportionate amount of profit gains have been flowing to a small number of very large companies. Yes, there are a lot of start ups crushing it, but they tend to be private rather than public. It seems this index is full of small businesses with mediocre growth outlooks.

I'd stick with VTSAX. If you really want increased small cap exposure, consider the Russell 2000.


bacchi

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Re: SMALL CAP TILTING
« Reply #14 on: January 16, 2019, 03:25:07 PM »
Why would one tilt to small cap value such as VIOV or VSIAX instead of small cap blend such as VTMSX? I know past performance is not a measure of future success but I ran all three of the above funds through portfolio visualizer and could not see any time period where the small cap value funds outperformed small cap blend fund?

The ETF has only been around since 2010 and VSIAX a little before then.

SCV has a better return than SCB over the past 90 years.



As Maas wrote, the past is not an indicator of the future.

Radagast

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Re: SMALL CAP TILTING
« Reply #15 on: January 16, 2019, 09:01:48 PM »
If you really want increased small cap exposure, consider the Russell 2000.
Actually no. Stay far, far away from the Russel 2000 and choose virtually any other small cap index. The chart below shows why. Index funds which track the Russel 2000 persistently underperform other small cap funds. I wouldn't know myself, but I have read that it is a systemic problem. Apparently the Russel 2000 index can be easily front run by traders, allowing them to buy and sell before the index funds get to it. There are loads of small cap funds out there, some of them are very similar to the Russel 2000 but track their own proprietary but very similar indices to avoid the problem. 'Course, nothin' wrong with the S&P600 neither.



Edit:
Blue: IWM iShares Russell 2000 ETF
Red: VSMAX Vanguard Small Cap Index Adm
Yellow: IJR iShares Core S&P Small-Cap ETF
Green: SCHA Schwab US Small-Cap ETF
« Last Edit: January 16, 2019, 09:05:11 PM by Radagast »

MustacheAndaHalf

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Re: SMALL CAP TILTING
« Reply #16 on: January 17, 2019, 04:57:48 AM »
VIOV ... VSIAX ... VTMSX ... I ran all three of the above funds through portfolio visualizer and could not see any time period where the small cap value funds outperformed small cap blend fund?
You might have been looking at just 7 years of data.  When I repeated that experiment, I see this at the top of the screen:
"Portfolio Analysis Results (Jan 2012 - Dec 2018)"

If you back test allocations, instead of individual funds/ETFs, you can look at a longer period of time:
from 1972 to 2003, small/cap value beat small cap/blend by 16.5% vs 13%.  And then small cap / blend does better for a number of years, followed by the overall stock market beating them both.

Tyler

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Re: SMALL CAP TILTING
« Reply #17 on: January 17, 2019, 11:11:58 PM »
VIOV ... VSIAX ... VTMSX ... I ran all three of the above funds through portfolio visualizer and could not see any time period where the small cap value funds outperformed small cap blend fund?
You might have been looking at just 7 years of data.  When I repeated that experiment, I see this at the top of the screen:
"Portfolio Analysis Results (Jan 2012 - Dec 2018)"

If you back test allocations, instead of individual funds/ETFs, you can look at a longer period of time:
from 1972 to 2003, small/cap value beat small cap/blend by 16.5% vs 13%.  And then small cap / blend does better for a number of years, followed by the overall stock market beating them both.

Yep.  And if you want to save a little time, try this tool and alternate between 100% small cap blend and 100% small cap value.  It will test every investing timeframe since 1970 simultaneously and give you a good idea for the spread of returns. 

In addition to Mustache+1/2's book recommendation by Larry Swedroe, I also really like this book of his.   Small and Value are two types of investing "factors", and it explains them extremely well.
« Last Edit: January 17, 2019, 11:17:35 PM by Tyler »

bacchi

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Re: SMALL CAP TILTING
« Reply #18 on: January 18, 2019, 02:39:50 PM »
(I use VIOV for my US SCV - it's harder to find true SCV for international, I can't remember off the top of my head what I use there.)

I use DLS, which is one that Merriman recommends. The most pure is probably DISVX.

MustacheAndaHalf

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Re: SMALL CAP TILTING
« Reply #19 on: January 19, 2019, 04:02:03 AM »
Tyler - I really like Swedroe's book on factor investing.  It laid the groundwork for me to tilt towards momentum, which has done well even in bad markets.  But I tend to avoid mentioning it until someone else brings it up, since I think it's less familiar/popular than small cap value tilts.

bacchi - I rely on morningstar's data because I prefer a 3rd party website.  Using morningstar.com, "DLS" doesn't look as good - it actually looks similar to Vanguard's small cap value fund:

DLS ("WisdomTree International SmallCap Dividend") is 32% mid cap, and 31% small/value stocks.  Expense ratio 0.58%.
RZV ("Invesco S&P SmallCap 600 Pure Value") holds 0% mid cap, and 62% in small/value stocks.  Expense ratio is 0.35%.
PXSV  ("Invesco Russell 2000 Pure Value") holds 7% mid cap, and has 60% in small/value stocks.  Expense ratio is 0.39%.

I think these latter two ETFs have better small cap value exposure with lower expense ratios.  While dividend ETFs do have some additional value exposure, value exposure isn't the goal of a dividend fund.

flipboard

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Re: SMALL CAP TILTING
« Reply #20 on: January 19, 2019, 09:56:17 AM »
bacchi - I rely on morningstar's data because I prefer a 3rd party website.  Using morningstar.com, "DLS" doesn't look as good - it actually looks similar to Vanguard's small cap value fund:

DLS ("WisdomTree International SmallCap Dividend") is 32% mid cap, and 31% small/value stocks.  Expense ratio 0.58%.
RZV ("Invesco S&P SmallCap 600 Pure Value") holds 0% mid cap, and 62% in small/value stocks.  Expense ratio is 0.35%.
PXSV  ("Invesco Russell 2000 Pure Value") holds 7% mid cap, and has 60% in small/value stocks.  Expense ratio is 0.39%.
You aren't comparing like for like: DLS is Int'l (ex-USA*), RZV and PXSV are USA.

Looking at my holdings, it turns out I'm actually using FNDC for Int'l, and DGS for emerging. I think I chose FNDC over DLS due to expenses and close enough (ish) performance. I do wish I could buy DISVX as an ETF though...

* As a non-USA resident, the USA is technically international to me...

MustacheAndaHalf

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Re: SMALL CAP TILTING
« Reply #21 on: January 20, 2019, 10:28:28 PM »
Hm, I see now that bacchi actually was trying to switch the discussion to international, since bacchi replied with "DLS" to your post about U.S. small/value ETF "VIOV".

(I use VIOV for my US SCV - it's harder to find true SCV for international, I can't remember off the top of my head what I use there.)

I use DLS, which is one that Merriman recommends. The most pure is probably DISVX.