Author Topic: VTSAX Weighting  (Read 6062 times)

AlienRobotAnthropologist

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VTSAX Weighting
« on: March 01, 2017, 06:46:30 PM »
I know everybody here loves VTSAX. As a practical matter, my 401k's only decent option is an S&P500 index, so that gets a significant chunk of my savings. The logical next step would be to balance this out with small caps in the IRA, HSA, etc. But, when I look up what VTSAX is composed of, the percentages seem somewhat arbitrary and I'm wondering if anybody has a good answer as to why the VTSAX weighting of large, mid, small cap holdings is considered optimal and some other weighting of S&P500, S&P600, etc. is inferior (ignore differences in expenses). Why not more small and less mid for example?

hankscorpio84

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Re: VTSAX Weighting
« Reply #1 on: March 01, 2017, 07:03:52 PM »
Here is a link from bogleheads.org that should help:

https://www.bogleheads.org/wiki/Approximating_total_stock_market

A tool like personal capital can give you a good view your asset allocation across several accounts.  Seeing it in a simple infographic will make re-balancing much easier when the time comes.

AlienRobotAnthropologist

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Re: VTSAX Weighting
« Reply #2 on: March 01, 2017, 08:32:49 PM »
That's an interesting link, but it's not what I'm asking. I'm not asking how to replicate VTSAX, I'm asking why the weightings VTSAX uses are better than some other weighting that includes every sector. Why would anyone want to copy the VTSAX weightings over say 1/3 to large, mid, & small cap each or less mid cap and more large & small cap, etc.

Indexer

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Re: VTSAX Weighting
« Reply #3 on: March 01, 2017, 09:15:45 PM »
VTSAX matches the US economy. That is how it works. It's a market weighted index.

In a taxable account this is great for tax efficiency. By matching the US economy it means you can own VTSAX and not need a bunch of smaller funds. This cuts out the need to rebalance between large, mid, small cap, and between sectors. You could own VTSAX for 20 years in a taxable account and never need to put in a sell order.

If you want to weigh more towards small/mid cap you can do that. You are increasing risk hoping for better returns. It's up to you.

Radagast

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Re: VTSAX Weighting
« Reply #4 on: March 01, 2017, 10:26:02 PM »
It is an equal percentage of every publicly traded company. For example, you might own 0.0000000001% of Apple. If Apple doubles, you still own the same percent. Same for every other company. Every other fund has to trade because of market moves, but total market funds do not because they own the same percentage of every company. It is a good way to minimize trading costs.

highflyingstache

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Re: VTSAX Weighting
« Reply #5 on: March 01, 2017, 11:50:24 PM »
I'll venture to guess you don't entirely appreciate how heavily weighted the US economy is towards certain companies, sectors, etc.
You may want to look into RAFI weight, or you can find a few references on Fundamental Weight, the pros and cons. Around here it's hardly discussed. The funds that do give such different options don't give very many, at that it is significant cost, (.5-.65% is not unheard of) however what research I see, shows that weighing different may give you a slight advantage. Worth the cost, up to you.

Certainly look at the different index weights. In fact, Wikipedia does a not bad job at breaking down the different options. VTSAX and what we see around here is only one version.

Indexer

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Re: VTSAX Weighting
« Reply #6 on: March 01, 2017, 11:54:34 PM »
It is an equal percentage of every publicly traded company. For example, you might own 0.0000000001% of Apple. If Apple doubles, you still own the same percent. Same for every other company. Every other fund has to trade because of market moves, but total market funds do not because they own the same percentage of every company. It is a good way to minimize trading costs.

This is not how VTSAX works.

Equal weighting is when each company gets the same percentage. An equal weighting 500 index would be 0.2% each company. Apple is 0.2%, and so is Tesla.

The Total Stock index(VTSAX) is market weighted based on the US economy. Apple is bigger than Tesla so Apple gets a larger % of the index than Tesla. In addition, if Apple is growing faster than the rest of the market then Apple's % share of the total will increase over time. Apple is currently 2.6% of VTSAX, but when Apple was a smaller company it was far less than 1% of the index.

Radagast

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Re: VTSAX Weighting
« Reply #7 on: March 02, 2017, 12:26:18 AM »
You misunderstood what I said. Bed time here so maybe I can't express it properly. You own 1% or whatever % of the publicly traded value of Apple and every other company. You own 1% of Ford. You own the same 1% of each listed company. You are correct they are not equally weighted. If you owned 1% of Apple and its price doubles, an equally weighted fund sells and now you will own only 0.5% of Apple, which generates a transaction expense and capital gains. But VTSAX is not an equally weighted fund, so it would not sell and you would still own 1% of Apple. You own the same proportion of every company's publicly tradable stock. Not a fixed percentage of the fund but a fixed percentage of the available stock value of each company. This way individual prices go up and down and you don't care because you own the same percentage regardless.
« Last Edit: March 02, 2017, 12:46:53 AM by Radagast »

AdrianC

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Re: VTSAX Weighting
« Reply #8 on: March 02, 2017, 05:09:15 AM »
I'll venture to guess you don't entirely appreciate how heavily weighted the US economy is towards certain companies, sectors, etc.
You may want to look into RAFI weight, or you can find a few references on Fundamental Weight, the pros and cons. Around here it's hardly discussed. The funds that do give such different options don't give very many, at that it is significant cost, (.5-.65% is not unheard of) however what research I see, shows that weighing different may give you a slight advantage. Worth the cost, up to you.
RAFI is a way of tilting to value and small size, which you can do at lower cost with Vanguard funds if you want to go that way.

PRF still has large weightings to certain companies, they're just a bit different to VTI.

http://www.morningstar.com/etfs/ARCX/PRF/quote.html
Exxon Mobil Corp  2.37   
JPMorgan Chase & Co  2.18
Chevron Corp  2.07
Bank of America Corporation  1.98   
Apple Inc  1.85
% Assets in Top 5 Holdings  10.45   

http://www.morningstar.com/etfs/ARCX/VTI/quote.html
Apple Inc  2.55
Microsoft Corp  1.98
Exxon Mobil Corp  1.44
Amazon.com Inc  1.38
Johnson & Johnson  1.28   
% Assets in Top 5 Holdings  8.62   

NoStacheOhio

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Re: VTSAX Weighting
« Reply #9 on: March 02, 2017, 05:59:31 AM »
You misunderstood what I said. Bed time here so maybe I can't express it properly. You own 1% or whatever % of the publicly traded value of Apple and every other company. You own 1% of Ford. You own the same 1% of each listed company. You are correct they are not equally weighted. If you owned 1% of Apple and its price doubles, an equally weighted fund sells and now you will own only 0.5% of Apple, which generates a transaction expense and capital gains. But VTSAX is not an equally weighted fund, so it would not sell and you would still own 1% of Apple. You own the same proportion of every company's publicly tradable stock. Not a fixed percentage of the fund but a fixed percentage of the available stock value of each company. This way individual prices go up and down and you don't care because you own the same percentage regardless.

VTSAX is market weighted, so the amount of stock it holds for each company corresponds to that company's share of the total index. Percentage ownership of a given company isn't a consideration.

MustacheAndaHalf

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Re: VTSAX Weighting
« Reply #10 on: March 02, 2017, 07:06:19 AM »
OP is asking about relative weight of the S&P 500 within the Total Market, not about other indexes to invest.

If a mid-cap company had greats prospects relative to it's current price, market participants would bid up the price.  A mid-cap could even become a large cap if it's price jump was large enough, because market cap is price x shares.  So when you ask why small cap stocks have a small proportion of the market, that's a decision by market participants.

When you buy only the S&P 500, making it's weight 100% instead of 72%, you are implicitly saying the market weight for mid-cap and small-cap stocks are not correct.  But that's theory - in practice the S&P 500 (see "VOO") and Total Stock market (see "VTI") mirror each other over the 10 years.

Radagast

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Re: VTSAX Weighting
« Reply #11 on: March 02, 2017, 01:56:45 PM »
Statement reinstated! See below.
« Last Edit: March 02, 2017, 10:39:46 PM by Radagast »

Radagast

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Re: VTSAX Weighting
« Reply #12 on: March 02, 2017, 11:37:56 PM »
You misunderstood what I said. Bed time here so maybe I can't express it properly. You own 1% or whatever % of the publicly traded value of Apple and every other company. You own 1% of Ford. You own the same 1% of each listed company. You are correct they are not equally weighted. If you owned 1% of Apple and its price doubles, an equally weighted fund sells and now you will own only 0.5% of Apple, which generates a transaction expense and capital gains. But VTSAX is not an equally weighted fund, so it would not sell and you would still own 1% of Apple. You own the same proportion of every company's publicly tradable stock. Not a fixed percentage of the fund but a fixed percentage of the available stock value of each company. This way individual prices go up and down and you don't care because you own the same percentage regardless.

VTSAX is market weighted, so the amount of stock it holds for each company corresponds to that company's share of the total index. Percentage ownership of a given company isn't a consideration.
You own the same percentage of the publicly available shares of every company in the US (for vtsax).  Percentage ownership is the only consideration. I made my own simplified table for an imaginary index fund to demonstrate this to myself below. Spreadsheet link below that, you can change the number of outstanding shares or share price to see that you own the same percentage of available shares regardless ($10,000 invested). That is the point of index investing: you bet equally on every company, and let the market determine the price.

TOTALSHARE % OF TOTAL
SHARESPRICESHARES*PRICE$ PURCHASED# PURCHASEDSHARES OWNED
A Corp  50,000 $ 350 $ 17,500,000 $ 8,933.13 25.520.05104645227%
B Corp  25,000 $ 350 $ 1,000,000 $ 510.46 12.760.05104645227%
C Corp  10,000 $ 100 $ 1,000,000 $ 510.46 5.100.05104645227%
D Corp  900 $ 100 $ 90,000 $ 45.94 0.460.05104645227%

https://docs.google.com/spreadsheets/d/1h8km9pd0yYiGAngUuQVMyX1YiDwvnDNeBoEtUG9AXPU/edit?usp=sharing

The Total Stock index(VTSAX) is market weighted based on the US economy.
It has nothing to do with the US economy. Subway and Koch Industries contribute to the US economy, but not to VTSAX because they are privately held. Schwab is part of VTSAX, but Fidelity is not, even though both contribute to the economy. Private equity, such as the company I work for, doesn't count. Also, some stock of public companies which is privately held also does not contribute to VTSAX, eg. Zuckerberg's shares of Facebook, or the Walton family's shares of Walmart. Basically the only thing that matters is the combined value of every share in the index relative to the amount of money you want to buy/sell, because that determines whether you buy/sell a greater/lesser percentage of each company.

Radagast

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Re: VTSAX Weighting
« Reply #13 on: March 02, 2017, 11:52:34 PM »
...the percentages seem somewhat arbitrary and I'm wondering if anybody has a good answer as to why the VTSAX weighting of large, mid, small cap holdings is considered optimal and some other weighting of S&P500, S&P600, etc. is inferior (ignore differences in expenses). Why not more small and less mid for example?
So, above I showed why it is what it is. If you ignore expenses there is nothing special about VTSAX and S&P400, or S&P600, or "fundamental" indexing is likely to be just as good, or quite possibly better. VTSAX just happens to be an easy, low cost, low turnover way to access the US stock market without fear of missing something.

AlienRobotAnthropologist

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Re: VTSAX Weighting
« Reply #14 on: March 03, 2017, 07:46:00 PM »
Let me elaborate a bit with what I'm getting at here. The S&P500 and VTSAX track each other very closely. The S&P500 is slightly less volatile, VTSAX has slightly higher long-term returns. Obviously, volatility can't be the reason to recommend VTSAX. The small caps are what give the slightly higher returns, so if that's what we're after, why not just recommend the S&P600 and scrap the S&P500 component entirely. Ah, but we're not sure that small caps will continue to out perform large caps. Well then, why go with the small/mid/large cap weightings of VTSAX instead of something else? Why not something like a Capital Asset Pricing Model approach to titrating the funds or a naive even split between market segments?

maizeman

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Re: VTSAX Weighting
« Reply #15 on: March 03, 2017, 08:08:55 PM »
Because market cap weighting means the absolute least work in terms of never having to worry about rebalancing. ;-) (which in turn means the least tax issues and the lowest expense ratios)

You can decide that's not a good enough reason for you personally and that there are likely better approaches, but that's the simple answer to why market cap weighting is so widespread.

MustacheAndaHalf

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Re: VTSAX Weighting
« Reply #16 on: March 03, 2017, 08:59:49 PM »
If you ignore expenses there is nothing special about VTSAX and S&P400, or S&P600, or "fundamental" indexing is likely to be just as good, or quite possibly better.
What source demonstrates fundamental indexing is better?

Indexer

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Re: VTSAX Weighting
« Reply #17 on: March 03, 2017, 10:07:17 PM »
Let me elaborate a bit with what I'm getting at here. The S&P500 and VTSAX track each other very closely. The S&P500 is slightly less volatile, VTSAX has slightly higher long-term returns. Obviously, volatility can't be the reason to recommend VTSAX. The small caps are what give the slightly higher returns, so if that's what we're after, why not just recommend the S&P600 and scrap the S&P500 component entirely. Ah, but we're not sure that small caps will continue to out perform large caps. Well then, why go with the small/mid/large cap weightings of VTSAX instead of something else? Why not something like a Capital Asset Pricing Model approach to titrating the funds or a naive even split between market segments?

The billion dollar question... which all market timing questions are. Will large or small caps do better in the future?

If you aren't certain... buy VTSAX. It is that simple.

Radagast

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Re: VTSAX Weighting
« Reply #18 on: March 04, 2017, 12:27:59 AM »
... a naive even split between market segments?
In practice I agree, especially about the naivety. People often ask how to mimic a total market fund and spend quite a bit of time figuring out how to do it more precisely, but in practice they would generally do just as well or better by naively splitting the funds into equal amounts. I was just backtesting naively splitting investments and that method seems to have been very effective, though it is also more work as Maizeman says. In fact it could get pretty complicated if you want to rebalance an even split between half a dozen or more accounts.

Radagast

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Re: VTSAX Weighting
« Reply #19 on: March 04, 2017, 12:36:18 AM »
If you ignore expenses there is nothing special about VTSAX and S&P400, or S&P600, or "fundamental" indexing is likely to be just as good, or quite possibly better.
What source demonstrates fundamental indexing is better?
Off the top of my head I don't have any, and I expect if I googled it they would all or mostly be written by people who make money from them :). I added it because it was mentioned up thread.

For my marginally educated opinion, we are ignoring expenses so on average they should be just as good. However they should also tilt to value/small/quality/random/whatever, so there should also be higher returns in the long run, presumably with more volatility along the way.