Should I add small-cap ETF?

For investors outside the US. Personal investments, personal finance, investing news and theory.
Sister forums: Canada, Spain (en español)
---------------
Post Reply
Topic Author
mohd
Posts: 85
Joined: Wed Jul 22, 2020 2:10 am
Location: Bahrain

Should I add small-cap ETF?

Post by mohd »

The majority of my holding is VWRA. I am wondering if adding small-cap value ETF (VIOV for example) to my portfolio makes any difference or worth it?
If not, what do you suggest as an alternative?

Thanks :happy
User avatar
David Jay
Posts: 11103
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Should I add small-cap ETF?

Post by David Jay »

In my opinion, your Vanguard FTSE All World UCITS ETF (VWRA) is the only stock fund you need. It is fully diversified across world equity markets.

Any "tilt" (shifting away from market capitalization) introduces behavioral challenges. If small cap underperforms for 10 or 15 years, will you continue to hold that fund or will you be tempted to switch to something else?
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
reln
Posts: 531
Joined: Fri Apr 19, 2019 4:01 pm

Re: Should I add small-cap ETF?

Post by reln »

mohd wrote: Thu May 06, 2021 12:08 pm The majority of my holding is VWRA. I am wondering if adding small-cap value ETF (VIOV for example) to my portfolio makes any difference or worth it?
If not, what do you suggest as an alternative?

Thanks :happy
Viov is ok.

Consider avuv and avdv.
User avatar
galeno
Posts: 2312
Joined: Fri Dec 21, 2007 12:06 pm

Re: Should I add small-cap ETF?

Post by galeno »

I agree. Our only equity UCITS ETF is VWRD. For bonds we hold AGGG.
David Jay wrote: Thu May 06, 2021 1:13 pm In my opinion, your Vanguard FTSE All World UCITS ETF (VWRA) is the only stock fund you need. It is fully diversified across world equity markets.

Any "tilt" (shifting away from market capitalization) introduces behavioral challenges. If small cap underperforms for 10 or 15 years, will you continue to hold that fund or will you be tempted to switch to something else?
KISS & STC.
User avatar
mokaThought
Posts: 329
Joined: Tue Jan 01, 2019 7:57 pm
Location: Texas
Contact:

Re: Should I add small-cap ETF?

Post by mokaThought »

mohd wrote: Thu May 06, 2021 12:08 pm The majority of my holding is VWRA. I am wondering if adding small-cap value ETF (VIOV for example) to my portfolio makes any difference or worth it?
If not, what do you suggest as an alternative?

Thanks :happy
Only do so if you know you can stick it out through 15 years of underperformance. Consider a mix of AVUV (Avantis U.S. SCV) and AVDV (Avantis Int'l SCV) to get world exposure.
Astones
Posts: 322
Joined: Mon Apr 12, 2021 12:48 pm

Re: Should I add small-cap ETF?

Post by Astones »

I was thinking about going for Ishares small cap ETF, with weights proportional to the market cap with respect to the All caps index.

The full name is iShares MSCI World Small Cap UCITS ETF.

Concerning tilting...... it's a tough call. I'm also not sure whether I'd have the strength to keep the same tilted weight for a whole decade of underperformance, in case it happens.
Swiss Bee
Posts: 26
Joined: Mon Dec 07, 2020 11:03 am

Re: Should I add small-cap ETF?

Post by Swiss Bee »

I have heard in a quality interview that the small cap factor premium was discovered in the past. As soon as the market has realized it, the factor premium was exploited and was then gone. They were saying that it does not exist any more, because it is known by market participants…

Long story short: Personally, I would not (and have not myself) add a small cap factor
Jaymover
Posts: 90
Joined: Wed May 12, 2021 8:19 pm

Re: Should I add small-cap ETF?

Post by Jaymover »

I Australia the Vanguard growth funds have a relatively small International small cap and emerging market tilts. I guess the big brained people at Vanguard think it is worth having these tilts to boost growth in the long term and add some counter cyclical diversity to the portfolio.

it wouldnt hurt but just make it less than 5 percent of your total portfolio.
User avatar
nisiprius
Advisory Board
Posts: 43780
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Should I add small-cap ETF?

Post by nisiprius »

I think this is an example of a situation where "if you need to ask strangers on the Internet about it, you probably shouldn't do it."

You are predictably going to find a range of opinions. None of them are crazy opinions and all of them will be supported by expert authorities and by examples of past behavior. It all comes down to the specific choice of endpoints in the time period, and belief in whether the behavior we are looking at is persistent.

If you look at small-cap value since about 2004, the answer will look like "no" even if you include the recent burst of good performance.

If you take the window back before 2000, to the first available small-cap value funds, circa 3/1993, shortly after Fama and French published their research, the answer will look like "yes."

If you take the window back to 1927, the beginning of the data Fama and French used, the answer will look like "yes-but." The "but" is that it wasn't really possible for a retail investor to invest systematically in small-cap value, the small-cap value effect wasn't generally known, there was no chance for widespread knowledge of the it to have any effect... and you start to get into data quality questions and questions of whether the market of in the early days was quantitatively the same as it is today.

What we know for sure is that people with small-cap value tilt experienced perfection in 2000-2003, with small-cap value going up while the rest of the market has been doing down. But it failed to repeat that performance in 2008-2009 or in 2020. From 2004 through 2017 it really hasn't done much different from Total Stock--it plunged much farther in 2008-2009 but it had grown more before that.

But in 2018 it started to do quite poorly. And in 2020, when the stock market fell, it fell much farther.

So the people who added small-cap value after 2004 have been waiting up to seventeen years for their ship to come in. Did it just come in? We don't know yet. Maybe? Or maybe it's just digging itself out of the hole it fell into?

Blue, small-cap value fund. Orange, total market fund.

Source

Image

So what that tells you is that in order to get the promised benefits of factor portfolios, you need to have the conviction to stay with them for up to 17 years. And if you are doubtful enough that you need to be asking the basic question "should I," you probably don't have that depth of conviction.

So I will give you the standard Boglehead answer: just invest in a total market index fund, such as Vanguard's VTSAX or VTI or Fidelity's FSKAX or FZROX or Schwab's SWSTX or iShares ITOT, and be satisfied with getting the return of the stock market as a whole.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Topic Author
mohd
Posts: 85
Joined: Wed Jul 22, 2020 2:10 am
Location: Bahrain

Re: Should I add small-cap ETF?

Post by mohd »

nisiprius wrote: Thu May 13, 2021 6:52 am I think this is an example of a situation where "if you need to ask strangers on the Internet about it, you probably shouldn't do it."

You are predictably going to find a range of opinions. None of them are crazy opinions and all of them will be supported by expert authorities and by examples of past behavior. It all comes down to the specific choice of endpoints in the time period, and belief in whether the behavior we are looking at is persistent.

If you look at small-cap value since about 2004, the answer will look like "no" even if you include the recent burst of good performance.

If you take the window back before 2000, to the first available small-cap value funds, circa 3/1993, shortly after Fama and French published their research, the answer will look like "yes."

If you take the window back to 1927, the beginning of the data Fama and French used, the answer will look like "yes-but." The "but" is that it wasn't really possible for a retail investor to invest systematically in small-cap value, the small-cap value effect wasn't generally known, there was no chance for widespread knowledge of the it to have any effect... and you start to get into data quality questions and questions of whether the market of in the early days was quantitatively the same as it is today.

What we know for sure is that people with small-cap value tilt experienced perfection in 2000-2003, with small-cap value going up while the rest of the market has been doing down. But it failed to repeat that performance in 2008-2009 or in 2020. From 2004 through 2017 it really hasn't done much different from Total Stock--it plunged much farther in 2008-2009 but it had grown more before that.

But in 2018 it started to do quite poorly. And in 2020, when the stock market fell, it fell much farther.

So the people who added small-cap value after 2004 have been waiting up to seventeen years for their ship to come in. Did it just come in? We don't know yet. Maybe? Or maybe it's just digging itself out of the hole it fell into?

Blue, small-cap value fund. Orange, total market fund.

Source

Image

So what that tells you is that in order to get the promised benefits of factor portfolios, you need to have the conviction to stay with them for up to 17 years. And if you are doubtful enough that you need to be asking the basic question "should I," you probably don't have that depth of conviction.

So I will give you the standard Boglehead answer: just invest in a total market index fund, such as Vanguard's VTSAX or VTI or Fidelity's FSKAX or FZROX or Schwab's SWSTX or iShares ITOT, and be satisfied with getting the return of the stock market as a whole.
This is really a great answer and well explained. Thank you for listing all these details.

A conviction to stay with a fund for up to 17 years in order to get benefits out of it is not really a thing that I would probably do.

I guess it's human nature to always seek complicating stuff when they are simple. I've been always asking myself since I started investing last year if I should add this or that to my portfolio. Whether it was gold, small-cap, or any other thing out there.

:happy I am going to keep my portfolio as it is and keep holding the total market fund, that's all I need.
User avatar
David Jay
Posts: 11103
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Should I add small-cap ETF?

Post by David Jay »

mohd wrote: Fri May 14, 2021 8:12 am:happy I am going to keep my portfolio as it is and keep holding the total market fund, that's all I need.
+ + +
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Astones
Posts: 322
Joined: Mon Apr 12, 2021 12:48 pm

Re: Should I add small-cap ETF?

Post by Astones »

mohd wrote: Fri May 14, 2021 8:12 am
This is really a great answer and well explained. Thank you for listing all these details.

A conviction to stay with a fund for up to 17 years in order to get benefits out of it is not really a thing that I would probably do.

I guess it's human nature to always seek complicating stuff when they are simple. I've been always asking myself since I started investing last year if I should add this or that to my portfolio. Whether it was gold, small-cap, or any other thing out there.

:happy I am going to keep my portfolio as it is and keep holding the total market fund, that's all I need.
I have this fear that if I tilt toward SCV, then after few years a new article will come out suggesting that the strongest factor is something else, and so I would keep adjusting my portfolio seeking for the best solution trending in the moment, and I end up losing money in transaction costs over the long run.
Jaymover
Posts: 90
Joined: Wed May 12, 2021 8:19 pm

Re: Should I add small-cap ETF?

Post by Jaymover »

I have this fear that if I tilt toward SCV, then after few years a new article will come out suggesting that the strongest factor is something else, and so I would keep adjusting my portfolio seeking for the best solution trending in the moment, and I end up losing money in transaction costs over the long run.
I think you have to set your percent target allocations at the beginning of your investment journey and then stick with it forever. Whatever logic made you choose those allocations in the first place was hopefully based on good advice. Thats why I just copy a fund where I know that some deep thought has gone into deciding on the allocations. They might decide to change the allocations a little and I will take heed to that (PS Dont tell anyone)

There is alot said for just keeping it simple like you originally intended and going and living life. The two or three fund solution makes sense. It might end up a little more volatile but in the end returns will probably be about the same. As you said the benefit of the tilt might end up being eaten up in fees and taxes so what's the point.

Some of us cant help over thinking things, including me. Its a bit boring just one ETF so lets spice it up a bit
Post Reply