Value stocks (3 factor portfolio)

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Topic Author
jg12345
Posts: 427
Joined: Fri Dec 11, 2020 12:03 pm

Value stocks (3 factor portfolio)

Post by jg12345 »

Hi everyone,
I will soon be receiving a non-trivial amount of money. Just to be clear, posts starting in this way usually ask about DCA or lump sum. For context, I am decided about a third lump sum and the rest DCA. My current allocation is 75-25 stock/bonds portfolio. Stocks implemented via 2 ETF (developed + EM). My portfolio is in EUR as I will (most likely) retire in EUR. I am based in UK and likely will move out within the next 3-5 years

After reading Fama-French 1992 article about three way factors portfolios, various follow-ups to that article, and a few youtube videos from Ben Felix (I know, youtube videos are not a good start, but academic articles are, and I think Felix is actually good), I am considering adding value stocks to my portfolio. The same article mentions the small size premium but I do not want to add small caps because 1) it seems small caps value would be the interesting part, and 2) I have no access to highly liquid world small caps value ETFs.

The obvious thought is that I could implement the value tilt with this new inflow of money. It would add a 3rd ETF to my stocks portion, so I'm still quite simple.

Does my thinking of adding value stocks make sense to you?
If so,
1) how much of my stock portion should be allocated to world value stocks?
2) which ETFs?
At first glance: Xtrackers MSCI world value, XDEV, unhedged, TER: 0.25% or Ishares world value (TER 0.3). One has slightly lower TER and lower AUM but still 0.7bn, ishares slightly higher cost but AUM >5bn

Note that boglewiki from the Little book of CSI would say: do nothing, but if you do then allocate 10% of your stocks to value (and 5% SCV).

I recognize this may not be in line with usual advice on stocks = All-world-stocks-end-of-story, hence I am asking.

Thanks!
Last edited by jg12345 on Thu May 06, 2021 5:25 am, edited 3 times in total.
TheLaughingCow
Posts: 253
Joined: Tue Jul 01, 2014 9:41 pm

Re: Value stocks (3 factor portfolio)

Post by TheLaughingCow »

Why wouldn't you use a combination of Vanguard Value ETF (VTV) and Vanguard International Value ETF (VTRIX)?

Expense ratio for VTV is .04%, expense ratio of VTRIX is .35%

In a 40/60 blend your average expense ratio would be .226%
Topic Author
jg12345
Posts: 427
Joined: Fri Dec 11, 2020 12:03 pm

Re: Value stocks (3 factor portfolio)

Post by jg12345 »

TheLaughingCow wrote: Thu May 06, 2021 4:46 am Why wouldn't you use a combination of Vanguard Value ETF (VTV) and Vanguard International Value ETF (VTRIX)?

Expense ratio for VTV is .04%, expense ratio of VTRIX is .35%

In a 40/60 blend your average expense ratio would be .226%
Thanks for the reply! I forgot to add to my post that I invest in EUR and I am based in UK. I have not yet considered ETFs domiciled in US and denominated in USD and I'd probably stick to the xtrackers given the currency, no risk of estate tax, small difference of .025% and that it is one less ETF.

Any opinion regarding adding value stocks to the portfolio are welcome :)
Valuethinker
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Joined: Fri May 11, 2007 11:07 am

Re: Value stocks (3 factor portfolio)

Post by Valuethinker »

jg12345 wrote: Thu May 06, 2021 5:10 am
TheLaughingCow wrote: Thu May 06, 2021 4:46 am Why wouldn't you use a combination of Vanguard Value ETF (VTV) and Vanguard International Value ETF (VTRIX)?

Expense ratio for VTV is .04%, expense ratio of VTRIX is .35%

In a 40/60 blend your average expense ratio would be .226%
Thanks for the reply! I forgot to add to my post that I invest in EUR and I am based in UK. I have not yet considered ETFs domiciled in US and denominated in USD and I'd probably stick to the xtrackers given the currency, no risk of estate tax, small difference of .025% and that it is one less ETF.

Any opinion regarding adding value stocks to the portfolio are welcome :)
American posters often come straight here & don't realise they are replying to internationals.

Make sue any US funds you do buy have "Distributor" status w HMRC (they publish a list) otherwise your tax is a world of pain.

In any case under PRIIP (check that acronym in wiki) European brokers will not sell you US funds because they lack relevant KIID document, risk and fee disclosures. Unless you get upgraded to sophisticated investors.

Your best bet is UCITS VI funds or ETFs registered in Ireland or Luxembourg, usually.
TedSwippet
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Location: UK

Re: Value stocks (3 factor portfolio)

Post by TedSwippet »

Valuethinker wrote: Thu May 06, 2021 6:32 am American posters often come straight here & don't realise they are replying to internationals.
Or they do, but don't realise the world of potential US tax pain that the US can inflict on nonresident aliens who hold US domiciled funds or ETFs.
Valuethinker wrote: Thu May 06, 2021 6:32 am Make sue any US funds you do buy have "Distributor" status w HMRC (they publish a list) otherwise your tax is a world of pain.

In any case under PRIIP (check that acronym in wiki) European brokers will not sell you US funds because they lack relevant KIID document, risk and fee disclosures. Unless you get upgraded to sophisticated investors.
Right. UK reporting status, for any US domiciled funds. In practice, PRIIPs will put these out of reach for UK investors anyway.
Valuethinker wrote: Thu May 06, 2021 6:32 am Your best bet is UCITS VI funds or ETFs registered in Ireland or Luxembourg, usually.
Yup. Ireland is the better of the two. Ireland domiciled ETFs can obtain a 15% US/Ireland treaty rate for dividends from any US stocks they hold. By contrast, Luxembourg domiciled ETFs cannot use the US/Luxembourg treaty. It's a weird asymmetry, but worth bearing in mind.
Topic Author
jg12345
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Joined: Fri Dec 11, 2020 12:03 pm

Re: Value stocks (3 factor portfolio)

Post by jg12345 »

Thanks valuethinker and TedSwippet for the valuable comments (as usual).

Both ishares and xtrackers fit the bill as they are Ireland domiciled, low cost, and have UK reporting status.

With that said... any comment regarding whether adding value stocks to a portfolio does make sense or not?

Thanks in advance!
TedSwippet
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Location: UK

Re: Value stocks (3 factor portfolio)

Post by TedSwippet »

jg12345 wrote: Thu May 06, 2021 9:26 am With that said... any comment regarding whether adding value stocks to a portfolio does make sense or not?
Honestly, I don't have any particular viewpoint on this. Neither for, nor against. In the past, I've flirted with value tilts, and it's been a broadly neutral experience, so ... shrug, basically.

My own portfolio is solidly rooted in broad index trackers, which gives it a bit of a large-cap bias, so to partially offset that, I use a relatively small additional holding in a global small-cap fund (not specifically value, just general). It's a Vanguard OEIC, and I'm not aware of any Vanguard equivalent ETF.

When you say you will come into a "non-trivial" amount of money, how "non-trivial" may affect (lower) your need to take risk, and also affect (raise) your ability to handle risk. If you're reaching the point where you have 'play money', then if small cap value floats your boat, fine. As long as you're disciplined and can handle the risk. Be aware though that when you have enough money, your need to take on more risk lessens. There comes a point when you have enough, and beyond that it's often best (easiest, most flexible, etc) to stick to conservative options.

Finally, you mention a likely move out of the UK soon-ish. Just be sure you're clear on the tax implications of holding or selling these investments, both from the UK perspective and from that of whichever country you'll be going to.
mrekvy491
Posts: 58
Joined: Wed Jul 29, 2020 10:43 am

Re: Value stocks (3 factor portfolio)

Post by mrekvy491 »

There also is JPGL

https://www.morningstar.co.uk/uk/etf/sn ... entType=FE

It is a factor fund, based on value, quality and momentum factors.

https://www.etfstream.com/features/prod ... ctor-etfs/

May not be exactly what you are looking for, but could be a simpler, practical option if you are looking for a value tilted ETF.
whereskyle
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Re: Value stocks (3 factor portfolio)

Post by whereskyle »

jg12345 wrote: Thu May 06, 2021 9:26 am Thanks valuethinker and TedSwippet for the valuable comments (as usual).

Both ishares and xtrackers fit the bill as they are Ireland domiciled, low cost, and have UK reporting status.

With that said... any comment regarding whether adding value stocks to a portfolio does make sense or not?

Thanks in advance!
My problem with value stocks is that there is no universal definition of value and different value-tilted funds outperform one another over different periods of time. The quest for the right value fund therefore becomes akin to the hunt for the right manager. Who has the best value criteria? We can never know in advance.

I do tilt small in an attempt to be aggressive while
I am younger and have less wealth to protect, simply because the tilting small proposition entails higher risk, but it does not necessarily entail correctly identifying market mispricing, as the "value" proposition necessarily entails.

If you nonetheless desire to tilt to value or any other factor, style, or sector, listen to Rick Ferri, host of the bogleheads podcast and all-around reasonable investment adviser: "If you're going to tilt, tilt gently."

For reference, my tilt is about 5%, and I am gradually building it to 10%.

Finally, beware the risk that tilting will lead you down the road of performance chasing, which road often involves investors chasing that portion of their portfolio that has most recently done well, a chase that decreases long-term returns.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
Topic Author
jg12345
Posts: 427
Joined: Fri Dec 11, 2020 12:03 pm

Re: Value stocks (3 factor portfolio)

Post by jg12345 »

Thanks, all.

Another main issue I have with factors' tilts is that I believe that implementing such strategy requires keeping it for a very long time because one never knows when will it happen that value or small caps would outperform the market. I am 37 and hopefully retiring early so I do have time but it's well, finite. plus it adds the complexity and psychology of maintaining the strategy forever... and I do not trust myself so much. see here http://johncbogle.com/speeches/JCB_Morningstar_6-02.pdf

The point made by TedSwippet is also very valid and I had not considered it. Montecarlo simulations tell me that it's already very likely I'll meet my target... so why bother tilting and start going down performance chase road.

I'll sleep over these thoughts for a few days and will update once I have made a decision.

Thanks!
Topic Author
jg12345
Posts: 427
Joined: Fri Dec 11, 2020 12:03 pm

Re: Value stocks (3 factor portfolio)

Post by jg12345 »

Just to provide an update: I decided to not add a value or a small cap (be small-cap value, or just small-cap) tilt.

Main reason is the need to stick to the strategy for too many years: I do not think I'll be able to do it. A similar point was made in this topic https://bogleheads.org/forum/viewtopic. ... 2&t=348120

Other secondary reasons are limited access to low-price world SCV ETFs, no need for returns beyond market to reach my goals, and simplicity.

Thanks everyone for the suggestions.
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galeno
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Re: Value stocks (3 factor portfolio)

Post by galeno »

My signature below is all you need to do.
KISS & STC.
invest2bfree
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Re: Value stocks (3 factor portfolio)

Post by invest2bfree »

Dont, just add VT or VWRL and call it a day.
36% (IRA) - Individual LT Corporate Bonds , 33%(taxable) - schy, 33%(taxable) - SCHD Dividend Growth
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