Small Cap and Value Stocks
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- เผยแพร่เมื่อ 16 พ.ค. 2024
- I have concluded many of my videos with some variation of “You’re probably better off in low-cost market cap weighted index funds”, which is a statement that I believe.
What I have not told you, and the reason that I think I owe you an apology is that I do not invest my own money in market cap weighted index funds.
Referenced in this video:
The Problem With Small Cap Stocks - • The Problem With Small...
Factor Investing with ETFs - www.pwlcapital.com/resources/...
Follow the link to read more content from the Passmore/Felix team at PWL Capital.
www.pwlcapital.com/teams/pass...
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Wow! A Financial Planner that is not just looking to line his pockets! I subscribed.
love how in-depth this is!
Ben, this is the best video you've made, and I've watched a lot of your videos and have recommended them to many people. Please keep making nuanced, technical videos like this. I have a background in portfolio theory and I feel like I've hit the jackpot upon finding your channel.
Why are you spending so much time making these videos and responding to the comments? Your opportunity cost is so high as you're so smart and talented so the cost of your time is extremely high. I can't imagine that your ROI from making these videos is offsetting your opportunity cost.
I’m absolutely loving your videos but am bewildered why such a smart guy like you so devoting so much time to this and am genuinely curious as to why you’re doing this.
I’m a huge fan and will continue to recommend your channel to people.
The simple answer is that I enjoy it. I have learned more by writing these videos and responding to the comments than I could ever learn by reading papers.
@@BenFelixCSI I'm sure it takes weeks to research and prepare each video on your channel.
I also learnt a lot. And I'm wondering now how to use factors to my benefits. I do like the global market cap weighted index fund for equity since it's one stop shop and I can get on with my life. Add some percentage with medium US Govt bonds to smooth the ride and go on.
BTW I'm from Israel and I must say that the podcast is not only for Canadians (though here we have different retirement savings products)
First 2 seconds of video:
"I owe all of you an apology."
Quintessentially Canadian lol
You probably dont give a damn but does anyone know a tool to get back into an instagram account??
I was dumb forgot the account password. I would love any tricks you can offer me
@Atticus Langston thanks for your reply. I got to the site thru google and im in the hacking process atm.
Takes a while so I will reply here later with my results.
@Atticus Langston it did the trick and I now got access to my account again. I am so happy!
Thank you so much you saved my account!
@Titan Achilles You are welcome :)
Hi Ben. Amazing explanation! Is there any region (say, emerging markets) that could be considered like a factor, increasing expected returns?
Great script. Clear, concise, direct, efficient. No wasted verbiage, just high density information with a clean flow. Great post.
Congratulations on your promotion. Absolutely love your videos, please don't stop making them! They're going to be more useful moving forward as consumers seek expert advice as we move towards an inevitable recession. Cheers :)
As a senior economics and finance student, I cannot tell you how helpful and informative your videos are. Keep up the great work and thank you!
This is one of the most clear and concise ways I've ever heard the Fama-French Model described. Great work!
Thanks so much for the video. I'm 18 and all of what you said has started to click in my head. I'll check out your paper too. Thinking about something like 45 VTI, 25 AVUV, 15 VTV, and 15 QQQ. There's still a lot to learn but I can't thank you enough for the clear and concise overview of factor-weighted portfolios.
It may be true that stocks mid-way between value and growth are indeed "bland", however I think that that middle column in the style box is supposed to be labeled "blend". 😜
Yea first thing I noticed!
Wow, every video is better than the other. Very insightful channel, the best one I came across on TH-cam so far.
Greetings from France
Ben - your videos are amazingly helpful and lucid explanations of complex topics. Thank you so much!
Hi Ben,
Great video once again!!
For diversification and increasing the asset exposure, I agree to include small-cap and value stocks. But, I am not sure how much percentage of these should a portfolio consist for long term. Would you please suggest the ratio of value and growth ETFs/stocks in 60:40 and 80:20 portfolios? or Any relevant literature that can provide insights?
Thanks!!
Great content as usual. I do wonder if there’s any more guidance on how to decide between different similarly tilted ETFs, like VBR (MER of 0.07%) versus IJS (MER of 0.25%) for example. As you pointed out in one of the podcasts, the intuition that “cheaper is usually better” may not necessarily hold here, since the more expensive fund could have a higher exposure to the relevant factors, and hence higher expected future returns as well. That begs the question: is there any way to find out the amount of factor exposure of these different funds, so I can figure out whether IJS would be worth the 0.18% additional annual cost?
Love your videos, always informative and backed up with statistical evidence. Furthermore your interaction in comments is very admirable. Wish you every success and commend your desire to help others.
When Ben says "it's time to go deep" I put on my thinking cap. It's actually not hard to understand: if the research shows that value stocks and small cap stocks have consistently higher returns than their opposites it makes sense to invest in those equities. Preferably through index funds or ETF's. See I did learn something from you Ben ;-).
Seriously: big thanks for your substantial efforts in popularizing complex research that directly pertains to investing and explaining it in such a way it's understandable for laypeople. You're making all of us better investors.
This video should be watched in conjunction with a related one titled 'The problem with small cap stocks'. The essence of that video is that it only pays to invest in small cap value stocks not general smal cap ETF's or index funds as they contain a lot of growth stocks that drag down the returns.
Thanks! We recorded an interview with Cliff Asness (AQR co-founder) for the Rational Reminder podcast recently and he pushed back on small cap universe being a bad idea. He said that even though you might not get any independent premium from small cap universe, you do get a higher beta (effectively more market risk than the market delivers) which could be used as a substitute for leverage. Option 1: leverage the market portfolio to get a higher beta. Option 2: use small cap stocks to get a higher beta. I thought that was an interesting perspective.
@@BenFelixCSI I'll be sure to check it out. Thanks for the suggestion. It's always good to hear multiple points of view.
I'm taking this approach. I was going to invest in COPX etf as I'm bullish on copper but Im UK based so it's unavailable to me. Instead im going to invest in SCCO mining company. However I still plan to invest in bigger ETF's like XBI even though it's equal weighted I like the risk is reduced. With the tech sector for example XLV would this be worthwhile as it contains blue chip companies & financial services and is a growing sector, therefore as these are large cap it would pay more? Or would it be more benefical to invest stocks
@@BenFelixCSI Why not do both? You can use some leverage and factor tilt to small cap value. Set the pie on M1 Finance and let it ride and DCA away for decades. Perhaps something like:
30% NTSX WisdomTree 90/60 U.S. Balanced ETF
30% AVUV Avantis U.S. Small Cap Value ETF
10% DGS WisdomTree Emerging Markets SmallCap Dividend ETF
10% VGO Vanguard FTSE Emerging Markets ETF
10% VEA Vanguard FTSE Developed Markets ETF
10% AVDV Avantis International Small Cap Value ETF
If you really wanted to lever it up further you could use margin to gain further leverage on equities beyond the treasuries leverage provided by NTSX.
What are some value small cap ETFs?
Great video...question: is adding long-only tilts to size & value enough to justify higher MERs? And is adding long-only tilts to size & value going to capture the alpha potential discovered by Fama & French considering that their research seems to be based more on a long-short strategy where large-cap and growth are shorted, not just reduced? Or is my interpretation of their research too rigid?
Thanks BTW, great channel, I just subscribed.
I owe you all another apology: at 0:48 I should have said RBC makes up *6.67%* of the S&P/TSX composite index.
I make 5 screw ups before breakfast every day, so no big deal. What are your thoughts ( video perhaps) of retired people, needing income more than growth, having a portion ( not sure how much) of their portfolio in covered call etf's such as ZWB, ZWU, ZWC etc?
@@HamiltonRb thanks. I do not think that there is any rational reason to prefer income over growth. If this is true, then it is not logical to sell call options to boost yield, while capping the upside potential of the security. I do think that this could be an interesting topic in the future. I covered income investing in general a while back th-cam.com/video/9j6DInAMMaM/w-d-xo.html
@@BenFelixCSI I believe the rational, from my perspective would be, either every month or quarter, the yield from the covered call etf's would go into my account, and I would not concern myself with the movements of the markets as a whole. I'm sure many retirees back in 2008/ 09 were nervous about selling some of their portfolio to live on, paying a fee to sell each time, especially when the markets were down over 40%. People became fixated on their portfolio value, and possibly if they still had their yield coming in per normal, they would have ignored the noise.
I agree that is a very good behavioural reason to be an income focused investor, but that does not make it rational. Not all good decisions are rational.
Lots of apologizing going on. Like a true Canadian lol
Hi Ben, Thank you for great videos you make! I have a question, need your help - for me, as for an european, does it make sense to invest in US market? I mean that there is currency exchange rate and nobody knows what will be over 20 years. Should I find some ETF of European stocks market or even Asia or Global? Personally I would prefer simplicity and just invest in two-three US ETFs which you suggested in this video. Thanks.
Hey Ben - great video! Thank you for all the informative information. If I read your paper correctly, gaining exposure to these other 2 factors can improve return about 0.44%? This is probably not worth it for Canadians that could just invest in XGRO/VGRO (like you metioned), if one isn't willing to put in the effort of re-balancing, etc, eh?
Ben, I love your videos so much, please make a video say something about momentum factor, thank you!
As a quantitative-value investor, I really enjoyed watching this video. I really like your way of explaining things, it makes it much easier to understand the whole topic! Could you maybe cover the momentum factor in a future video?
I am glad that you enjoyed the video! I think that covering momentum is a great idea.
Put a decent % into small cap 6 months back as a result of this video, reaping the rewards atm!! Thanks Ben!!
Hi Ben, love your videos and your podcast. I looked at the MSCI US Small Cap Value index and noticed the largest holding in it is... Gamestop. Which brings me to my question: what do you think of the risk of ending up in such an index fund with highly shorted stocks which do not necessarily indicate they are good long term investment. Of course, the weight of Gamestop is very small in the index (0.5% at Jan. 29 2021), but I would assume that there are other similar cases that make it relatively high in the holdings list. Thoughts? Thanks!
It seems like VIOV might also be a good choice, interchangeable with IJS. It also tracks the S&P 600 -- giving exposure to the profitability factor -- but its expense ratio is 10bp lower.
Subjectively, I'm also just more comfortable with Vanguard funds. I trust them more than other firms, because of their history of promoting sensible investments, and their client-owned business model.
Hello Ben, I have just found your channel and want to thank you - you make the subject much more accessible for a lay investor like me. One question; I am familiar with factor analysis from my background in Psychology. In Psychology we commonly talk about the explanatory power of the factors. In this way we know that Extraversion has greater explanatory power of individual differences than Conscientiousness (for example). From watching your videos I take it that B, Value and Cap Size are the three factors with the greatest explanatory power and wonder what the research suggests about their weighting relative to each other?
Miles (UK)
Felix - just found your channel. Subbed. Fantastic content, this should be mandatory viewing for Canadians.
Excellent - thank you!!
Ben,
Great video and info. I do have a few questions:
1) Now that we know about key factors that contribute to equity risk premia, why restrict to two factors only (size, value) vs the four factors (size, value, momentum and quality). Example IJS vs SMLF to make the point.
2) Does more potent value exposure via value-weighted index funds provide better equity risk premia compared to market-cap weighted value index funds?. Example IJS vs VFVA (if you ignore that VFVA is a total cap).
3) I am yet to see a fund that is built around the thought of "small cap minus the junk" i.e. small cap with a quality tilt? Any thoughts?
Thanks.
Great video! Could you make another video adressing the factors Profability and Momentum? Or aren't there any good ETFs around to even do it in the real world?
Which ETFs would you use if you couldn't access US and canadian ETFs? Is it possible to overweight value and size with Irland domiciled ETFs?
Extremely informative video and great for diving into deeper concepts within the world of financial markets! Subscribed.
I think you made a lot of very valid points. The factors are probably here to stay and we have found 95% of what actually works. A lot of the new factors that are introduced every year are probably just the result of data mining and won‘t work out of sample. I think that it‘s still possible to improve on the criteria that are used to determine what‘s a „value“ or „quality“ stock. For example there is a lot of debate whether price-to-book is an accurate representation of the value characteristic or if we should also (or exclusively) look at metrics like EBITDA, EBIT, Gross Margin, etc.
I am glad that you mentioned that there also seem to be some interdependencies between the factor. Small is good. Growth tends to e bad but the combination of the two (Small-Growth) tends to be even worse and is known as „the black hole if investing“. The reason is probably that these stocks feel like lottery tickets to many people and people are known to overpay for lottery-like games.
Another interesting quadrant is Large Cap-Value. There is some evidence that the value premium has disappeared among large caps. Maybe it‘s worth looking for Value-Factor ETFs that exclude Large Caps. I have no idea if any exist.
This is a great comment. Well stated, and clearly informed about the issues. Thanks for watching and commenting!
Hi Ben, read your paper. Amazing content, and decided to follow the outlined portfolio immediately, only difference substituting in XIC for the Vanguard equivalent (cost worked out slightly more evenly). My question is, will there be any future discussion to include the profitability factor (RmW) and which ETFs best capture it currently?
Tough one. IJS offers some RmW. I would be skeptical of most ETFs marketed as factor ETFs as the fees tend to be high. As far as I know right now there are not any low-cost and well diversified funds similar to IJS or IUSV that target RmW.
One of the big challenges with targeting RmW is that if it is targeted alone (like an RmW specific fund), you will end up with a large cap growth portfolio. The trick is using RmW to filter out the "junk" stocks once you have already sorted by relative price and size.
Can you share your experience of owning this model portfolio?
@@oliverj9256 Not sure what "experience" you're looking for. If you want to know what his returns have been, know that any returns measured over such a short time period are completely meaningless. Long term, this should produce positive returns in excess of the aggregate market returns. Short term is impossible to predict. Beyond that, the "experience" is that it's slightly more complicated to setup and manage, especially being that the listed ETFs are in USD and therefore conversion must be accounted for.
I have recently moved my own portfolio to more closely resemble the model portfolio. I've already moved my registered accounts in this direction, but I'm still slightly light on these factors, as my taxable account has not yet been adjusted. To avoid paying taxes to re-balance the taxable account, I plan to do most of the shift through new contributions over time, rather than selling and re-buying and therefore incurring capital gains.
Hi Ben - I'm wondering if you can do a video talking a bit more about the some of the other main factors that people talk about besides value and size (momentum, quality, volatility). Are these real factors distinct from value & size and should a DIY investor try to get exposure to these through US ETFs? Thank you for your videos! They are awesome.
Hi Ben, greetings from Kazakhstan! I'm a big fan of your informative TH-cam sessions, and I've been learning a lot from you. I have a quick question: In my region, there are no small-cap and value ETFs available. Do you think it's a good idea to manually track the top 10 companies from each category (small and value) from a reliable index and buy them individually to gain exposure to small and value factor stocks? Alternatively, should I stick with large-cap growth stocks, which are readily available here? Thanks for your insights!
Love this clip, it's my favourite of all of your mini-lessons.
Finally found Ben's "Going Deep into Factors" video!
This podcast episode goes deeper rationalreminder.ca/podcast/64
I wish you could share some of the etfs you've invested in. I'm looking for some long term growth etfs but there are too many options!
This guy is probably too smart for me. I know the very basics of investing and want to become more sophisticated and knowledgeable. Not sure if I will get to this level of sophistication but it inspires me to learn more.
I just discovered him today and have been watching his videos for the past hour. I love this channel!
Have you found any correlation in small cap vs large cap REITs?
came back after EP 129 of the RR and I've spent the last few days transiting my portfolio from VGRO to the NEW 5 factor, thanks ben!
Hi Felix,
Thank you for all your videos! I have two questions: 1) How often do you recommend rebalancing your portfolio if you had these funds 2) Are there any low-cost market cap weighted index funds in Canada or the Global market that you'd recommend to help DIY investors increase their exposure in having a factor-tilted portfolio?
*My first name is Ben :)
Hi Michael, I think that any portfolio is ok to be rebalanced once or twice per year. I did outline some ETFs that you can use to get small cap value and value exposure at the end of this video, and also in this paper www.pwlcapital.com/resources/factor-investing-with-etfs/.
Thank you for the transparency. This was something I'd been wondering about, but I never felt like you were purposefully skirting the issue, rather that it just wasn't really the topic of the discussion. Side note: I checked further with my finance guy, and they _do_ use index funds (tons of different types). He started spouting the same stuff as you. It was pretty cool to understand that stuff, for once. Woot!!
Awesome!
Wow. What a video. Have to watch this one a few times!
Hey Ben, really appreciate what you do. Do you know the long-term average return rate for small-cap value stocks?
Great video and analysis! Another approach is to have a part of the portfolio in weighted index funds plus another part in small and mid size companies selected through value investing process, investing more in them when they get 10-20% down until reach an adequate level of the overall portfolio (5-7%) and not re-balancing unless the stocks get overvalued vs their DCF analysis. What do you think?
Ben, awesome video and article! Now I understand better what you meant by cost per unit of risk premium in relation to your earlier video about small caps. Am I seeing things or should the bottom table titles on page 8 be "global ex-US" instead of US MKT, etc. in your article? Finally, what would be the rationale for assuming a 50% reduction in the factor premia as a criterion whether an ETF is suitable? Wouldn't it be rational to expect factors to "persist" given the data?
That table needs to be corrected - good eyes.
I used the 50% premium assumption to be conservative. If a factor product can deliver excess returns at 50% of historical premiums I am comfortable using it. If it needs 100% of the past premiums, I am not willing to bet on that. I agree that the premiums should persist, but persistence and magnitude are very different things. Even of the premiums do deliver 100% or more of the past premiums over the next 50 years, the next 25 years may see only 30% (or some number less than 100%) of the past premiums. Who knows. Basing the product selection decision on 50% gives us more wiggle room, and lets us weed out weak factor exposure and high fees.
Ben is really one of the few TH-camrs that are willing to share a bit deeper knowledge. This is amazing!
Would dividing up the Equities portion as follows: 2/3 IUSV 1/3 IJS be to value tilted in your opinion? Looking to add small-cap and value tilt to my portfolio now, but there is a benefit of having 1 less ETF in the portfolio this way. Just wondering about the severity of tradeoffs, I am ok with taking some additional risk.
Very informative video. Thanks, Ben. Could you give me an example of how the style box for a factor-tilted portfolio would look like? What are you thoughts on the quality factor and an ETF like ZGQ?
Good question. It depends on the extent to which you tilted the portfolio. The portfolio that I invest in is about 3x on small cap compared to the market, and about 1.5x on value.
The quality factor is an interesting one. It combines a bunch of metrics into one, often using ROE, leverage (Debt/BE), and earnings variability. The problem is that many of the metrics used in quality are explained by the factors that I mentioned in this video.
For example, once you control for the level of profitability, the variability of profitability contains little additional information about future profitability. Academic studies such as Fama/French 1992 also show that once you control for size and book-to-market, leverage contains little additional information about differences in average returns.
The result of using more metrics than needed to target factors is that you may get factor exposure, but you will also get unnecessary portfolio turnover, increasing costs.
@@BenFelixCSI Ben, how did you come to the particular size and value loadings for your portfolio? Does the ETF factor portfolio you suggest match those loadings? It seems quite high loadings compared to the often referenced 2/3 total market and 1/3 small cap value. As the size premium has been less than value, why not a higher exposure to value than size in your portfolio? One other thing - I presume you considered DLS for international small cap value? That is sometimes mentioned as a possibility and wondered why you rejected that one.
@tristano42 I tried to match the US equity factor exposure to a Dimensional fund. I got very close. The value factor exposure in this model portfolio is more than 2x the small cap factor exposure. Keep in mind that IJS is giving us lots of value exposure in addition to small cap. Finally, the highest expected returns come from small cap value stocks, so that seems like a sensible place to focus the tilt.
I want to like DLS, but it is a dividend-focused ETF. I can’t get behind a dividend strategy. I covered why in a recent video. It also has fairly light exposure to the size factor, and minimal exposure to value.
Please go into detail about ETNs such as MRRL, SMHB, USOI. I am thinking of holding for 5 years with distribution yields @ +20% , the speed of these would accelerate my dividend portfolio. I am investing just fun money on them, but on the other hand....I would like some grasp of knowledge on these tools. Could these be viable if I could handle the risk?
Hey Ben,
Firstly thanks for everything you do for us DIY’ers. Your advise and insight is greatly appreciated. I have 2 questions regarding this latest video.
1: you mention that this strategy is not “for everyone” but I’m not sure what determines what situations would make this strategy for me. My assumption by this is people who want to not maintain their portfolio (rebalancing, picking ETF’s etf)!should not proceed with the factor investing strategy. Correct?
2: can you elaborate why you divy factors by equal weights of 1/3. Is there any disadvantage to putting more weight on market cap vs value/small cap since performance has not been as expected over the past 5-10 years?
Hi stakis12,
You are welcome, and thank you for watching.
1. I agree that for anyone who places a high value on simplicity, factor investing with the currently available products is probably not a good idea. Not only does it add additional components, but the ETFs that I mentioned, IJS and IUSV, are US listed, adding further complexity. For anyone who loves getting into the weeds and getting their hands dirty, I think that there is definitely a quantifiable benefit to adding factor tilts.
2. I tried to model the factor exposure to match the Dimensional funds that we use for clients at PWL. The mix of ETFs that got me the closest was the 1/3 each split. I wouldn't try to time the factors. Even though they have under-performed for a while now the probability of them outperforming in the future hasn't increased. There have been studies done on timing the factors, and just like timing the market it cannot be done successfully on a consistent basis.
thanks for the info Ben. I figured this would be a market timing move. I should’ve known better. Lol
Ben, have you ever considered being a professor after you're ready to be done working as a portfolio manager? I just graduated with my degree in Finance and I think you would've been an awesome professor to have. Teaching seems natural to you. Just my thoughts. Great video!
I have not considered it. Thanks for the kind words!
Hi Ben. Thanks for the amazing content you give out to us for free.
Hi Ben,
In the Indian markets, I see that actively managed funds with longer history or index funds across market caps has given similar returns over longer term. Do you feel that there is a small cap risk premium across geographies. May be this premium varies across geographies. Any views on this.
personally I like a blended small cap etf better because it captures growth in addition to value but if your goal is long term growth, you really can't go wrong with small cap value
What's more important is the index it tracks, a russell 2000 etf will perform differently from an S&P 600 index fund because both of the indexes themselves have different criteria for a stock to be qualified for inclusion (like profitability, trade volume, etc)
100% agree on the importance of index selection. That's why I went with IJS as opposed to VBR or IWN. How to pick an index might be a good future video.
Do you recommend allocating long term investments entirely in Small Cap Value as a result of this model? What are your thoughts on investing in something like VWO in addition to VBR? Thanks!
I think it makes the most sense to start with total global market and then add additional exposure to small value.
Great explanation, I have 25% small cap I'm my fidelity portfolio
Ben, can you elaborate on why small cap growth stocks with weak profitability drag down results of small caps as a whole? Also, in an efficient market, wouldn't investors discount their prices until that effect was erased?
Ben, I have a "what would Ben do" type of question. In my 401k I invest in NMSAX which used to be the only option for small-cap. However, now they added DEVLX. This one is a small-cap value. Looks way better than NMSAX but expense ratio is more than double. Should I stop NMSAX and go DEVLX instead? Or is it better just to have core s&p500 in 401k and instead invest in VBR in my Roth IRA for small-stock value in addition to everything else? I do like DEVLX better than VBR except for the expense ratio. Thank you for your help!
Excellent thank you so much!
Hey Ben, thank you for the great videos! I would like to increase the value exposure in my portfolio. However, for me as a Finnish investor, taxation is a major problem with dividend-paying funds (the ones you propose in this video). I found an ETF that tracks MSCI World Value Index (iShares Edge MSCI World Value Factor UCITS ETF USD (Acc): abbreviation, IWVL). This ETF seems like a reasonable choice for me. However, I haven't found any information regarding its capability to capture the factor premium. Have you examined this ETF thus far and what are your opinions on it?
No small companies in this ETF.
@ Yeah that is a major drawback.
That's a terrible fund. Their largest holding is Intel, which is not a value stock by any means. Its P/E ratio is over 90, whilst its P/B ratio is about 1.33.
For comparison, Warner Bros Discovery has a P/B ratio of less than 0.5.
Relative to Intel's respective sector (technology), the p/b and p/e -ratios are rather low, though.
I enjoyed and appreciated the info in this video. Thanks!
Hi Ben, I do have some small cap exposure following your REIT video.I have been rotating away from a mainly stock based portfolio into ETFs (mainly XAW and ZAG) but your REIT video saved me from buying REIT ETFs and I instead picked up VBR. Ended up going with VBR over IJS. But what are your thoughts on VSS for non-US small cap exposure? Would you recommend not pursuing international small cap exposure or would you recommend a different ETF?
Unfortunately VSS is small cap universe, which includes small cap growth. Small cap growth has poor risk adjusted returns and should be avoided.
@@BenFelixCSI Hi Ben, thanks for taking the time to reply to my question. So I understand that you are suggesting to avoid VSS due to its content of small cap growth but was wondering if you could clarify what you meant by "small cap universe"? Its not a term I'm familiar with, "universe" when describing and ETF.
Thank you Ben for another great video! Any chance your cousins from down south can convince you to apply your skills to US customers/investors?
I'm all Canadian for now, Jimmy. The US is a huge market. I'm sure there is an American Ben Felix equivalent.
@@BenFelixCSI I highly doubt there is a Ben Felix equivalent stateside. :) But Paul Merriman's work is worth a look. paulmerriman.com/
How can you best capture the value premium as an European investor using iShares products? MSCI USA and MSCI Europe Enhanced Value Indexes are a reasonable solution for retail investors? What about Emerging Markets equities? Really appreciate your feedback.
Are all 5 of the funds suggested available for canadian investors through canadian investment accounts? Are they hedged/non-hedged? How does the currency work with the two additions to the portfolio (the value and small cap US ETFs)
The two additions are US listed ETFs. They are available to Canadians, but they need to be purchased in USD. Depending on the amount, you can convert your Canadian dollars to US using Norbert's Gambit, or accept your brokerage's (typically 1.5-2%) currency conversion cost. The currency does not affect your returns. The returns of these ETFs will be the same whether you own them in USD or CAD.
@@BenFelixCSI Are there any somewhat similar Canadian funds that give the exposure to more small cap and value stocks at low cost that you suggest?
@@navigatingradiology No. That is why I had to use US listed funds.
Hi Ben, Love your show, it's the clearest investing series I've seen that is backed up with solid sources.
After watching your videos on factor investing I've been mulling over implementing a US value tilt to my portfolio.
I've been doing my reading to understand the S&P 900 value index and from what I understand, the index is rebalanced annually in December.
Would the recent market drop due to COVID 19 have an affect on the expected size of the value premium? I mean if the value premium is based on buying riskier companies, would the drop mean that those hypothetical risks have been realized and are no longer hypothetical, therefore reducing the expected premium?
Theoretically if I were to buy the value ETF, should I buy it only right after the underlying index has been rebalanced?
Thanks!
The value spread (relative difference in valuation between value and growth) is wide right now. That could imply a larger value premium going forward. Looking at the p/b for IUSV, it got a whole lot cheaper in March. I don't know if you need to wait for reconstitution if the goal is value exposure. Might be different if we were in the middle of a big bull run.
@@BenFelixCSI thanks for the perspective Ben!
@Ben Felix, IJS seems to have an expense ratio of 0.25%. Why not VIOV, with 0.15%? Is it possible to get away with VBR at 0.07%?
In case someone is wondering, you can buy "IJS" ETF to get exposure to the Small Cap Value factor.
AVUV and AVDV came into existence after I made this video. They are good options too.
@@BenFelixCSI So if I already have a one-funder like XGRO, is it a good idea to supplement with AVUV/AVEM? Or would the overlap make that move redundant?
Ben, really liked your model portfolio. I recently implemented it with some small adjustments. Basically I used VEU instead of VEE and VIU to lower the cost of my international assets, accepting some small increase in canadian exposure by lowering my VCN allocation. Overall I get a 0.04 reduction in my portfolio expense ratio. What do you think?
12% XUU, 11% IJS, 33% (was 31%) VCN, 11% IUSV, 35% VEU (was 25% VIU, 8% VEE)
Also, thank you for this series, it's a great resource for any level of investor. Keep up the good work.
@@valcaron Is it just XUU and VCN that don't work? These two are listed on the Toronto Stock Exchange, whereas the others are on american exchanges. I have found some stock tracking sites do not support TSE.
Hi Ben,
what are your thoughts on
ISIN: IE00BF4RFH31 (IUSN)
and
ISIN: IE00BCBJG560 (ZPRS)
They are world small cap, but not value, instead medium weighted.
Do they come close enough?
I'm invested solely in VT. How should I incorporate small cap value into my portfolio? Should I include international small cap value?
Hi Ben,
What your thoughts about SVAL etf?
Hi Ben, I was looking at the returns for the US vector vs. its benchmark (Russell 3000). It appears that the DFA fund trailed its benchmark in most years. The unhedged fund trailed its benchmark by about 2.5% annualized for the past 10 years. what's your thought on it? I do have almost all my money in DFA, but sometimes I question my judgement.
It has been a rough decade for small and value. This is not a reason to abandon the strategy. The behavioral challenges of sticking with it are exactly why DFA does not generally go direct to consumers. I discussed this again in this paper www.pwlcapital.com/resources/factor-investing-with-etfs/
Hi all, in Germany we cannot invest in the S&P 600 Small Cap Value ETF since there is no ETF offered for this index. We would be able to invest in the MSCI USA Small Cap Value Weighted index via a SPDR ETF. Do anyone know the differences?
Can be the Vanguard Global Value Factor ETF (offered in Europe) a good choice for the topic discusses since it also includes a quite high number of mid caps and small caps?
Thanks for any reply!
Greetings from Germany, enjoying to watch all the videos from Ben.
Probably the most important video I’ve watched on TH-cam of all time 😃
Ben, any thoughts on Vanguard VBR (small cap value etf) for gaining exposure to small cap and value factors?
Robert Burkey In his video “the problem with small caps” he talks about VBR towards the end. He seems to give it kind of a mixed review.
I am no expert but I am about to open a position in VBR and just looked at a chart comparing it with 3 other small cap etf’s for 2008-2018. They all significantly outperformed the S&P the entire period with nominal difference and when I compared VBR to the ones that performed slightly better I noticed that VBR has a much lower expense ratio than the other 3
@@whatarefriends4 We need a canadian VBR
I also considered it, but opted for the Vanguard Small Cap ETF (VB) instead. If you compare them, the VB is less volatile and returns are higher, though of course that doesn't necessarily predicted future performance. The VB is a roughly even mix of value, growth, and blend stocks, so it's likely to be less volatile than the VBR.
VBR is a mid cap value fund. If you want small cap value from Vanguard, look at VIOV.
For US investors, you do not need Dimensional Funds(DFA) to get the value exposure. You can use ETFs such as Vanguard. They may not be as deep value as DFA but you can get the amount of value you desire by adjusting the amount of your exposure to the value ETFs. The Vanguard Value ETFs would be cap weighted value stocks. DFA uses additional factors in addition to cap weighting, such as the magnitude of value of the stocks.
In a more recent episode he discusses Avantis US Small-Cap Value (AVUV) and International Small-Cap Value (AVDV). These ETFs emulate DFAs approach. I use them to supplement my global cap-weighted total market indexes to approximate the holdings of DFA.
Would small cap and value ETFs sell the stocks of value compsnies as they become more successful and become large/mid cap? Is there any ETF that hold these valued stocks for longer even though they become larger?
I'm thinking something like 60-70% VTSAX (total US market index fund), 10-20% VBR (small cap value ETF), and 20% VXUS (total international index fund) for my portfolio. I might even split that 20% VBR down to 10% VBR, and the other 10% into VBK (small cap growth ETF.) Still playing around with the percentage allotments. Great video.
I've done something similar, but simpler. Rather than using VBR I have VIOV, Vanguard S&P 600 value index. Comparing VBR and VIOV, VBR is a blend of small and mid cap with about 900 holdings. VIOV is composed of micro and small cap w about 500 holdings. While more holdings is usually better, VIOV has few because it applies more *rigorous sales screening.* VIOV average 10-yr return is about 1% higher with only slightly more volatility than VBR.
Rather than mixing VBR and VBK, you might as well buy VB (small cap index) since it's a blend of growth and value.
Anyway, my portfolio consists is approximately 40% VTI, 30% VXUS , 10% VIOV, 10% BND, and 10% BNDX. I'm 50 and want to limit volatility, hence the bond funds. If you're younger and won't need to withdraw anytime soon, you might not want bother with them.
I would replace VBR with AVUV, Avantis's small value ETF, it's actively managed at a low price.
Can someone please clarify which are the best european alternatives to the ones shown in Ben Felix's paper?
Is AVUV or IJS better for US small cap value allocation?
Are ZPRX and ZPRV ETFs a good way to invest in small cap value stocks? Can the small size of these funds destroy all the upsides?
THANKS FOR DETAILED ANALYSIS
If you chose an index over another one you are stockpicking. A good company, but still a "stock" you have to chose. If you take many indexes, it's like chosing many stocks. It is less risky, I agree, but not necessarily a better option.
Correct me if I am wrong, please
Hi Ben, I'm in the US but I love your videos and a LOT of it is relevant to us.
I'm starting a 401(k) for my small business and looking at our Vanguard fund options. According to your factor investing videos, value stocks historically do better than growth stocks. But Vanguard's VSGAX (small cap growth index) is kicking VSIAX (small value index)'s butt from 2010-2011 to now. Is it just the bad run small value has been having in the past decade?
I'd really like to find a factor tilted solution within Vanguard if possible, since our little 401(k) doesn't have the Dimensional option! Thanks.
This has been a historically bad decade for both small caps and value, and especially small cap value. Relevant videos:
m.th-cam.com/video/kYO7xrHhqsY/w-d-xo.html
th-cam.com/video/foqswJT3Spc/w-d-xo.html
@@BenFelixCSI Thanks for the response! I'm confident small cap value will dramatically outperform the market once a vaccine is released. Love your stuff, man. Empirical evidence, not just opinion and bluster!
Hey ben, what would be the maximum total expense ratio you would consider paying for an etf? I found that the most they have fees up to like 0.75% for really specific etf's like ishares msci emerging markets. Do you think its worth it going for ones like these, or should i just stick with basic ones with around 0.10% fees? Thank you!
0.75% seems pretty high. It always depends what you're getting in return for the fee. I chose IJS for the model portfolios I mention in this video despite its 0.24% fee because it offers exposure to smaller and cheaper stocks compared to VBR which has a much lower fee. Emerging markets ETFs are fine, but I don't know why you would pay 0.75%. XEC only costs 0.26%.
Great Channel totally love it !! Any chance you could cover tax declaration of capital gains calculations in a non-registered accounts in Canada. This ABC for ETFs deserve a video... or should I say I need a video to understand them ;-) Awesome Job keep up the good work.
So a video explaining the adjusted cost base calculation?
Yes ajusted cost base for ETFs ;) that would be Awesome !!
Ben, I'm sure you left it out because it is a subset of the 900 value as tracked by IUSV but IJJ seems to offer an equally compelling exposure to midcap value as does IJS to small-cap value. I have discovered something strange and I can't explain it, The dividend yield of IUSV should be by definition between that of the SP 500 value and SP 400 value indexes. I am showing it as greater than both and I am at a loss for words.
Hi Ben, I have two questions, but first, thank you for such informative & practically helpful/ applicable content, I’ve learned so much from your videos & it’s stopped me from potentially making some bad/ subpar investments. I am wanting to invest in a mostly equity, diversified portfolio of sustainable (likely ESG and/ or integrated with negative screening) ETFs (probably all index ETFs to keep it simple & easier to keep it passive). I am in my late 20s, and am investing long-term in the Canadian RDSP (I have about 30 years to invest, so am comfortable with an aggressive medium-high/high risk & logical vs emotional investing). Question 1) are there any ESG/ sustainable ETFs that apply factor investing (especially size & value, but without the growth, etc. You noted take away from the size factor being effectively applied )? 2) since the factor tilted ETF model portfolio you noted in this video is not sustainable/ ESG-based, do you have any suggestions of ESG ETFs that could similarly represent it & what percent allocation for each ETF? I have watched your video on ESGs/ SRI & am aware of the unfortunate (current) realities (lower risk-adjusted returns, higher fee, etc..) you noted in it. Essentially, Before I look in much more depth into specific sustainable ETFs (to see if they actually do align with my views/ values), I wanted to see if you know of any that apply effective factor diversification. Thank you so much, I really value what you can suggest/ point me to.
Thanks! I am not intimately familiar with the products, but Desjardins has a lineup of ESG + factor ETFs. The fees are a bit high but maybe worth a look www.fondsdesjardins.com/etf/market-insight/responsible-investment/
Hi Ben, thanks so much for the reply, I respect that you ask for comments/ questions and actually reply! So appreciated & helpful.
Re-viewing this episode, something occurred to me: If I understand the data correctly, when comparing small cap and large cap value, it seems the overall premium difference is modest. Considering the higher risk of small cap stocks, is it really necessary to be have a factor lean towards both rather than large cap value only? Doesn't large cap value produce similar returns with much less volatility?
You just showed me a rabbit hole. Thanks! I will google this topic deeper
That's a great video! Thanks a lot!
Close you eyes. Obama is talking to you about investing
OMG, you are so right!
I came to the comment section to see if anyone else noticed. 😆😆😆
man....! =)
If he spoke slower, has more random pauses, he'd really sound like Obama.
I don't hear it.
Hi Ben, How we could link the valuation theory (like discount cash flows valuation) with factor investing?
Why anyone would use this kind of valuation technic if they could just buy ETF or smart-beta funds?
Great question. I have recorded a video that does a deep dive on exactly this but it won't be released for a while. We did talk about it on our podcast, and I wrote about it.
Blog post: rationalreminder.ca/blog/2019/8/22/zqes51gt9xfgi7iggxtjfmuh8z73sf
Podcast episode: rationalreminder.ca/podcast/2019/8/22/episode-60-valuation-theory-and-the-imminent-recession
I know you mentioned it's not worth pursuing factor based investing with international markets, but what do you think about the DLS (wisdomtree international small cap dividend fund) which tracks the corresponding wisdomtree international small cap dividend index ex US? Does it pass your analysis based on the 5 factor model?
I want to like DLS, but it is a dividend-focused ETF. I can’t get behind a dividend strategy. I covered why in a recent video. In short it limits diversification with no added benefit. DLS also has fairly light exposure to the size factor, and minimal exposure to value using the Fama-French global ex-us data.
Sometimes you need to come back and watch this video just to remember why you're SCV tilt is absolutely the best approach.
I would take it a step further and create a investment plan document for yourself and list this and Ben's paper as citations as to why you are doing your SCV tilt. "long-term, decade+ plan; don't stop early".
Hi, i think your videos are very informative and am also a strong believer of passive investing! However, i dont understand how dimensional, being a mutual fund, is different from the rest. Correct me if i am wrong, investing in dimensional would place it under active management as well? Then how would that support the argument that passive is better than active?
Bit of a late response, but mutual funds don't necessarily have to be actively managed, just like ETFs don't have to be passively managed. It just has to do with where the fund is traded. ETFs are exchange traded funds, and mutual funds are traded directly with the mutual fund company.
Something being passively managed merely means that it simply follows an index. That index could be a global market cap weighted index, but it could also be an index that weighs stocks in order to attain exposure to certain factors, for instance the MSCI USA Small Cap Value Weighted index which is not a market cap weighted index.