The historical data and few papers have shown that Smal cap value and Emerging market stocks outperform other asset classes on the (very) long run. I wonder if it would make sense for young people to invest massively or only in these two assets.
50% Small cap value world
What are your thoughts on these assets classes ? Which % would make sense for long-term investment?
I know what you consideration behind this is, and i had the same. i decided for myself that i’d rather have a world portfolio with some overweighting of these two asset classes rather than your solution. how to quantify this decision i have no idea.
- a chance to outperform by a bit, i.e. an increase in expected return
- loss of diversification
- increase of volatility
@wapiti for US-based companies there’s VBR, but what about the rest of the world? Are there any reasonable non-US small-cap value ETFs?
Why value? There is VSS (Vanguard FTSE All-World ex-US Small-Cap ETF).
Except DISVX which is a mutual fund. I don’t have other exemple of international small cap value. I will look deeper.
Small cap value international would be even better than Small cap international. Value + small cap outperform only smal call. However, you are right VSS is a really cheap and good fund.
How much would allocate to these riskier assier ?
I must say I don’t understand the difference between Growth and Value. From Investopedia:
A growth stock is a share in a company whose earnings are expected to grow at an above-average rate relative to the market. A growth stock usually does not pay a dividend, as the company would prefer to reinvest retained earnings in capital projects. Growth investors choose stocks based on the potential for capital gains, not dividend income, so they can be risky.
A value stock is a stock that tends to trade at a lower price relative to its fundamentals (e.g., dividends, earnings and sales) and thus considered undervalued by a value investor. Common characteristics of such stocks include a high dividend yield, low price-to-book ratio and/or low price-to-earnings ratio.
The only clear characteristic to me is no dividend vs high dividend. Do you have any proof or reason that value stocks are better? If I get this right, a value/growth ETF is no longer passively managed, but picked by a person? I would not like to trust a manager with making the right decisions.
Normally, I would expect a Value ETF to do something in the following spirit :
- Take a criteria, for instance price to book ratio, price/earning ratio, …
- Rank every company of the universe according to this criteria
- Invest in the companies in the best decile according to the criteria (for instance, investing in the 10% of companies with the lowest price to book ratio).
An ETF does not have to be passive, it stands just for Exchange traded Fund. As with classic funds, you have active and passive ones.
That’s clear to me, but what you described looks like a recipe for a passive fund. It just needs to gather reliable data and then apply them without human interaction.
A different question is if such a strategy makes sense. I’m sure people who buy and sell stocks already look at these things and the price reflects that. But we come again to the “efficient market hypothesis” .
it looks more active to me, because in the algorithm I described we make the active decision of getting rid of 90% of the universe of stocks considered at the beginning.
A lot of funds have implemented algorithm and don’t use human decision to trade (we call that Systematic trading, on the contrary to discretionnary trading). For instance the biggest Hedge Fund, Bridgewater Associate, only trade using algorithm implemented in computers. There is almost no human decision during operations.
Regarding the relevance of value strategies, I will let you read the following document by Tweedy Browne (former broker of Ben Graham and Buffett), and decide for yourself. This paper makes an inventory of various studies on such value strategies.
Long story short : yes it worked a lot in the past. No, there is no way to know if it will continue. But we can say the same of indexing.
That’s exactly what these funds do, this is one of the oldest examples of what’s now fashionably called “smart beta” strategies. Often, the data comes even from an independent third party like S&P 500 Value index, so all the fund itself has to do it just to trade, In a nutshell they take established basic value fundamentals like P/B, P/E, P/S, throw away the extremes, normalize and average them out - and that’s your value score. They do the same with growth fundamentals like eps growth and then partition the stocks into growth and value segments with some overlap, the partitioning however is more elaborate than just simple percentiles. You can read about exact S&P methodology here: http://us.spindices.com/indices/equity/sp-500-value
You end up with way too much banks in the value index to my taste…
Yes, you have less diversification. However, you will still cover the world with SC
More volatility, mean more return, I don’t think that more volatility is a issue in the long term.
A passive ETF will track an index. However, the index can have a complex methodology. For exemple: value, small cap, momentum, high yield
An active ETF will track an index and “gives” the right to the ETF manager to deviate from the index
“An actively managed ETF will have a benchmark index, but managers may change sector allocations, market-time trades or deviate from the index as they see fit. This produces investment returns that will not perfectly mirror the underlying index.”
Didn’t want to open a new topic - so just wondering what I am seeing today, in the SCV ETF area.
Two ETFs, tracking the exact same index - S&P600 - from Vanguard and iShares.
VIOV day change +2.1%
IJS day change - 7.7%
What the hell
Well I don’t know what you are showing me (VIOV is in green today, yes)
I am merely looking at the two at Yahoo Finance: