Any updates on how to best include small caps in a non-US-domiciled global portfolio (IE accumulating preferred)?
I slightly prefer Vanguard to other companies (no strong feelings, but i like the ownership idea of Vanguard), and I am considering 70% VHVE, 20% VFEA and 10% WSML.
Interestingly, there seems to be no overlap between VHVE (FTSE) and WSML (MSCI). However, I find WSML really expensive (TER 0.35).
Oh, and I guess synthetical might be better performing tax-wise, but I just prefer holding physical stuff in case of bankruptcy. Also, I donât really understand the synthetical build and fear intransparent derivative shenanigans
At only 10% for a diversified global equity fund, itâs hardly going to make any tangible difference.
Even if there is - or will be - a 1% or 2% annualised premium on small caps, and you hold that fund for 10 years, with such a small part of your portfolio and high correlation between both indices/funds, it will likely (from historic figures) make a difference of less than 2% or 3% of your overall portfolio.
In other words: Itâs as if you invested a lump sum into just one (large/mid cap) fund.
And then get lucky - or suffer bad luck - by not buying it 2 or 3 days earlier or later.
On another note, the 10% allocation for small caps is probably not much different from what they are in VT/VWRL. So again, you could pretty much have your three-fund portfolio all baked into just one fund.
Good points, thanks! Iâve come across a very interesting article saying that leaving out small caps in a global market-weighted portfolio is leaving out 15% of the world market. I donât know if I feel comfortable with that (FOMO-alert ). Also, my idea with small caps is more diversification, less correlation, and who knows, maybe I get the next Amazon or Google in my small caps.
VT includes small caps, true that is, VHVE I believe not. I just prefer non-US-domiciled ETF due to policy risks / unforseeable tax developments. Also, Iâm not getting retired any soon, so I like accumulating because it disciplines me to reinvest automatically. And keeping DM, EM and Small Caps apart enables me to rebalance when good opportunities arise (e.g. undervalued EM currently).
Agree, itâs great being able to discuss with you guys! Strangely enough, many banks have or recommend like 5% allocations to gold, real estate, specialized market segments etc.
Yeah, why wouldnât they, theses products often have higher fees, meaning they make more money with it. Banks also want to sell you active equity funds with 1-2% mgmt fees
This is technically correct, as standard MSCI indices include 85% of respective market capitalization. But
Well performing small caps get promoted to the standard index, and you get demoted mid caps as top components of a small cap index instead. As I do believe in momentum, I donât think it is a good idea. So it is total market or standard index for me.
Coming back to small caps: Iâve just adjusted my pillar 3a to include 15% small caps in order to more correctly replicate MSCI ACWI IMI / VT.
Do you believe this quite considerable 15% chunk of the world market is (for now) often overlooked by global stock investors and might therefore lead to outperformance eventually? VT is not well known outside the US, and UCITS MSCI ACWI IMI ETFs donât seem to be too popular (everyoneâs talking about MSCI World/EM portfolios).
Also, I could imagine thereâs kind of a little bias toward the big/sexy names (FAANG, Tesla etc.); 15% small caps might help counterbalance this a little
Yes. At only 15%, it will most likely not make a negligible (and ârandomâ) difference to your overall portfolio performance. If anything, Iâd say you can (should) go 30 to 50%.
Though you arenât underweighting US stock by adding a small cap fund.
Interesting, so I take it that small caps could also outperform if you believe in the coming deglobalization / decrease in globalized supply chains (big global companies will do worse in that sense than small local ones).
Great video, I love the science-based approach. Probably I didnât fully understand the content, but to me it still seems just like a quality-factor bet. Of course, this might work out perfectly well.
What I also cannot get my head around: Is Ben defining the âmarketâ as a factor, just like value, growth etc.? To me, that wouldnât make much sense, because the marketâs supposed to be the sum of all factors.
I do admit that in theory, I find multifactor-ETFs a very interesting concept (very expensive though). However, having multiple factors in one ETF would in the end cancel each other out and amount to the âmarketâ as whole again, just by means of a super-expensive âVTâ. In essence: a ETF-industry marketing gag.
Anyone following, or do I need to drink some coffee to get my head straight ?
Thatâs the market risk premium, the rate at which investing in the market at large outperforms investing in a zero-risk asset.
The CAPM makes up the first factor of the Fama-French Three Factor. Its central element, (Rm â Rf), is known as the âmarket risk premium.â It measures the returns you get by investing in the market (which carries the potential for loss) compared to the returns you would get by investing in a risk-free asset. This difference is your compensation for accepting the marketâs risk of loss.
Typically when calculating formulas such as the CAPM and the Fama-French Three Factor model you will use the return on U.S. Treasury bills or bonds as the risk-free rate.
In the CAPM the beta variable, âB1â in the formula above, is calculated based on the volatility of the investment being measured. This represents the risks involved with that investment.
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