Small Cap and Value Stocks

[@superslyko123]

Wow! A Financial Planner that is not just looking to line his pockets! I subscribed.

[@sunnypsydup]

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!

[@Riley321b]

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.

[@BenFelixCSI]

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.

[@ramiveiberman3182]

@@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)

[@aaron159r2]

Great script. Clear, concise, direct, efficient. No wasted verbiage, just high density information with a clean flow. Great post.

[@BenFelixCSI]

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.

[@HamiltonRb]

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?

[@BenFelixCSI]

@@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 kzbin.info/www/bejne/b5uZdXykdrKAl68

[@HamiltonRb]

@@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.

[@BenFelixCSI]

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.

[@Manofsteel519]

Lots of apologizing going on. Like a true Canadian lol

[@mangoh69]

This is one of the most clear and concise ways I've ever heard the Fama-French Model described. Great work!

[@chadify007]

I think we need an update video!

[@linusverclyte4988]

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.

[@BenFelixCSI]

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.

[@linusverclyte4988]

@@BenFelixCSI I'll be sure to check it out. Thanks for the suggestion. It's always good to hear multiple points of view.

[@TheSeanxy]

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

[@chrisolson5386]

@@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.

[@SS-pg1hi]

What are some value small cap ETFs?

[@SebtorDude]

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.

[@BenFelixCSI]

This is a great comment. Well stated, and clearly informed about the issues. Thanks for watching and commenting!

[@RazeenMujarrab]

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 :)

[@samuelpezzetta7084]

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?

[@BenFelixCSI]

I am glad that you enjoyed the video! I think that covering momentum is a great idea.

[@sheldonberg125]

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.

[@josephniblock6093]

I just discovered him today and have been watching his videos for the past hour. I love this channel!

[@sharonminsuk]

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". 😜

[@muffemod]

Yea first thing I noticed!

[@iandunn206]

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.

[@juukame]

First 2 seconds of video: "I owe all of you an apology." Quintessentially Canadian lol

[@titanachilles7627]

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

[@titanachilles7627]

@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.

[@titanachilles7627]

@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!

[@atticuslangston9756]

@Titan Achilles You are welcome :)

[@Mutmutism]

Wow, every video is better than the other. Very insightful channel, the best one I came across on KZbin so far. Greetings from France

[@andrewdixon2730]

Put a decent % into small cap 6 months back as a result of this video, reaping the rewards atm!! Thanks Ben!!

[@vicente3j]

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.

[@cat-.-]

Close you eyes. Obama is talking to you about investing

[@kimp2002]

OMG, you are so right!

[@Jaji813]

I came to the comment section to see if anyone else noticed. 😆😆😆

[@amaetfacquodvis2450]

man....! =)

[@kyrie4451]

If he spoke slower, has more random pauses, he'd really sound like Obama.

[@Ones_Complement]

I don't hear it.

[@AwesumBear]

love how in-depth this is!

[@NathanielSkinnerMusic]

Is there a meaningful advantage in investing in value stocks throughout market caps, or could one just invest in a small-cap value ETF and call it a day? In the example shown at 14:53, it splits them out, but I don't remember hearing anything about if larger-cap value stocks had better risk-adjusted performance than small-cap or not.

[@alankoslowski9473]

Yeah, that's one of the few things I don't think he explains well, so I checked on it. The value premium is 3.78% and the small-cap size premium is 1.88%. As I understand it, this means the total premium of small-cap value stocks is 5.66%. So the value premium is about twice as much as the size premium. It seems with small cap value stocks you're getting two premiums in one (size + value), but with significantly more volatility. I currently have a value slant across all market caps, but at some point will probably just go with large cap value since it's much less volatile and the additional small cap size premium isn't all that significant relative to how volatile they are.

[@aara-tg7kc]

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)

[@BenFelixCSI]

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.

[@Flyfisher403]

Felix - just found your channel. Subbed. Fantastic content, this should be mandatory viewing for Canadians.

[@BenFelixCSI]

Excellent - thank you!!

[@jan2000nl]

Man… How spot on is this video given what’s happening now with rotation.

[@zzzzzzzzzzz6]

Finally found Ben's "Going Deep into Factors" video!

[@BenFelixCSI]

This podcast episode goes deeper rationalreminder.ca/podcast/64

[@JW-pg4di]

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!

[@_matt_howard_]

Ben, what is your consensus as to why small-cap value hasn't performed as well in the past decade?

[@BenFelixCSI]

I have no intelligent answer. Risk premiums can be negative for long periods of time. That is why they are risky!

[@_matt_howard_]

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!

[@BenFelixCSI]

I think it makes the most sense to start with total global market and then add additional exposure to small value.

[@robertjohnson4401]

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.

[@alankoslowski9473]

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.

[@Connorstalions11]

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!

[@BenFelixCSI]

I have not considered it. Thanks for the kind words!

[@ewoutv4288]

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?

[@apothe6]

Sometimes you need to come back and watch this video just to remember why you're SCV tilt is absolutely the best approach.

[@jroysdon]

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".

[@SS-sy4uu]

Just came back here to drop a note....The 2020 performance of the 3 US stock etfs recommended by Ben reflects that he was spot on...

[@batrarohit1]

AVUV is on FIRE

[@Sethnaca]

@@batrarohit1 until now

[@Sethnaca]

😞😞😞😞😞😞

[@yesimBata]

If we put things into context, it makes perfect sense that value stocks aren’t as profitable as they used to be. In the older days, investors didn’t have access to the internet and a plethora of ways to automate investing. This means that trying to beat the market is much more difficult, as virtually any metric that can be used to evaluate a stock has already been priced in. While small caps still manage to escape this to a certain degree(as they tend to be less of a focus for institutional investors and bots), I just don’t see this changing over time at all. If anything, it will just get worse.

[@Loopy_McLooperson]

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?

[@joaosallaberry]

Hi Ben. Amazing explanation! Is there any region (say, emerging markets) that could be considered like a factor, increasing expected returns?

[@Bobventk]

No

[@Vishal-ih3tc]

In case someone is wondering, you can buy "IJS" ETF to get exposure to the Small Cap Value factor.

[@BenFelixCSI]

AVUV and AVDV came into existence after I made this video. They are good options too.

[@nelfmo910]

@@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?

[@JeffreyQProductions]

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.

[@alankoslowski9473]

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.

[@ljrockstar69]

I would replace VBR with AVUV, Avantis's small value ETF, it's actively managed at a low price.

[@michaelquiambao3596]

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?

[@BenFelixCSI]

*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/.

[@ElvisSatoshi]

Ben, I love your videos so much, please make a video say something about momentum factor, thank you!

[@vatinnifora]

I am retrieving now ALL Ben's videos since 1st one. Of course they are magnificent, all of them. Anyways it seems that in March 2019, our beloved Ben had a promotion from Associate to Portfolio Manager 🤩🤩🤩. much more than well deserved

[@decatombe]

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!

[@lewpaul6310]

What percentage of a portfolio should the small cap be?

[@simonlynchsae]

in his papers he uses 11% of value and 11% of smallcap value index funds.

[@Bunjee77]

100%

[@jakedesnake97]

PZW seems to be the best product available in Canada for global equity (incl. US) weighted towards small value stock. It's not perfect obviously, but the ETF's PE ratio is 17.28, and the Morningstar style box is Small Blend (but tilting more towards value than any ETF I've found).

[@bluegreenalge]

Love this clip, it's my favourite of all of your mini-lessons.

[@anonymousswimmer4010]

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.

[@ISpoofBIG]

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.

[@robtun]

Wow. What a video. Have to watch this one a few times!

[@robertburkey5789]

Ben, any thoughts on Vanguard VBR (small cap value etf) for gaining exposure to small cap and value factors?

[@emazon88]

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.

[@whatarefriends4]

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

[@guillaumegiroux9425]

@@whatarefriends4 We need a canadian VBR

[@alankoslowski9473]

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.

[@JasonBuckman]

VBR is a mid cap value fund. If you want small cap value from Vanguard, look at VIOV.

[@seena1993]

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!

[@aseiado]

Great explanation, I have 25% small cap I'm my fidelity portfolio

[@inigomeniego4906]

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

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?

[@InvestitorulInteligent]

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.

[@wei-chunlee7140]

Ben is really one of the few KZbinrs that are willing to share a bit deeper knowledge. This is amazing!

[@mjlyco9752]

Loved the video/paper, but instead of paying a premium for an S&P600 value index fund and an S&P 900 value index fund; why not use VBR for small/mid value and VTV for large. You make a compelling argument for wanting factor exposure, but the only thing any of us can control for certain is the fees we pay.

[@BenFelixCSI]

This is an excellent question. I looked at VBR and VTV initially when I was putting together the model portfolios. I liked VBR more than I liked IJS, and was leaning in that direction, but the difference-maker in that decision was the extent of small value exposure that each ETF offers. The SmB regression coefficient for IJS is 0.86, while it's 0.60 for VBR. They are similar for HmL (0.27 for IJS and 0.29 for VBR). IJS has an average market cap less than half the size of VBR (1,554m vs. 3,647m), and a lower P/B (1.53 vs. 1.72). If small cap value exposure is the goal, I think that IJS is delivering more of it than VBR. This decision is not just about cost - based on 50% of the past factor premiums, IJS would beat VBR by about 20 bps per year _after_ fees. As for VTV, again, it was intuitively my first choice before I started doing analysis to compare the options. The problem with VTV is that it's all large cap. It has an SmB regression coefficient of -0.18. This means that it reduces the overall portfolio's small cap exposure from IJS/VBR. I suppose I could have done less VTV and more IJS to balance it out. I like how IJS and IUSV together give total market value exposure.

[@mjlyco9752]

@@BenFelixCSI Thanks!

[@dodger2051]

VLU may be worth a look as well; it should yield similar exposure in a single fund (with lower SmB).

[@aaronlee4077]

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?

[@BenFelixCSI]

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.

[@oliverj9256]

Can you share your experience of owning this model portfolio?

[@Green__one]

@@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.

[@anonymousswimmer4010]

Ben - your videos are amazingly helpful and lucid explanations of complex topics. Thank you so much!

[@aaronlent7970]

This may be a dumb question, but at 10:19, why do we only have global data going back to 1990?

[@BenFelixCSI]

There is market data going back further, but it is not broken out into the components that we are talking about in this video.

[@anindomaiti8695]

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.

[@RicoCordova]

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!!

[@BenFelixCSI]

Awesome!

[@stakis12]

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?

[@BenFelixCSI]

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.

[@stakis12]

thanks for the info Ben. I figured this would be a market timing move. I should’ve known better. Lol

[@dg29661]

Ben, your content is so persuasive and well grounded. Plus your voice and inflections remind me a lot of Barack Obama. I thoroughly appreciate your work...

[@alankoslowski9473]

As a US citizen I miss Obama so, so much right now...

[@Ones_Complement]

@@alankoslowski9473 Obama was a smooth talking disaster for America and its economy.

[@alankoslowski9473]

@@Ones_Complement How so exactly? When he took office there was a severe recession. The efforts of his administration and congress restored the economy. During the last several years of Obama's presidency unemployment was low and the stock market did exceptionally well. How is that a disaster?

[@SS-sy4uu]

Ben how about naively trying to capture the value factor for international stocks by using a market cap ETF like VXUS and tilting it with VYMI? Since dividend stocks tend to associate themselves with the value and profitability factors.

[@BenFelixCSI]

Might be a good idea. You introduce some unpriced risk due to the exclusion of non-payers. That might not matter much. But it might matter a bit. That’s the risk.

[@DeepakJain280491]

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!!

[@rotocoach5397]

Is AVUV or IJS better for US small cap value allocation?

[@headlibrarian1996]

One of the issues I have with P/E as a proxy for risk is investors are being pushed into capital-weighted or large-cap growth funds, which pushes a lot more money, and effectively increases demand for, large-cap stocks than seemingly makes sense based on risk alone. An investment advisor can hardly get in trouble for recommending the S&P 500 or TSX, after all. Low P/E could mean risk, or it could mean that there is less demand than one should expect based on the company's profitability. An efficient market should, I think, more strongly equalize P/E across capitalization sizes. Of course, if you're the only person with demand for a particular stock its price isn't going up no matter how well the company is run, which I think creates problems for small-cap value funds.

[@alankoslowski9473]

That could be true, but if a company is highly profitable relative to share-price, its long-term prospects are probably very good, esp for small caps. Of course the future prospects for value stocks are more precarious. For instance many petroleum-oriented stocks are value since there's a push for de-carbonization, so their future prospects seem more risky than growth stocks like Microsoft, Amazon, etc. If alternative energy continue to become more viable oil company stock returns will probably diminish, but that's a big if and since oil is still such a prominent component of modern economies they might have market-beating returns.

[@dima-cascais]

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.

[@yetanothercsstudent]

@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%?

[@milesteasdale8742]

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)

[@jonathanpaylor7171]

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?

[@gunnarkarlpalsson8014]

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?

[@BenFelixCSI]

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.

[@classicconrad]

Is a SCV index fund an effective way of capturing both the size and value premiums?

[@flammmenspeeryt9184]

The size and value premiums seem to interact with each other (ie greater than just buying a small cap fund and a value fund). In regressions it is shown that good small cap value funds give you around a 0.7-0.8 small cap exposure and about a 0.5-0.6 value exposure. Mensing that you are getting about 70% of the small cap premium and about 50% the value premium.

[@jmk2060]

Probably the most important video I’ve watched on KZbin of all time 😃

[@BS-rb5jp]

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?

[@jcayzac]

I love the typo in "blend" ("bland").

[@khaled5233]

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?

[@BenFelixCSI]

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.

[@tristano42]

@@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.

[@BenFelixCSI]

@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.

[@merovingiean]

I am still trying to understand how do we quantify risk.. To me underlying there is a probability distribution of possible return over a period of time. In CAPM we model risk via std deviation of return, which implicitly assumes retuns are Gaussian Distributed. But now when we say there are these new risk factors what are we actually saying? Are we better capturing non-Gaussian distributions? Becoz inherently there is only one underlying probability distribution. Also it is not clear what this new risk means, which apppears to be linear combination of the factors, which may not be strictly linear. I am trying to understand if say value stocks means they have larger tail and we are somehow trying to capture it? Underlying confusion is what is true definition of risk, if given a probability distribution of returns that need not be Gaussian?

[@Stefbb]

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?

[@user-ju7ze9to4k]

That’s a compelling argument for DFA. However, what one will want to know is what kind of premium DFA are expected to deliver, given that accessing them will likely cost in the neighbourhood of 100 basis points!

[@BenFelixCSI]

Very true, and I would never suggest that it is worth a 100 bp fee solely for access to Dimensional. However, a 100 bp fee (or, hopefully, less), should be paid for many other non-portfolio services, like a combination of financial planning, financial advice, tax minimization etc. regardless of what the portfolio is invested in. For anyone who values what they are getting for that fee, regardless of the portfolio, I would not call it a 100 bp cost for access to Dimensional. Based on Dimensional's factor exposure in the products that we use, and based on 50% of the historical premiums (maybe a good conservative estimate for the future?), Dimensional would be expected to deliver about 20 bps of excess return over the market. That's over the market, so compared to an ETF with a 10 bp fee, that's 30 bps excess return.

[@nds9441]

Why did you choose ITOT vs VTI in your portfolio example?

[@GiantAnteatersRkool]

Starting at 9:30 you mention the premiums that are left on the table with a market weight index fund. Where can I find the paper that mentions those numbers? Thanks

[@BenFelixCSI]

There are academic papers, but they are not so easy to comprehend. I did a white paper that (I hope) is easier to understand. www.pwlcapital.com/wp-content/uploads/2019/04/PWL-WP-Felix-Factor-Investing-with-ETFs_03-2019-Final.pdf

[@michaelmoreton5042]

What about Mid Caps? Vanguard has a couple of EFTs with good numbers VOE and IVOG.

[@Mosesusorer]

VOE is a decent option since it captures some of the value premium, but you’d still be better off with a small-cap value fund/ETF as this would allow you to capture both size and value factors. If you’re seeking value exposure in general (rather than exposure to just small-cap and value), then I believe it’s more sensible to go with a US value ETF or fund that includes all sizes (small, mid, and large caps), as historical data shows that large cap value stocks have tended to come second only to small cap and value stocks. In short, a small-cap value ETF like IJS and a value ETF like IUSV might be just what you need to get exposure to the size and value factors.

[@lester7760]

Hello Ben, I read your paper "Factor Investing with ETFs". What's the easiest method to calculate the appropriate allocations of IJS and IUSV when combined with an all-in one ETF solution, such as VGRO?

[@BenFelixCSI]

You will end up way overweight US equities if you do that.

[@DEXVD]

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?

[@BenFelixCSI]

Unfortunately VSS is small cap universe, which includes small cap growth. Small cap growth has poor risk adjusted returns and should be avoided.

[@DEXVD]

@@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.

[@HitsOfRage]

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?

[@PildorasDelConocimiento]

No small companies in this ETF.

[@HitsOfRage]

@@PildorasDelConocimiento Yeah that is a major drawback.

[@me-myself-i787]

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.

[@HitsOfRage]

Relative to Intel's respective sector (technology), the p/b and p/e -ratios are rather low, though.

[@tayloroxelgren264]

Do a video about leverage in the future. I find that it is a taboo topic although as long as you are rational about it, I don't see why it couldn't be plausible. Going from 90% stocks 10% bonds to 100% stocks can't be much different than going from 100% stocks to 110% stocks -10 bonds(effectively)

[@BenFelixCSI]

There's a good quote from this article www.collaborativefund.com/blog/the-psychology-of-money/ that explains why people don't do this: _One study I remember showed that young investors should use 2x leverage in the stock market, because - statistically - even if you get wiped out you’re still likely to earn superior returns over time, as long as you dust yourself off and keep investing after a wipeout. Which, in the real world, no one would actually do. They’d swear off investing for life. What works on a spreadsheet and what works at the kitchen table are ten miles apart._

[@mjlyco9752]

People already do this with their mortgages. 😛

[@BenFelixCSI]

@@mjlyco9752 I think the big difference is that with a margin account, it is very possible to get wiped out. Less likely with a mortgage. But I agree, people are willing to take on massive debt to buy a home, but get nervous about borrowing to invest.

[@Stefbb]

@@BenFelixCSI Please make a video about leveraged ETFs!

[@winelisthk]

Please do a video about using leverage for long term ETF investors. Would really be great to hear your perspective on this topic.

[@hermes8258]

Yes, in fact mine is a combination of small cap and emerging markets: SMIN

[@Riley321b]

Ben, what would your model portfolio be for a USA investor? I read your awesome paper but don’t know how to substitute the 33 percent Canada etf and how the other allocations would change. Amazing content and comments!

[@BenFelixCSI]

Somebody on reddit did a translation for a US investor. I don’t know where it is but some googling would probably uncover it.

[@Riley321b]

Hi Ben, I couldn’t find the Reddit USA translation you referred to. I found this thread but there’s no USA translation: www.google.com/amp/s/amp.reddit.com/r/PersonalFinanceCanada/comments/b8ezhx/small_cap_and_value_stocks_factor_investing/

[@Riley321b]

@@BenFelixCSI Ben, would you mind posting a rough model portfolio be for a USA investor? I wasn't able to find the reddit thread you were referring to.

[@dominic2446]

1:32 what is the use of a style box analysis?

[@BenFelixCSI]

It is one way of understanding the types of stocks that a portfolio is comprised of. It shows value and growth on one axis, and size on another axis.

[@jerichoicho2402]

the problem with this model is using book value, as IT sector growing, intangible assets are harder to quantify. Plus book value doesn't quantify brand equity and network effect

[@alankoslowski9473]

But smaller IT companies are highly speculative. A few tend to do fairly well while most don't.

[@aaronali7735]

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.

[@aaronali7735]

@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.

[@MmmAaa936]

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.

[@BenFelixCSI]

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/

[@MmmAaa936]

Hi Ben, thanks so much for the reply, I respect that you ask for comments/ questions and actually reply! So appreciated & helpful.

[@behrensf84]

So to sum it up, small cap value etfs

[@coolguy-ze1gs]

@@BitsOfInterest stfu

[@Matbart]

@@coolguy-ze1gs ? Bruh what's wrong with you lol

[@NATOnova]

@@BitsOfInterest AVDV is one of the few, if sole, ETF for international small cap value

[@mukammedalimbet2351]

Hi Ben, greetings from Kazakhstan! I'm a big fan of your informative KZbin 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!

[@itsfarseen]

Where to get access to this stock data to conduct independent research on the trends?

[@dhruvdnar]

Quite confused between choosing VBR or AVUV... Also adding large value vtv too

[@kyrie4451]

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?

[@lslurpeek]

Have you found any correlation in small cap vs large cap REITs?