The Problem With Small Cap Stocks

In this video I'm going to tell you why you should think carefully about owning small cap ETFs.
You probably won’t be surprised if I tell you that small-cap stocks, in general, have outperformed large-cap stocks over the long-term, even on a risk-adjusted basis, with risk measured as standard deviation. This is well-documented around the world and over time. Small caps were the first market anomaly that challenged the capital asset pricing model and resulted in today’s multi-factor models for asset pricing.
My name is Ben Felix, Associate Portfolio Manager at PWL Capital.
Referenced in this video:
Figuring Out Factor Investing - www.pwlcapital...
The Delisting Bias in CRSP Data - www.jstor.org/...
Size Matters, If You Control Your Junk - papers.ssrn.co...
You can find the Rational Reminder podcast on
Google Podcasts:
www.google.com...
Apple Podcasts:
itunes.apple.c...
Spotify Podcasts:
open.spotify.c...
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PWL Capital Blog Post: www.pwlcapital...
Visit PWL Capital: goo.gl/uPcXg7
Follow PWL Capital on:
Twitter: / pwlcapital
Facebook: / pwlcapital
LinkedIn: / 105673
Follow Ben Felix on
Twitter: / benjaminwfelix
LinkedIn: / benjaminwfelix
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#stockmarket #investing #pwlcapital

[@paraalso]

Another thing I'm concerned about with small cap ETFs is the size of the funds. A lot of these funds are much smaller than the more popular market-cap weight index funds. Small funds are in more danger of being shut down when holding for a long time, and if a fund that is part of your long-term strategy stops existing, that can have a serious negative effect through taxation etc.

[@PatrickPray]

These videos are very high quality, informative, and thought provoking. Thanks so much.

[@Capital10X]

"Size matters if you control your junk", well said! That report is right on about the importance of profitability vis a vis size of a stock.

[@isla424]

As a finance undergrad these videos give an excellent overview of topic and provides an amazing starting point for further study. Thank you so much!!

[@prashunpcchakraborty70]

This channel is so god damn underrated.

[@terran236]

Probably because he doesn't tell people what they want to hear. because he tells the truth. The best way to invest is to invest long-term and not like a casino.

[@barqueros2001]

​@@terran236 A small cap value channel

[@dimzoll3669]

Thanks for the informative video! I actually did a backtest starting from 2005 between the Msci Small Cap Value Weighted and the Russel 2000 index and it showed similar return with a very similar Sharpe Ratio. Maybe a longer period would be better but did not had older data

[@Tuxedo_Cake]

Thank you for setting this straight. I used to believe in the “small stocks outperform big stocks historically” cliché, but I always had a feeling that it must be more nuanced than that. I've never purposely tried to get exposure to small caps in my portfolio, but I've thought about doing that. I won't think about it anymore now. Also, on TD the actual MER of XCS is 0.60%. Ouch! Not buying that one.

[@BenFelixCSI]

Yes, definitely a bit nuanced.

[@liubovpiano9573]

I invest in small caps, but I use no more than 50% of portfolio in individual small cap stocks and 50% - in 1-2-3 stable ETF ( now I own dividend aristocrats ETF 50% of portfolio). However, I use financial anaysis (liquidity, profitability, solvency ) and pick only relatively good small caps with potential.

[@fernandohp5362]

@@BenFelixCSI por favor, qual etf smallcap value você indica ? Global Ex EUA

[@alex2143]

​@@liubovpiano9573so you're a stock picker, which we know to be detrimental to long term returns, and have a poorly diversified ETF section, since we know that whether a company pays out a dividend is irrelevant for total returns. Gotcha.

[@SamToshi]

Thanks for the many interesting and detailed videos. I was already convinced about investing in index funds, but wasn't sure what to look for as there's so many out there. These videos are very helpful to make a good decision.

[@BenFelixCSI]

That's great! I'm glad they have been helpful.

[@cavemanstyle1376]

The inception date of VBR was 01/26/2004 so that's a little bit of a problem for your case of VBR underperforming the DFA fund since jan 2000. Also fun fact, VB (vanguard small cap index fund) has outperformed VBR since the latter was incepted. Also VB, which was incepted in nov 2000, has outperformed the S&P500 since its inception.

[@costanzojr]

So... Now that we have Avantis funds available to DIY investors, one question remains. Since the premium resides in the deeper Small Cap Value stocks, which also have less liquidity, how well will these SCV funds be able to implement their strategy as their AUM grows? Are there enough of these deep SCV stocks? Also, there is so much excitement around Dimensional funds, but then VIOV has outperformed DFSVX over the last decade. How can this be explained? And should we expect the same outcome with Avantis? Would be great to hear if anybody has any thoughts on this.

[@Sokrabiades]

I am increasingly convinced that the size and value factors are a mirage. In the academic literature, they are clear and obvious, but nobody has been able to automate them in practice.

[@CBCuster]

I live in the US so am much more familiar with US-listed Vanguard funds than the Canadian funds you mention, but I love your channel for the educational value that I can apply to my own journey. Keep it up!

[@Chron1cMTG]

Personally I focus on picking stocks with low pb and low pe with some other parameters, and most of them coincidentally happen to be small cap or mid cap. I could not find any etf matching my strategy for these type of stocks. I will also note that some small cap stocks are simply unavailable on my investment platform, so that's another difficulty as a DYI investor

[@evilevan9687]

Lots of comments wondering what ETF Ben recommends to capture the small and value premiums. He likes IJS for small value and IUSV for value. He talks about these in his video "Small Cap and Value Stocks. He digs deeper in his white paper "Factor Investing". He has IJS and IUSV in his model portfolio, which you can find in the white paper and his website.

[@irhumbled]

What are your thoughts on ijs vs slyv?

[@GarrettOHara]

In Dec 2020, Ben released a paper recommending AVUV in lieu of IJS. AVUV came on the scene after this video, and its managers are former DFA employees.

[@evilevan9687]

@@GarrettOHara thanks

[@ojjunior4579]

I agree it’s much better to just invest in broader diversify ETFs like VCN, VXC and done with it.

[@BenFelixCSI]

There are no good arguments against that approach.

[@rutgerdemaeyer]

@@BenFelixCSI Even this reply is so rational and neutral, that's why I like your channel. You should make a video about real estate investing (no reits) and accumulating ETF's opposed to distributing ETF's, for example here in Belgium there is no capital gains tax but there is a 30 percent dividend tax.

[@elmateo77]

@@rutgerdemaeyer By non-reit real estate investing do you mean owning rental properties? That's not really his area of expertise as a portfolio manager, although there are many other good channels for real estate investors.

[@saudispinoza]

Rutger De Maeyer same situation here

[@atefkhella7398]

May God bless your soul for your service Mr. Ben

[@eliasron6941]

Hey Ben, love your videos. Quick question, is there any study on the effect of imposing a performance boundary on "small cap ETFs"?. Meaning, the good companies that are doing very well and grow eventually leave the ETF as they lose the small cap status. This would seem like a bias that penalises best performers and would introduce some negative effect compared to, say, a portfolio that takes a snapshot of current small caps and follows them indefinitely.

[@shares-qg9kw]

wow that a great point Did you find any info yourself Elias? If so where please

[@eliasron6941]

@@shares-qg9kw unfortunately nope, I did not. I think it's still something to consider though

[@thegreat9481]

@@shares-qg9kwits only common sense. Cant be small cap forever unless you never grow….

[@adriennecohea2462]

Yes, I bought VBR, AVUV, and AVDV. I wish DFA had small cap value ETFs, because I'd be inclined to own them too as long as the expense ratio was low enough. I don't have enough available cash to meet the investment minimums of the advisors in my area who sell DFA funds.

[@alankoslowski9473]

Look at VIOV. It seems significantly better than VBR.

[@grigorirasputin425]

They now have it

[@stefanball5029]

They do now. DFSV

[@NathanielSkinnerMusic]

8:54 But what about Vanguard's VIOV Small-Cap Value ETF with median Market Cap

[@alankoslowski9473]

A couple of us have asked about this. He didn't respond to me, but referred others to his rational reminder podcast. I'm not an expert, but for the last few weeks have attempted to understand S&P 600 value index funds as best I can. They seem like really good options since they employ rigorous screens and are truly small-cap focused.

[@gordongustafson2799]

Hmm, I had my (limited-options) 401k setup like this: 500 IDX (FXAIX) : 40% MID IDX (FSMDX) : 20% SM IDX (FSSNX) : 20% INTL LG IDX (FSPSX) : 20% After this video I'm debating dropping the generic small cap from the 401k and buying small cap value elsewhere. Thanks for all the great info!

[@MartinMarchev]

Great videos, Ben! I'd be curious to hear your opinion on medium cap stocks and S&P 400.

[@kmkcorner]

VIOV has a median mkt cap of $1.7B and a P/B ratio of 1.4x right now. This exposure seems to be evident when comparing VBR and VIOV 10 yr returns.

[@alankoslowski9473]

Yeah, I originally held VBR before I knew about VIOV. I sold off VBR and moved it into VIOV since it seems significantly better.

[@evilevan9687]

Ben, I read your March 2019 white paper on Factor Investing and see you recommend IJS for Small Value (and IUSV for Value). You also have those 2 in your model portfolios. Wonder why you didn't mention ISJ in this video. Is it because you made this video before you figured out IJS fits? If you redid this video today, what would you say about IJS?

[@BenFelixCSI]

I can't remember why I didn't mention it. I like IJS because it is fairly well diversified but still has deep size and value exposure while maintaining a profitability screen through the underlying index's eligibility criteria. I think I'm going to start to like AVUV, but I don't have enough data yet to know for sure.

[@JFH899]

@@BenFelixCSI You didn't exactly answer Evil Evan's questions. I am wondering the same questions. Thank you.

[@evilevan9687]

Thanks for the answer Ben. I have a big chunk to invest during this market crash. I'm going to follow your DIY portfolio. John, I assume he'd add IJS to this video if he could. If you haven't already, watch his video "Small Cap and Value Stocks", he talks about IJS and IUSV there. If you really want to dig deeper, read Ben's white paper on factor investing.

[@MrBomoro]

Evil Evan link to the paper?

[@pedroteixeira07]

The stance still feels a bit confusing tbh ...

[@thethierry22]

Hi Ben, What about IJS, RZV or the new AVUV from Avantis to capture the size and value factor ?

[@brianchrisrogers]

Grateful for Avantis- AVUV, AVDV and AVEM. Proper Small and Value exposure.

[@StockSpotlightPodcast]

These are interesting thanks for sharing

[@TalGalili]

There is also VIOV

[@nuzod]

you mean AVES? It is smaller and mroe valuey than AVEM

[@brianchrisrogers]

Yup I use AVES, have used AVEM before they came out with AVES, and for tax loss purposes would use DFEV

[@simonlynchsae]

Man.. I just fell down the CSI rabbit hole.. if you see your views spiking, it's me! It would be nice to Canadians to do an overview of the platform available for DIYers to trade ETF online. There is a LOT of choice and the cost analysis on them would make for interesting chat. Thanks!

[@MrC0MPUT3R]

"Size matters if you control your junk" 😂😂😂😂😂

[@smilinazzdoggy825]

No comment lol

[@spadbob24]

😂😂😂😂

[@dlw3m]

😂😂😂 I am a 52 year old, 8 year old at heart.

[@macdaddy1291]

For US options, whats your take on IJS or SLYV?

[@ryanstovercfp]

I've opted for DES - Wisdomtree's US SmallCap Dividend ETF in this space over VBR since according to Morningstar, VBR is around 56% Mid Cap (worth noting, its Small Growth counterpart - VBK is 64% Mid Cap). If I want small cap exposure, I want small cap, not 50% of Mid. Comparatively, in the Small Growth space, it seems like VIOG is more pure small cap than VBK. I'm sure that the Dividend tilt within DES does not perfectly capture the broader DFA definition of Small Cap Value that they're going for..but I'm using it to complement . I also don't have access to DFA.

[@BenFelixCSI]

I agree that the midcap exposure in most small cap products is a major problem. DES seems interesting. The thing about dividend paying companies is that they often have good profitability, and they are often value companies. Not _all_ dividend payers have those characteristics which is why dividends aren't considered a factor, but with a lack of better products to get exposure to small/value/high profitability this is probably a reasonable solution.

[@ryanstovercfp]

@@BenFelixCSI Then...YAY! :) Thanks Ben

[@BenFelixCSI]

@@ryanstovercfp No problem! To be clear to anyone else reading this, I wouldn't recommend DES. But if you really want small cap exposure and are comfortable with a bit of an active tilt, it may offer naive exposure to small/value/high profitability.

[@elliottmiller3282]

Is it weird that i hear your voice when i read the things you write ben

[@BenFelixCSI]

I don’t think so! It is still me “saying” those things. I hear my own voice in my head when I write too.

[@lting001]

I suppose in efforts of simulating risk premiums, size and value are treated as independent factors. If the conclusion is that size is not a valid factor and value is, then we should buy all value stocks and not just focus on small cap value. In my experience, small cap stocks tend to fluctuate more than large cap and since that small cap risk is not rewarded with a premium, I would even go further to buy only large cap value.

[@alankoslowski9473]

That seems pretty sensible, though I think he states small cap value has higher long-term returns than large cap value, though as you say small cap is more volatile.

[@pbesthall]

What do you think of the Avantis ETFs, particularly AVUV?

[@muffemod]

They are goodie yo

[@daviddalton8545]

I just added small positions of IJR and IJH to my RRSP. I hold XUU in my non-registered account. It seemed logical to attempt to reproduce the holdings of XUU in my RRSP by holding the US listed small and mid-cap ETFs in order to reduce fees and enhance tax efficiency. Time will tell if I made the right decision. I just read Larry Swedroe's book Your Complete Guide to Factor-Based Investing. I had to review whatever vague notions I retained from university statistics in order to understand it. What I especially appreciate about your work is your ability to explain the results of academic research in a way that small investors can understand. You are doing a great service. In the future, I plan to add US listed ETFs to my non-registered portfolio in order to capture factors. I shall continue to follow your work with interest.

[@rotocoach5397]

Try IJS and IJJ (small cap value and mid cap value)

[@daviddalton8545]

In fact, I now hold IJS and ITOT.

[@andolee9369]

Hi, Ben, thanks for sharing, it is very insightful! I noticed the big difference in expense ratio between IJS(0.25%) and IUSV(0.04%)? source: Yahoo finance. how about IJR instead of IJS? are there any US market based small cap ETF in Canada?

[@Deamer24]

What do you think about i investing in Vanguard’s Small Cap 600 Value ETF(VIOV) instead of VBR? It’s median market cap is $1.6B and it’s P/B ratio is 1.4, making it closer to the DFA fund you mentioned in the video.

[@BenFelixCSI]

Anything that offers good diversified exposure to the risk factors is a good solution.

[@alankoslowski9473]

Thanks for asking that. I just added some VIOV to my portfolio of cap-weighted global index ETFs. It does seem like it should do a better job of capturing the size-value premium than VBR.

[@Marcus-zp4xp]

What about AVUV?

[@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!

[@higorcarvalho920]

Very insightful video, as always! They really help on creating a strategy for my investing in the US market plan. Cheers from Brazil!

[@aerialdude]

In your paper about DIY factor investing with ETFs, you construct a portfolio that gains small cap value factor exposure through the use of IJS and IUSV. After watching this video, however, I'm wondering if you would still recommend that approach? You didn't mention IJS or IUSV at all here, and you made it sound like there aren't any good options for a DIY investor. Could you clarify your position on this? Do you still recommend IJS and IUSV for factor-tilting towards small cap value? Or do you think it isn't worth trying to capture the factors as a DIY investor? Another related question: in some of your videos you mention the Profitability factor. In you paper about factor-tilting a portfolio to SCV, you don't mention profitability (if I recall correctly). Do you believe it is worth it to try to tilt towards profitability? Are you aware of any ETFs to achieve that tilt (in a way that is similar to how you recommend IJS to tilt towards SCV)? Lastly (sorry for dumping so many questions), how does one know how much factor exposure they should take on? On the one hand I understand it is taking on additional risk to increase factor exposure. On the other hand, sometimes the way you talk about factors makes it sound like you get something like a diversification benefit(?) or at least a higher expected value (EV)? How does the increase in risk relate to increasing risk through more equity exposure? For example, if I had a 50/50 stock/bond split, how would taking on more factor exposure compare to simply increasing weight in stocks and decreasing weight in bonds? I'm guessing it is more complicated than simply evening out the risk/return ratio. Thanks btw for your videos. I have sold my individual holdings thanks to you. I now invest only in globally diversified market-cap weighted index ETFs. But I am gaining interest in factor exposure...

[@kyrie4451]

You either need to spend more time to read research and come up with your own conclusion or you need to pay a financial advisor to help you.

[@DaxXx988]

Thanks for this. I am considering digging a bit into the value (small cap) ETFs but only once the downturn arrives (I am ready to wait) - due to the cyclical nature of the markets, value *should* outperform in the first couple of years of recovery. Have you considered IWN versus VBR, since it has much larger small (vs. mid) cap coverage? I would not necessarily consider it value specifically though, as it "just" takes the bottom-most 2000 Russell stocks (even though they claim to rely on P/B criteria). Or perhaps FYT, which uses significantly more fundamental metrics to define what gets in (and keeps it truly "small" and "cheap")? Thoughts?

[@DaxXx988]

Or VTWV, has even a stronger lean towards Value than VBR (according to MorningStar)

[@DaxXx988]

@@wread1982 Why do you think I did? :) I ultimately have loaded up on SLYV, AVUV, AVDV a while ago, luckily. :)

[@plotus1937]

The youtube algorithm could have saved me by recommending this earlier. Haha. I switched into small cap value ETFs from my predominantly tech growth weighted portfolio for fear of what was happening in Asia in Feb. Turns out this was the exact opposite of what I should have done as they were absolutely hammered where as my growth tech :(

[@George_Beth]

Hi Ben. What is the ticker of this DFA fund that you mentioned towards the end? I wanted to have a look at it. Is it the one named DFSVX? Also, why would a DIY investor not be able to get access in this DFA fund? Do they have high minimum investment amounts?

[@BenFelixCSI]

Yes it was DFSVX. DFA doesn't have high minimums but the funds can only be purchased through firms that DFA approves. Most of those firms have high minimums.

[@mstuchell]

@@BenFelixCSI And DFA charges two percent annual fee.

[@daktuno]

what about slyv?

[@Ciborium]

Wait, what? In the ETF Bubble video you said that diversifying large-cap growth with small-cap value is a good idea.

[@BenFelixCSI]

Small cap value is good. Small cap aggregate is pulled down by small cap growth, which is not so good. Thanks for paying attention!

[@Superhrst]

So you don’t recommend indexes such as Russell 2000 or MSCI Europe Small caps as an addition to a regular world portfolio?

[@Vishal-ih3tc]

@@Superhrst he recommends IJS.

[@mortenjacobsen2472]

Yes. I tried to get exposure through iShares MSCI world small cap ETF which does not sort for value growth stocks so now I'm a little lost how to get this exposure. I'm probably just gonna keep it even more simple and buy some market index funds and be done with it. I feel like every new piece of information redirects my strategy or at least alters the products I wish to include

[@alankoslowski9473]

@@mortenjacobsen2472 I know what you mean. I think that's why Ben generally seems to recommend cap-weighted total market index funds for most people. There are so many ETFs out there it gets overwhelming. Searching for the perfect small-cap value ETF might improve long-term expected returns, but at some point I just want to be done with it and enjoy life.

[@drott150]

For my taxable account I loaded up on VTMSX just before the 2020 election and it just exploded upwards since then. Sure hope it continues, it's the best performer I've ever had other than VGT.

[@lanceareadbhar]

My wife doesn't have access to a total stock market index fund in her 401K. Would investing in a large cap fund (78%), mid cap fund (16%), and small cap fund (6%) be similar enough to a total stock market index fund? They all have low fees.

[@DraganAlves]

Yes

[@brandonmorin1179]

Any plans for a video discussing the diversification effects of including infrastructure-oriented securities?

[@BenFelixCSI]

I had not planned for it but will look into it as a potential topic.

[@brandonmorin1179]

@@BenFelixCSI in the course of simulation model portfolios for my wife and I, I started adding some of the Vanguard Global infrastructure fund (reduced my fixed income allocation to make room for it). What I found was it reduced the portfolio's R squared metric and improved risk-adjusted performance. Curious if your research would show the same benefits.

[@BenFelixCSI]

@@brandonmorin1179 Interesting. I'll see what I can dig up.

[@tacticalclochard]

Pls, correct me if I'm wrong. So, a small cap company takes off like a rocket and I'm globally invested only in large and mid cap ETFs. Wouldn't I still profit a lot (actually the larger part of returns to be made) by catching its rise through the mid and large cap stratum and only miss out on its increase inside the small cap range?

[@evilevan9687]

8:20 With VBR, I noticed there is no comparison to the overall US market. So we don't see if VBR actually has outperformed the US market as a whole. We do see that all the other non-DFA examples in the video did under-perform. Wondering if VBR beat the market or not.

[@BenFelixCSI]

When this video was made VBR had beaten the US market since inception. Today it has trailed substantially. It's been a rough time for small value recently.

[@Feds_the_Freds]

Are there some updates on this for practicability? iscv looks pretty good imo. Probably not for me, as I'm more about sustainability, so currently in wscsri, but mostly just to capture a acwi weighting.

[@shaunrosenberg4568]

I've tried by investing in the ETF IJS. This has crushed the S&P 500 since inception. But gas lagged the S&P 500 since I started buying it. 😂

[@alankoslowski9473]

That happens. Small caps, esp value, are highly volatile, so can lag the overall market for months or even years. As you probably know, returns surged Jan and Feb, but it's been pretty flat since. Long-term prospects are good. I own VIOV, which is essentially the same as IJS.

[@shaunrosenberg4568]

@@alankoslowski9473 I own both funds. They've been doing great this year. Still had to hold through a lot of volatility while seeing the S&P 500 do better for a while. I'm not worried. It's a long term play.

[@alankoslowski9473]

@@shaunrosenberg4568 My portfolio consists of VASGX and VIOV. Since the former is much less volatile, essentially I use the latter to "feed" it. I try to maintain a minimum baseline amount in VIOV. When it exceeds that amount I move some of the money into VASGX. If VIOV drops significantly and I have money to spare, I'll buy shares since it will likely recover eventually.

[@CW-up7xv]

Do you have a video of why you think market cap weighted index's are good? Meb Faber and others say market cap weighting is possibly the worst way to create an index because it is not tied to any meaningful metric like value or trend. What makes market cap better than just about any other tilt?

[@BenFelixCSI]

Meb Faber has a product to sell. Market cap gives exposure to market beta, which is the market risk premium. That is pretty good. I agree that going for value is also good, but it also adds complexity, and it is much harder to choose a good value fund than it is to choose a market cap weighted index fund. For clients of my firm we do not use market cap weights. We tilt toward value, profitability, and size. But for any DIY investor I think market cap is the best approach.

[@CW-up7xv]

@@BenFelixCSI if market cap is just shares times price, what exactly makes that any better than any arbitrary method of picking stocks? To Meb's point, market cap has no tie to any valuation metric, therefore it's use in weighting stocks in a fund seems as useless as sorting alphabetically. I believe there was also research done on this to show that, however I cannot remember reading it so I don't have first hand knowledge, just going by what I've heard Meb say over and over. You are right, he is selling a product, so it would be cool to see your side of the story on this, as this is the first time I've heard market cap is a good way to weight an index.

[@BenFelixCSI]

@@CW-up7xv I do not disagree that market cap weight is arbitrary, but it is simple and low cost to access. Other weighting schemes may be arbitrary (equal weight) or targeting specific risk factors like size and value. The tradeoff is that funds tracking alternative indexes almost always have higher fees. The perpetual question is whether or not the portfolio structure will be sufficient to overcome the costs. In the case of small cap, value, and profitable stocks, there is a clear theoretical and empirical risk premium. I think that weighting toward those factors makes sense. With equal weighting you are getting an arbitrary mix of small cap and value that will drift over time. It is not obvious that it will consistently add value to returns. With trend the big questions are costs and persistence. High turnover leads to high costs. There is no sensible risk-based reason for momentum to persist, so betting in it may not lead to a reliable outcome.

[@staceyvieira6946]

Ive heard that we haven't seen wage increases because the consumer price index isn't accurately estimating cost of living, more so, rent and housing costs.

[@mamoudouba9731]

Well this very much makes me question my plan to invest 1/3 of my Roth into Small-cap growth ETF (VBK). I invest in VOO, VXUS, and VXF so my portfolio really lacks exposure to small cap companies. My first thought was VBR because Ben is always talking about how small cap value stocks have outperformed large cap (historically) in almost all his videos. I did more research and eventually landed on VBK because I wanted something more aggressive. But now I am like am I over-complicating this?

[@BenFelixCSI]

I'd go VBR or IJS over VBK.

[@rentsmiami]

Mamoudou Ba I have the same etfs you have! And adding VBR. What allocations do you have?

[@davidhanson4971]

Dimentional now offers a small cap value ETF!

[@fzigunov]

You see, even though it is a sensible decision to remove the low profitability small caps for analysis (4:47), I must say that this is the classical example of unintentional data mining. I.e., if you torture the data long enough it will confess. I don't see the increase in statistical significance to be sufficient to affect one's decisions. The researchers (as a community) could very well have tested hundreds of other hypotheses, and this one happens to explain the data. But given the universe of hypotheses, it is not that unlikely that one of them will do so. Careful!

[@BenFelixCSI]

I disagree. The research that we are taking about here starts with theoretical basis. The theory has been tested empirically which has resulted in these models. It has not happened the other way around (data mining resulting in theory).

[@alankoslowski9473]

Do you have any thoughts on the Vanguard S&P 600 Small Cap Value Index ETF (VIOV)? Structurally it seems almost identical to lJS and since I already have a Vanguard acct to keep things simple I'd like to use VIOV unless there's a good reason not to. Thanks.

[@NikiTheWreck]

Thanks for the interesting video. Is it still a good idea to hold a cheap small cap ETF in addition to S&P 500 for the sake of better approximating the market portfolio?

[@simonlynchsae]

As a mean to get exposure to small cap value stock, I used your white paper example portfolio with ISJ and IUSV and so far so good. I have to admit that apps like Passiv make it reaaaallly easy to rebalance a portfolio of 6-7 ETFs in one clic, especially with Questrade since the service is free.

[@Murt2]

could you maybe look at explaining the difference between RZV and SLYV? Thanks!

[@BenFelixCSI]

RZV is a fundamentally weighted index. Fundamental weighting could lead to higher turnover. RZV seems to average over 50% turnover. IJS (same index as SLYV) is usually under 40%. If they're turning over a lot on value signals they will always be short momentum.

[@Murt2]

thanks!

[@dominikthibault5902]

Hello Ben, What do you think of these new Avantis ETF (ex: AVDV) that looks really similar to the DFA funds you often talk about?

[@andrewbullman1685]

I got into it because of his prior videos

[@dustinkw]

I have looked for videos of your perspective on mid cap stocks, but don't see any. I'm curious what your stance is on why specific mid cap exposure should or shouldn't be part of a portfolio.

[@ranjitinamdar]

Thanks Ben for the very informative and scientific research which seems largely universal. I have one question - since you are using data/stats for value vs. growth stocks, you seem to be using a water-tight exact definition or classification of these stocks. What is the criteria and how do you get this (stratified) data? I am aware of the concepts but I am asking generally esp. on the background that in Indian stock markets, costly quality stocks (what some people call as growth or momentum) have generally outperformed 'value' stocks (which unfortunately include many low growth, low profitability, utility kind of companies without much moat, government owned companies or cyclical companies etc.). These definitions will change perhaps as per context, so wanted to clarify....

[@BenFelixCSI]

Thank you. All of the data come from here mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html You raise an excellent point. Many value stocks are 'junk' which makes value stocks as a whole look bad. If you control for junk you get a better expected outcome. In the Fama French 5 factor model this is done by controlling for relative price (value), in combination with profitability and growth in book value. These additional factors add in a level of control for the quality of the company.

[@MarcusW123]

I had assumed the different risk factors were independent of each other, so it is a bit confusing that exposure to the size factor seems to depend on exposure to other factors in order to be effective. Is there some literature where I can get a more robust understanding on how to interpret these factors?

[@niveaulimbo6101]

There is an unlimited amount of papers about these topics, just start with the fama french paper if you want to explore the science behind it.:)

[@stgeorgn]

what is in the canadian small cap MSCI value index

[@mortenjacobsen2472]

How about the: spdr msci usa small cap value weighted ucits etf Would you say you're covered small cap wise by incorporating this into your portfolio?

[@engpds]

Ben, love your videos simply because I agree and have been applying the strategies you mention for many years now. But on this one you got me puzzled. By comparing VBR to DFA, you almost make a case against VBR, as if the relative under-performance of VBR also means it under performs broad ETF's in the long run. You mentioned you question the efficacy of VBR... why? VBR is precisely combining the value and the size factors, very cost efficiently. Not sure why its implementation is difficult or why you suggested in the end that DIY investors will be better off in a broad ETF. To be sure, VBR is not a big chunk of my portfolio, but I do tilt it towards value and, when CAPE-valuations eventually decrease, I will be buying VBR more aggressively (yes, even value stocks go down in a bear market). I don't know of any simpler method to capturing history-based increased odds of better returns.

[@CW-up7xv]

He explains this in the video. Doesn't say VBR is bad, just the holdings determined by the stronger value factors in DFA have resulted in better performance (half a percent) over time.

[@m.morininvestor9920]

How much % of VBR you have ?

[@JorgeRamos-xw6dy]

Very smart analysis. I however remain confused as to a course of action. I would appreciate guidance on where to invest.

[@raguthanabalasingam2166]

Also keep in mind the liquidity issues that occur during market bottoms like in 2009. Large caps also tend to outperform late cycle like we are in now. As markets have become more liquid over time and more advanced, most of these factors don't really work anymore. Also people start buying ETFs and mutual funds that make more of these strategies available to lay people, which in the end removes the advantages in the long run.

[@BenFelixCSI]

It is not accurate to say that the factors don't really work anymore. It is also not accurate to say that more people buying these types of assets makes the premium go away. Post publication factor premiums do tend to decline, but they do not disappear. This is because factors are *risk* factors. Risk cannot be arbitraged away. Size has never been explained as a liquidity premium, so liquidity should not impact it. Edit: some people have explained size as a liquidity premium, but that is not the generally accepted explanation. Studies have shown that size is not a liquidity premium.

[@alexanderbaskakov9190]

Ben Felix if factors effect is explained by additional risk is it correct to say that if we adjust additional return of factors by additional risk than risk adjusted return will be the same as for broad market?

[@BenFelixCSI]

@@alexanderbaskakov9190 Excellent question. The answer is no. The reason that factors are compelling is that they offer higher _risk-adjusted_ returns than the broad market. That is why adding in these additional risk factors to portfolio construction seems sensible.

[@Commando303X]

3:50: "Fortunately, I do have some good news - which I will follow up with some more bad news." I want this on a hat.

[@Schabulla]

What about profitable small and mid cap growth stocks with not too high pe? These are my favorites. You said the problem would be the loss making companies.

[@spencer2937]

So I agree with you about us Small cap value. You compared vbr and DFA us Small cap. You mention the fee differences but this isn't the entire picture. If DFA has performed 0.5% better per year on average, but needing to use an advisor licensed to work with dfa, and they charge say the average of 1% management fee for access to these funds; logically it still would make sense to invest in vbr, viov, or IJS yourself, would it not?

[@alankoslowski9473]

Probably. Since I have a vanguard account I invest in VIOV and VBR for simplicity and convenience. Even if DFA performs modestly better, which is the best case scenario, it's not worth the hassle to me.

[@gregorw4517]

Then comes Avantis with Small Cap Value ETS with ERs of 0.15% Also SP600 funds are good as they filter for value and profitability.

[@msay87]

Towards the end of the video you caution DIY investors because they do not have access to DFA funds, and might miss out on the benefits of capturing the size effect. As a DIY investor, then, is it better to completely leave out small cap value funds/ETFs, and instead stick entirely to broadly diversified market-cap weighted low cost index funds? Or would you still recommend DIY investors to supplement them with the small cap value funds (like VBP, IJS) available to them?

[@BenFelixCSI]

Since I made this video Avantis has come out with great products for small value and DFA has filed for ETFs. The landscape has changed for the better.

[@msay87]

@@BenFelixCSI Wow thanks, that's useful to know.

[@msay87]

​@@BenFelixCSI If I wanted to primarily invest in Index Funds (as opposed to ETFs), what would be a good option for adding small cap value stocks? I can find close equivalents for other categories like total stock market indices but cannot find index funds for small cap value stocks. Reason for me being interested in index funds over ETFs is to be able to automate investments. Thanks!

[@msay87]

Actually, never mind. I see that Avantis has launched corresponding mutual funds with the same expense ratios. Thanks for your replies!

[@nicolasmoreau3434]

Hi Ben! Great video. Fully agree on your conclusion re DIY investors and broadly diversified index funds. One question: most of them are as you say market cap weighted. While it reflect what the market buys and values, it does expose me to the top of each listing (eg American tech for the msci world). Am I increasing risk due to the market cap weighting? Cheers

[@MikelSyn]

By definition, no. The market premium is based on market cap weightage, which means that a fully market cap weighted portfolio takes on only the market risk. If you underweigh the top of each listings, such as large cap and/or growth stocks, you're technically taking on more risk, namely the small cap and value risk, and receiving the higher expected returns (on average) in compensation.

[@wezwang1986]

Thanks for the information but since its been a few years since the video was uploaded, do you think the new Avantis products such as AVUV is a good small cap value ETF?

[@AISoundEngine]

Yes

[@GiantAnteatersRkool]

Yeah I have a tilt with vbr... This is sad for diy investors. Wonder if I should just have a portfolio of only vti, vtv, and vxus. By the way, according to morningStar VBR is 17% small blend and 4% small growth. So like 12% small growth in vbr?

[@BenFelixCSI]

VBR is at least extremely low fee so it's not as much of an issue. The Canadian small cap ETFs have higher fees so if there's no expected benefit you could be hurting yourself. With VBR there isn't much of a downside for a US investor. For a Canadian we would need to worry about currency conversion costs which effectively increase the cost of ownership.

[@GiantAnteatersRkool]

@@BenFelixCSI interesting! My current allocation is 23% VBR 23% VTV 9% VTI 40% VXUS 5% VNQ. I'll let you know in 30 years how it works out haha ☺️. Thanks for all your hard work Ben!

[@evilevan9687]

@@BenFelixCSI Why is currency conversion a cost for Canadians buying VBR? Can't we just bypass the exchange rape with Norbit's Gambit?

[@stineldo]

Many US listed ETFs are not available in Europe. WSML is one of the only ones I found. Would this be good to add in a portfolio with a IWDA (is a world stock, as VTIAX is not available either).

[@james4727]

So what is a good alternative to dimensional for us retailer investors? Is it still worth putting our money in something like VBR, IJS or SLYV over a standard market-cap weighted index? Also, how does this extend to mid-cap companies? is there still a size premium for midcap over large-cap? Would tilting to value on mid-cap stocks offer a premium?

[@BenFelixCSI]

kzbin.info/www/bejne/oHy6k4ptjMygZtk

[@TruthDefender]

your mic is quite "boomy"

[@beginnersmindguitar2101]

Hi Ben, Really enjoying your videos. I was wondering what you think about SLYV? I’ve seen others in the comments asking as well. It seems like you are suggesting cutting the dead weight of small cap growth all together. I’ve been holding VTWO and SLYV (for a blend with a value tilt). Wondering if you recommend selling off VTWO and sticking with SLYV (if you think that is a good option)? Thanks so much!

[@BenFelixCSI]

See here community.rationalreminder.ca/t/best-etf-for-small-cap-value-ijs-slyv-avuv-or-something-else/385

[@evilevan9687]

Is there a way to filter a fund search by the Morningstar style box thing? In other words, filter your search for small cap and low weight in growth?

[@seatconnect224]

Hi Ben, what you think about my portfolio 60% in bonds VWOB and 40% in SPMV from iShares, is it a good strategy before recession if it may happens in next few years? or it may sense to increase percentage in SPMV

[@yakiengel7489]

What about SPDR’s value weighted small cap ETFs (ZPRV and ZPRX)?

[@stgeorgn]

what if you create your own ETF, chosing 100 stock small cap value and holding them bindly for 10 years, you would beat the index maybe no ?

[@samsonsoturian6013]

Trading fees can be higher for you than the ETF fee, depending on the fund, the stocks, and the size of your orders

[@KennyKimura]

What about Vanguard's VVL etf? Any hope there for those of us who would like a tilt towards global small/mid cap value stock?

[@MrBomoro]

What’s the definition of Value / Growth in „hard numbers“?

[@elmateo77]

Whether a stock is value or growth is determined by its P/E (price to earnings) ratio, but there's no hard boundary it's just relative to the overall market. Anything with a higher than average P/E ratio is growth, and a lower than average ratio is value, but the average changes over time. In the past the average has been as high as 120 and as low as 5, with a current value of around 30.

[@jackietsaah]

@@elmateo77 it’s also usually only reasonable to consider P/E within the context of a sector/industry, and the cohort of companies’ peers. P/E percentiles can vary a lot across sectors.

[@prestonlui6451]

@@elmateo77 No, it is P/B that is the generally accepted definition of value in academia. P/E is more of a profitability measure

[@mattslowikowski3530]

What about just sorting the tsxv by profitable companies, and buying the largest 20?

[@m.morininvestor9920]

Dear Ben, what do you think of IJJ med cap value? Thx a lot friend!

[@SGTpark82nd]

Hi Ben. As a DIY investor I am getting the size and value factor using Fidelity index fund FISVX. What are you thoughts of using this fund for the size and value factor? Thank you.

[@andremadureira5966]

Hi Ben, really nice content. Every video I watch of your channel is a new opportunity to improve as an investor. Ben, I've saw two ETFs that seems promising for small caps (FNDC, FNDA). What are your thoughts about them? Do they make sense?

[@johndoodoohead9221]

VBR is not the best example of small cap value. I am curious of his thoughts of IJS and RWJ.

[@BenFelixCSI]

Thanks for the comment Mr. Doodoohead. Feel free to address me in the second person (you), as opposed to the third (he). It's kinda weird addressing me in the third person. I'm right here. I suggest watching this video and reading the comments where I specifically address VBR vs. IJS. kzbin.info/www/bejne/aH65hKaMnpaSm5Y

[@johndoodoohead9221]

Thank you pointing me to that video. Great video series, good work

[@BenFelixCSI]

@@johndoodoohead9221 thank you!

[@georgemanka]

Yes, it’s all in the implementation of factor strategies. As well as in the sequence. From what you have outlined, small cap should be the secondary factor to value and profitability.

[@BenFelixCSI]

I wouldn't say it's secondary, but it probably shouldn't be considered in isolation.

[@dioxan5684]

Hey Felix, first off thanks for this great educational content. I'm just getting into DIY investing, and you've completely introduced me to risk factor premiums with historical backup. I wonder what you think of Vanguard's Russell 2000 Value ETF? The underlying index seems to address your concerns with the Vanguard Small Cap Value ETF, with rock bottom cost ratios.

[@johnbrown1851]

So, you're saying size doesn't matter?🤔

[@GhettoFabulousLorch]

If you have a total stock market index fund is there any advantage to be gained in investing in mid cap and small cap index funds to increase exposure to their returns due to market cap giving a bias to large cap stocks?

[@BenFelixCSI]

Yes. See here www.pwlcapital.com/resources/five-factor-investing-with-etfs/

[@GhettoFabulousLorch]

Thank you.

[@bisonfan715]

A product like XSHQ seems to take only the "high quality" small cap stocks. Unfortunately, it's a pretty small fund right now

[@warriorr6966]

Could you do a review for Fobi Ai?

[@DekarNL]

So what kind of etfs áre smart to have in my portfolio besides a global market weighted etf?

[@alankoslowski9473]

If you have access to small cap value ETFs, it might be smart to allocate some portion this. Since small cap is highly volatile I'd probably keep it a fairly small portion, maybe 10%.

[@MrBomoro]

how can i find small cap value companies?

[@raymondwilliams379]

Trust the professionals who are working 100 hours a week to put the index funds together, and get one of their products, not sure if you mean "value" as in good, or high dividend, but either way you can find some good funds in Vanguard Fund List and clicking over to the Fund tab. it'll take 100x less time to pick your proper fund then proper stocks, and historically it's the smarter play by a long shot

[@robert.j.forrest]

Thoughts on FYT from First Trust in the US?

[@TheNinjutsuninja]

Do you have any thoughts on iShares SVAL that was just listed today?

[@BenFelixCSI]

Seems like a good concept. The data aren’t available in analysis tools yet though so I can’t rip it apart.