SC and SCV ETFs -- does DFA outperform?

[chang]

The chart below shows DFAS vs VB (small cap) and DFSV vs VBR (small cap value) over a 3 year period ... unfortunately all crammed onto one chart, sorry. In a nutshell, the DFA funds beat the Vanguard funds. Change the period to 1 or 5 years, and the order remains the same: the DFA charts sit on top.

Over shorter periods -- 1 to 6 months -- there is more volatility. Over 3 mths, for instance, VB and VBR actually lead.

The DFA funds track the Russell 2000 Index/Value Index, while the VG funds track the CRSP US Small Cap Index/Small Cap Value Index. This probably adds an element of noise that makes it hard to decide which is the better ETF to own.

(Click to expand.)

[anitya]

chang,

Vanguard switched to CRSP after I bought their index funds. I was not too thrilled when I noticed what you are saying but am stuck (tax handcuffs). I do not agree with Vanguard's obsession / business model solely on cost. Extreme behavior and all that.

[chang]

anitya Actually I have heard arguments in favor of the CRSP indexes (over the Russells). We are not talking about major differences. Still, it seems that DFA is able to overcome the small increases in expense ratios and still deliver a good result.

Edit: see here
www.morningstar.com/etfs/most-popular-small-cap-index-isnt-best

[chang]

To throw a wrench into things, there is also Vanguard Tax-Managed Small-Cap Fund (VTMSX) which tracks the S&P SmallCap 600 Index.

[anitya]

chang ,

You can write to Yogi who likely has better info than I do.

If you are interested in a small cap index, I would go with the S&P SmallCap 600 as that leaves behind unprofitable small caps present in Russell 2000 and its CRSP equivalents. If you are willing to tolerate manager risk, an active fund may be worth looking at.  I own VEXRX (available in my 401(k)) but I have not looked around for a better one - I will be surprised if there is not one.

P.S.: When Vanguard moved to CRSP, their reasoning was the cost. Their obsession to prove that they are the lowest ER firm has cost investors plenty and I do not want have enough time to indulge in Virtues of Vanguard conversations. You guys can open a dedicated thread on it and enjoy.

[chang]

Jun 28, 2023 22:26:45 GMT anitya said:

If you are willing to tolerate manager risk, an active fund may be worth looking at.  I own VEXRX (available in my 401(k)) but I have not looked around for a better one - I will be surprised if there is not one.

A little while ago I did a simple "study" of SC/MC index funds by comparing their M* "rank in category". Almost all SC/MC index funds ranked above the category average (50th percentile), while SCV/MCV index funds ranked in the top 20%, over 5-10-15 years.

I concluded that it's better to index with SC/MC, especially value. Apparently, actively managed funds simply cannot scale the obstacles of: (1) too many companies to evaluate; (2) insufficient public information to analyze; (3) high expense ratios.

Maybe there are some actively managed SCG/MCG funds that manage consistently to beat the indexes, but it's hard to find blend and value examples.

[mrc]

chang ,anitya ,


I am one of those who never succeeded with active funds in the Smallcap category. A while ago, I observed that Vanguard's VIOV (SP 600 value based) outperformance over VBR, so I held VIOV for a brief period until I get to know about Avantis ETFs. Since then, I moved to AVUV, which outperformed both Vanguard ETFs as per performance figures quoted on ETFdb.com.

AVUV does not have 5 years performance numbers yet as it is relatively newer one. DFSV seems to be even newer one, as they brought ETF versions of their mutual funds after Avantis came into existence, started by some folks from DFA.

Since my investment is in retirement account, change was not a problem for me.



AVUV Vs DFSV


Avantis Vs DFA -  Links to Bogleheads discussions on these ETFs and others 

[chang]

mrc I never heard of Avantis, thanks for mentioning it. I will look at their ETFs, performance, and liquidity. It's becoming clear to me that I should check the benchmarks first, and decide which one I want to index.

Edit: I see that both funds index the Russell 2000 Value Index:

• www.avantisinvestors.com/avantis-investments/avantis-us-small-cap-value-etf
  
• www.dimensional.com/us-en/funds/dfsv/us-small-cap-value-etf

This being the case, I would just choose the better performing and cheaper one.

[chang]

Jun 28, 2023 22:26:45 GMT anitya said:

If you are interested in a small cap index, I would go with the S&P SmallCap 600 as that leaves behind unprofitable small caps present in Russell 2000 and its CRSP equivalents. 

Actually, VIOO (S&P Small Cap 600) seems to be inferior to VB (CRSP Small-Cap) or VTWO (Russell 2000).

To be fair, the differences involved are fairly small. If there are other factors that could influence a decision, I would consider those.

[roi2020]

I would avoid funds which track the Russell 2000.
Many unprofitable companies are included in this index.
The Russell 2000 is also susceptible to front-running before its annual reconstitution.

I'm pleased with VTMSX (my only dedicated small-cap fund) which is based on the S&P 600 index.
This fund is tax-managed and technically not a true index fund.
S&P implements profitability screens to exclude unprofitable companies from their major indexes.

[mrc]

chang ,anitya ,mrc ,roi2020 ,

I am sure you are all aware of it, but probably missed in noticing it while researching these funds.

Using an index as a benchmark for beating its performance is one thing and using it for constructing a portfolio like it is different.
Many passive index funds simply mimic their benchmark indices for portfolio construction, whereas Avantis and DFA use their proprietary methods to construct portfolios.
In other words they won't mimic benchmark indices.

So you should not ignore an index fund or a passive fund just because of its benchmark.

[chang]

Jun 30, 2023 0:48:45 GMT mrc said:

chang ,anitya ,mrc ,roi2020 ,

I am sure you are all aware of it, but probably missed in noticing it while researching these funds.

Using an index as a benchmark for beating its performance is one thing and using it for constructing a portfolio like it is different.
Many passive index funds simply mimic their benchmark indices for portfolio construction, whereas Avantis and DFA use their proprietary methods to construct portfolios.
In other words they won't mimic benchmark indices.

So you should not ignore an index fund or a passive fund just because of its benchmark.

mrc Yes, excellent point. I am aware that DFA’s funds are passive, but do not track/mimic an index: they apply various screens to accentuate value, quality, profitability, etc. I assume the same is true of Avantis.

So the “benchmark”, I should try to remember, is just a benchmark against which to measure performance (and may also be the pool of companies from which the portfolio is constructed) — but the fund itself, its constituents, rebalancing protocols, etc., need not exactly resemble the benchmark index.

[yogibearbull]

Almost 40% of R2000 (IWM) companies have no profits. It isn't selective, nor is CRSP completion index (total market - SP500). I have debated this with people who use these indexes and they say that small-cap market is what it is, so they must use it for benchmarking; these indexes are also easy for the fund managers to beat.

Better SC index is SP SC 600 IJR, SPSM.

[chang]

yogibearbull AVSC and AVUV state the Russell 2000 is their “benchmark”, but presumably they constitute their portfolios using whichever companies pass through their screens. IWN has about 1,500 constituents but AVUV has only 750.

AVUV seems like a good SC choice. It’s on my watch list.

[Norbert]

AVUV offers a combination of amazingly low valuations plus good profitability. From M*:

(click to enlarge)



Looking at Avantis' description of this SCV ETF, I see that these characteristics are by design:

"Invests in a broad set of U.S. small-cap companies and is designed to increase expected returns* by focusing on firms trading at what we believe are low valuations with higher profitability ratios**.

"Pursues the benefits associated with indexing (diversification, low turnover, transparency of exposures), but with the ability to add value by making investment decisions using information in current prices."

www.avantisinvestors.com/avantis-investments/avantis-us-small-cap-value-etf/

Looks like a winner to me. Does anyone see things differently?

N.

[Fearchar]

Norbert , Thank-you for sharing;

I'm taking a closer look.
So far so good.
Morningstar likes their approach and describes their shrewdly constructed portfolio process!

It's a relatively new ETF; 9/24/2019 inception.
While I realize history does not repeat, I do like to take a peak and consider the potential role of a a fund considering recent performance.

Here is a resampled Efficient Frontier map over maximum time period available:



AVUV has considerable standard deviation, so it's out there just beyond SPGI which for me is the high return portion of my current portfolio.
Notice, I'm considering EMO, which is really out there even more.

To keep things reasonable, I'm really targeting a ~10% total return.
Here is what that looks like with AVUV added into the mix considering the Jan 2020 to June 2023 time period.



Using my ~10% goal in mind, the optional amount of AVUV is 2.96%.
That may not look like much, but it greatly reduces reliance on RCTIX, SPGI, JQUA, BRK.b and EMO.
It also would encourage a greater stake in JHEQX.

So, need to mull this over some more before deciding, but yeah looks potentially like a great addition.

Attachments:

[anitya]

Fearchar,

Have you evaluated EMO relative to NRGX or anything else in the space? I have traded NRGX and FIF (much tamer) but do not have the stomach to make them permanent members of my portfolio. Interestingly, I own much more volatile (and less TR over 3 yrs) Chevron but I do not pay attention to it and it does not bother me. May be high volatility is an issue only if one pays attention to it!

Interesting Efficient Frontier transition map.

I do not recall you owning JHEQX. Are you considering it now? If so, would you be using it as a substitute for fixed income, equities, allocation funds, or something else? What prompted you to consider it? Always good to know your thinking.

[Fearchar]

anitya ,

I have now evaluated NRGX and yes it might be useful.
Thank-you.

I'm finding that it depends on what other components I include and the time period examined.
Probably less than 2% for my purposes.

You're correct; I do not own JHEQX.
However, I've found that it can easily dominate portfolios constructed along the efficient frontier.
It tends to have the highest Sharpe ratio over most time periods that I evaluate.
So, I am seriously considering purchasing it.

[yogibearbull]

A rare 2nd DEATH-CROSS for small-cap R2000/IWM today. 1st was in April.

There were high hopes for GOLDEN-CROSSES that turned out to be false in January and July.

The same is also seem for better index SP SC 600 (IJR, SPSM).

Bright side may be - but how much worse can it be? Or, it is in giant trading range since 2022.

stockcharts.com/h-sc/ui?s=_IWM&p=D&st=2023-01-01&id=p37153942767

[mnfish]

All I can add is that SC has been rated "Most Unfavorable" for about a year by Wells Advisors.