Motivation
I'm looking to diversify into value stocks to complement my current portfolio that is increasingly skewed towards US market and the tech giants which are the major market movers of late.

Existing portfolio
LSE:VWRA
LSE:CSPX
A few other company stocks but let's ignore that.

My investment "flavour"
- I am a long term investor (plan to hold for +/-20 years)
- prefer minimal manual investment work to minimise my emotions/biases into every manual action.
- I have IBKR and already have scheduled investment.
- I tried but find myself turned off by stock picking and understanding corporate financials.

Questions
Currently I've bookmarked these after searching on ETF sites:
- LSE:WSML -- iShares MSCI World Small Cap
Irish domiciled
World diversified

LSE:R2US -- SPDR Russell US Small Cap
See below

LSE:R1VL -- iShares Russell 1000 Value
This ETF kinda matches what I want: I don't really like the idea of betting on small companies as they've proven to be less resilient in hard times, so I'm looking for mid cap. Additionally, there's also the distinction between value vs growth... I'm inclined towards the former -- you can think of this as my little gamble, hoping to capture something currently undervalued because everyone's focused on the other side.
My biggest problem with this ETF is that it's still US based. I couldn't find a similar ETF but for world/non-US market.

NYSE:VOE -- Vanguard Mid-Cap Value ETF
As above, but diversify on investment company.

Edit: eh I forgot to ask after writing a wall
So my questions... what do you think about these ETFs?
Any alternative to the above that I found so far?
Opinions about my line of thoughts also welcome... Pls don't roast ya 🙏
Thank you!

This post has been edited by Takudan: Jun 16 2024, 04:53 PM

Any pre-thoughts on which segment / markets that you would like to look into?

i.e. Countries / Asset classes

Since your portfolio is heavily, in my opinion (or increasingly skewed as you mentioned) skewed towards US market, have you considered looking into holding stocks (company shares) rather than ETFS?

This would be the second question to complement the first, i.e. what is your risk appetite?

As your holding period is relatively long, I believe emerging markets could be worth your time, and the period might be good enough to mitigate existing short-mid term fluctuations.

just TNA bro. 🤣

Halo

If you are purely buy-and-hold and believe in the index providers then I think just let the markets move on its own.

Many decades ago in the 1980s during Pax Japonica, Japanese stocks account for 44% of MSCI World Index as well. The proportion has since declined to just single digit %, but MSCI World Index still exists to this day.

So, the index will rebalance itself over time. If you attempt to diversify on your own you might end up underperforming the index in the long run.

If you are are really concerned about concentration pick a global equity ETF which track MSCI World or FTSE All-World Index rather than purely S&P 500 (e.g., heavier weights on VWRA rather than CSPX). That way your returns are correlated to S&P 500 or major US indices but not moving entirely the same way as just a purely US ETF.

It's important to recognize that mid and small caps are less liquid than large cap stocks (-> higher trading fees -> higher ETF expense ratio) and the lack of cash in most of those companies' balance sheet make them underperform in a high interest rate world. They also tend to be more volatile than large cap counters.

Lastly, try not to touch thematic investment themes like "value", "growth" etc... these ETFs don't outperform the main index in the long run... They are created by "smart" fund managers to harvest your "fees and commissions"... You see a lot of AI-themed ETFs recently for a reason... and not too long ago, we have ESG-themed ETFs...go further some more years, we have... clean energy... climate change...

One theme may perform well in a year but falters quickly in the coming years...(clean energy did very badly in 2022 when interest rates went up and oil prices spiked) But you are sure it's your fund managers who walk home with your money. Try to google "thematic investing/investment underperform" and you will see why. If they tell you you can broaden your scope of "themes", then you might as well ask yourself why not just buy the whole market, aka. VWRA/URTH etc.?

Just my 2 cents. Hope that helps.

References:

https://archive.ph/J2NWY

https://archive.ph/FXsIk

https://www.wsj.com/articles/investors-love...share_permalink

https://en.wikipedia.org/wiki/MSCI_World

I'm thinking mid cap to tap into their potentially undervalued market as opposed to the big companies.

I mainly long for equities Definitely not touching crypto for my personal beliefs. I tried stock picking but I didn't like the process and don't feel the passion to dive deeper into the technicality of it. Additionally, like crypto, I cannot bring myself to buy something I don't like/believe in, but that bias won't apply to me emotionally if I just pick ETFs.

Not sure about emerging market in particular. It feels like each country has its own problem so maybe just world in general lol.

Hi sifu!

Thank you for shedding some light on value vs growth. I wasn't aware this is actively managed by managers, I thought it's something you could tangibly determine like big/mid/small cap. I'm aware about thematic traps thanks to Ben Felix videos, but I guess I was about to step into one unknowingly...

On that note, can I assume that ETFs that are passively managed will have <0.1% expense ratio, and would never be thematic / handpicked by fund managers?

I did notice that most mid/small cap ETF seemed to have higher expense ratio, like +/-0.2% IIRC. Well tbh, I have bullets now and I want to lump sum enter, but I'm afraid to jump in as I see the sharp ATH. Another part of me wants to gamble/stake on mid caps as I think they're not as highly priced compared to the blue chips. Perhaps "market knows better and they're low for a reason"... but I can't read market's mind and know when the ATH will come crashing down.

ben felix is a staunch supporter of S&P500. he even discourages QQQ or XLK because you'll miss out on bull runs in other sector. like dominos (almost fell off my chair when he said that in the video)

Differentiating companies by market cap is a lot easier than such thematic factors as value/growth etc. Market cap is straightforward, more than bla bla bla hundred of billions = large cap, between bla bla bla tens and bla bla bla hundred of billions = mid cap and smaller than bla bla bla ten billions = small caps. Then you have micro-caps and the mega caps worth trillions in USD.

Value/growth has no exact definition per se, and is subject to accounting manipulations if you use such measures as Price/Book value. But market cap = price per share (directly observable) * no. of outstanding shares (again directly measurable). So, no ambiguity here.

Thematic factors are actually invented by index providers and fund managers to make more money... (don't say I tell you this. ) If MSCI and FTSE just sell you the lists of FTSE All-cap and MSCi World Index constituents they will go bankrupt fairly quickly So as the fund managers. But then their creative marketing departments come up with new "business ideas" to "sell more value to their clients". So they claim they walked the extra mile and studied the various factor models and they think they understand the various thematic factors at play. In reality, as researches have shown, no themes or factors outlast the major index in the long run.

Well, truly passive ETFs will have extremely low expense ratio. VOO achieved 0.03% per year and that is full replication. For large global indices, the ETFs tend to do representative sampling of a portion of the index rather than physical replication of all the thousands of stocks in the index. They claim this will help cut trading costs as some markets are less liquid than others. Even with representative sampling, the expense ratio of URTH is around 0.24% p.a. There will be some semi-active management by the fund managers for the case of partial/representative sampling because the fund managers need to decide what stocks to sample, out of the entire thousand of stocks in the indices. You can assume that for representative sampling of global liquid stock ETFs, expense ratio would be around 0.3% p.a.

As for whether the ETFs' constituents will be handpicked by fund managers, you will have to check the prospectus of the ETFs. They will state clearly whether the ETFs seek to fully replicate, representatively sample or pick stocks at the fund manager's discretion. VOO is fully-sampled, tracking S&P 500, URTH is representatively-sampled (semi-actively managed), tracking the MSCI World Index while ARKK is actively-managed, stock purchase/selling are decided by Cathie Wood without consultation with any index providers like MSCI or FTSE.

Mid-caps and small-caps are less liquid than large/mega caps so a higher expense ratio is normal. Can't advise on what to buy. That's your money haha. If you want to wait on the sidelines there's BIL ETF paying you 5% p.a. (nearly) risk-free. In recent years, large and mega caps are doing better than mid-caps because of the large flow towards passive market-cap weighted stock indices like S&P 500/Nasdaq 100, which benefit more towards those big companies accounting for a large portion of the market index. "Big begets bigger" And of course flushed with cash and in a weak antitrust environment, mega caps "knows no enemy" and expand wildly with M&A while mid and small caps are stuck at square one.

You're incorrect. He never was a supporter of the S&P500. His reasons for discouraging from investing in QQQ or whatever sector/thematic funds are valid too.

Since it's better for us to invest in UCITS funds, it's better to wait out for Avantis to launch their UCITS fund lineup soon.

Small Cap Value funds aren't considered thematic funds. They're part of factor-based investing (Based on academic literature). However, only invest in them with high conviction in the literature.

This post has been edited by Gwynbleidd: Jun 17 2024, 06:29 PM

You have to think Passive and Active as a spectrum. Even the S&P500 is considered active as the stocks are selected by a committee. And in the middle we have rules-based/systematic funds like those factor funds where there isn't discretionary decisions by someone (fund manager).

Another thing about concentration: https://finance.yahoo.com/news/big-reshuffl...-174907744.html



Indeed, as Gwynbleidd said, the index providers also have to bow to ETF concentration limits requirements, so passively tracking indices may not be the that passive after all. Tech sectors will probably have this issue due to high concentrations in market cap among the few, but S&P 500 is still large enough to prevent the diversification rules from being enforced for now...

Value investing = book investing / academic investing. It is good to learn the fundamental as the beginner but the knowledge has little practical uses in the reality.

Reason = value investing is almost non-existence in the real world because the period of the existence will be very short. How is the retailer able to compete with the fund managers , backed up by professional teams? Before you even got the chance to make move, the fund manager already made the move until it is no longer value buy.

A very simple analogy- all the girl dream of ideal candidate of bf to be handsome, 6ft tall, sturdy & fit built, wealthy, educated, charismatics, filial piety, patient, romantic, understandings, etc. If this kind of candidate exist, all your competitors also will be able to spot it. Before you make the move, your competitors already made the move.

Growth investing + sticking to the quality is the way to go. A lot of newbies or retailers cannot get through the psychology barrier of entry, engineered by the fund managers. The quality stocks are expensive for reason, the valuation are rich for a reason. You will not be able to see the reason until you are able to perform qualitative analysis to the condition.

Take a easy road, then you will have the hard outcome. Take the hard road, then you will have the easy outcome.

This post has been edited by nihility: Jun 18 2024, 09:02 AM