Selecting a Small Cap Index/ETF
I'm thinking of adding a dividend-paying small cap fund and would appreciate the opinions of those who'd care to share. There are several of these funds on the market- Wisdom Tree SCDI, iShares Russell 2000, iShares S&P SC 600, Vanguard SC ETF, etc. I'm looking at a long time horizon (plus 20 years) of reinvesting the dividends.
Thoughts on the indexes these track, or other factors?
This is one area where I find that select mutual funds can often match or beat the indexes because the small cap sector is less analyzed, leaving more room for pricing imperfections. I also tend to add to small cap in small amounts making ETFs less practical.
I hold the following for my small cap allocation:
Beutel Goodman Small Cap (Canada)
Mawer Global Small Cap
TD U.S. Small Cap equity
It's been a stinker of a year for Canadian small caps but all 3 have beaten the indexes.
I own Vanguard SC600GrETF ...low MER but dividends are not the greatest. I'm actually replacing this by buying several small cap stocks directly since some(alot) of the stocks in the Vanguard ETF stink.
Small cap mutual funds/ETFs are a waste of time.
The returns are atrocious and the fees too high.
Save your money and do something else with it.
Don't confuse the potential return of a small set of carefully selected small cap stocks against a large pooled mutual fund/ETF buying small caps willy nilly.
I agree with Harold for the most part.
For indexers, if you believe in Fama French analysis of historical returns it does make sense to slightly slant your holdings to smaller cap and value to increase returns so there may still be some value in getting a fund or index ETF specializing in such segments of the market.
The one thing I'll say is that the Canadian small cap space is so under-followed that there can be major errors in pricing of equity offerings. If you have some talent to spot these companies early and the stomach to withstand their volatility you can make a lot of money. The problem is that you might fail two times out of three and still come out on top if your hits are 5-baggers on average. So this is the aggressive part of your portfolio that gives you the chance of out-sized returns. I prefer to stick to highly profitable companies or game changing technology type issues.
My own suggestion to most people is to avoid small caps altogether is you will likely sell during a period when the stock is weak and lose all your money even if you have chosen a winner. This is due to the volatility of the markets and the tendency for the stock prices to be manipulated which can easily fool the individual investor. I started with mutual funds picked by my advisor, then went to funds that I picked but my advisor bought for me, then I started buying my own mutual funds on a full-service brokerage, then I started buying my own ETFs on a full-service brokerage, then I started buying large caps on a discount brokerage and finally I got into the small and mid-cap space this year as an experiment to see if I can do this profitably. I'm giving myself a year to see what I can do but the first 4 months have been tough as I started investing my money in this space at the start of a market peak at a time when small caps have been pumelled. I am down a bit here but interestingly my large cap performance over this period has not been better than my small caps even though they were mostly large dividend paying issues.
Anyhow, it has been an interesting learning experience for me thus far and I'm not sure if all the work I've put in will result in any true alpha in the end.
How about this one ?
iShares S&P/TSX Venture Index Fund(TSE:XVX)
I guess one first has to decide whether small-cap fits their portfolio construction. I've read compelling evidence that small cap does add value over time and deserves a place, proportional to the desired risk, in a portfolio. If the investor decides to add small cap he then has a choice of picking stocks individually, choosing an ETF or picking a mutual fund. For me, I think the complexity of this less-analyzed market may make this one of the few spaces where a good mutual fund manager can add enough value to justify his fee. But everyone has to do their own research in this regard.
Last edited by Spidey; 2012-06-10 at 10:25 AM.