# Selecting a Small Cap Index/ETF



## indexxx (Oct 31, 2011)

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?


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## Spidey (May 11, 2009)

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.


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## Eder (Feb 16, 2011)

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.


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## HaroldCrump (Jun 10, 2009)

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.


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## PMREdmonton (Apr 6, 2009)

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.


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## leoc2 (Dec 28, 2010)

How about this one ?
iShares S&P/TSX Venture Index Fund(TSE:XVX)


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## Spidey (May 11, 2009)

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.


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## james4beach (Nov 15, 2012)

This is an old thread, but I wanted to ask about Beutel Goodman Small Cap.

What's the story with this mutual fund? Maybe someone who knows about the history (or the fund company) could tell me -- how does this do so incredibly well? The fee is moderately low at 1.49% MER, and they have a front-end load fee but the performance still looks excellent. Is there some kind of catch? Some other fee separate from the MER and front-end load?

I invest in small caps myself but I have a feeling this mutual fund will do better than my efforts. They've been achieving the high returns for multiple decades.

According to Morningstar info (to Jan 5) the 15 year return is 11.2% versus 9.0% annual return for XIU.

According to Globe and Mail (to Nov 30, 2017) the *20 year* return is 10.95% versus 7.13% for the TSX index.

Shorter periods like 5 years and 10 years similarly show outperformance vs both small caps and TSX index. So is this mutual fund a no-brainer? Is there some catch? One strange thing is that I can't figure out the front end load fee. And do you have to pay the front end load every time you add more money to your investment?


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## nobleea (Oct 11, 2013)

It's not Canadian focused, but MAW150 does pretty darn good too. I think it's been averaging 12.8% over the past 10 years. That includes the drops in 2008/09. I hold it.


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## james4beach (Nov 15, 2012)

MAW150 looks good to but there's a big difference in track record. This Mawer small cap fund was only created in October 2007, so it's only lived through one bear & bull cycle (13.6% annualized since inception). Their managers have only seen one flavour of each bull and bear market.

On the other hand, Beutel Goodman's was created in 1995 and has gone through: bull & bear & bull & bear & bull -- outperforming through all that is far more impressive, I think. They've achieved 12.9% annualized through all that and this is pretty much unheard of.

If BG can continue achieving anything close to that over the decades, that would be amazing. I'm currently already at my maximum stock allocation but am seriously considering buying this when I'm low on stocks again.


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## Ponderling (Mar 1, 2013)

I have had about three years of good performance out of VBR so far. US small cap value.
US small cap is usually a good mid cap to standard TSX300 cap equity valuation in the Canadian equity markets.

Recently more muted returns, as you would expect as US market is perhaps peaking.


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## james4beach (Nov 15, 2012)

I'm a bit surprised there isn't more interest in small cap investment in general, considering how good their returns have been.


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## james4beach (Nov 15, 2012)

james4beach said:


> MAW150 looks good to but there's a big difference in track record. This Mawer small cap fund was only created in October 2007, so it's only lived through one bear & bull cycle (13.6% annualized since inception). Their managers have only seen one flavour of each bull and bear market.
> 
> On the other hand, Beutel Goodman's was created in 1995 and has gone through: bull & bear & bull & bear & bull -- outperforming through all that is far more impressive, I think. They've achieved 12.9% annualized through all that and this is pretty much unheard of.
> 
> If BG can continue achieving anything close to that over the decades, that would be amazing. I'm currently already at my maximum stock allocation but am seriously considering buying this when I'm low on stocks again.


I'm thinking of buying some of this Beutel Goodman Small Cap especially if current weakness continues. Does anyone here have experience buying this kind of mutual fund through TDDI? How do I find out what the front end load fee is? I can't find any clear information on the loads and fees when bought through TDDI.

And when loads are involved, is there an advantage to buying single large amounts vs multiple small purchases?

Their web site says the following, but I can't decipher what this means:



> Investing with a Discount Broker
> 
> We offer Class D funds through Discount Brokerage platforms. Our Class D funds have an embedded trailer commission to compensate the Discount Broker for providing service. The trailer commission is 0.25% for equity and balanced funds and 0.10% for fixed income funds. The Class D funds have an initial sales charge option, which is specified by the Discount Broker at the time of purchase. It is also possible that some third party intermediaries may apply additional fees and/or service charges.


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## Spudd (Oct 11, 2011)

On TD, look up BTG799 in the research section. You'll see a box on the right hand side of the screen, about half way down, that shows the fees. It says there's no front end load, no deferred sales charges, and MER is 1.49%.


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## james4beach (Nov 15, 2012)

Spudd said:


> On TD, look up BTG799 in the research section. You'll see a box on the right hand side of the screen, about half way down, that shows the fees. It says there's no front end load, no deferred sales charges, and MER is 1.49%.


When I look up BTG799 through TDDI, under Fees & Expenses, I see:
Maximum Initial Sales Fees: -
Maximum Deferred Sales Fees: -
Actual Management Fee: 1.25%
Actual Mgmt. Expense Ratio (MER): 1.49%
*Load Type: Front-end Load*

You don't see the same thing? Could TDDI apply different fee structures for different accounts?

Mine is saying there is a front-end load so it appears that TDDI is not waiving the load fee. How do I find out how much the load fee is?


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## Spudd (Oct 11, 2011)

You're right, I totally overlooked that - just focused in on the "--" and didn't see that at the bottom. I guess the only way to find out is to phone in. 

Beutel Goodman's own documents say the front end load is negotiable, anywhere from 0-4%. Helpful, right? LOL.

http://www.beutelgoodman.com/assets/2017-FF-English/FFSmallCapCD.pdf

After I posted this I got a brainwave to click on the "buy" button and see what happens. I figured they would warn me up front about the load, so I could find out by doing that, how much it is. And this is what happened:


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## Beaver101 (Nov 14, 2011)

Spudd said:


> You're right, I totally overlooked that - just focused in on the "--" and didn't see that at the bottom. I guess the only way to find out is to phone in.
> 
> Beutel Goodman's own documents say the front end load is negotiable, anywhere from 0-4%. Helpful, right? LOL.


 ... extremely helpful and clear as mud. But to be fair, it did state next to those numbers/percentages: " You and your representative decide on a rate." and I guess if your representative is nice enough, it might be zero....(dream). 

Man, if one has to wade and dig deep into getting a basic question answered "is it no-load or a load", I'll skip as imagine how clear are the other financial documents? 

Besides, glancing at the top 10 holdings, nothing seems interesting. Well, maybe just Winpak and it's so much easier to buy that stock itself than having to take the rest of the basket.


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## james4beach (Nov 15, 2012)

Yeah I can't believe how complicated these mutual funds are. This whole industry is clearly all about covert fee collection. Spudd: thanks for the screen shot. That screen says no load! A person would look at this and think that there is no front load on this after all... is that true though? Oh man.

Spudd -- how do you interpret all this? I will phone TD...

Beaver101: I'm actually pretty interested in this fund, despite the fee confusion. In my own attempts to create a small cap portfolio, I have frequently run into the same names that this fund holds. I think their portfolio construction is legitimate. I think I might be able to pull off similar performance to what they're doing, but their track record is amazing and they clearly have skills in this area. I am convinced that their manager adds value, and I'm willing to pay for that.

Now if only I could figure out how much I'm paying.


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## james4beach (Nov 15, 2012)

I reached a TD rep (almost no time on hold!) and they told me that BTG799 has no load fee. It's just the MER... pretty sweet. I think what's happening is that the front load is the negotiable one and TD has chosen to make it 0%.


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## Spudd (Oct 11, 2011)

Good that you were able to get that confirmation! My assumption based on the "no load" screen shot when I made the fake buy was that there wouldn't be one, because TD would have to disclose the FEL up front if you were buying. But definitely good to know for sure.


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## AltaRed (Jun 8, 2009)

For many years now, discount brokers have been offering true 'no load' funds on the simple premise that a 'commission' is not justifiable when there is no advice. I suspect the regulator saw to that... 

Some independents (like E*Trade pre-2000) even tried F series (no trailer) before the full service side of the industry had them 'mend their ways'. Outfits like BG, Mawer and the like still allow FEL simply because no 'paid' financial advisor would sell them to clients for free....and these outfits do not pay trailers.....period.


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## james4beach (Nov 15, 2012)

Does anyone think this might be a buying opportunity for BG Small Cap? I don't own it, but have been eyeing it for a long time. Usually it's outperforming the TSX but I just noticed it's been trailing for the last while, which is quite rare.

I'm at my full stock allocation so I can't buy today, but curious what others think. Small caps in general have been lagging during this current rally, both in US & Canada.


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## james4beach (Nov 15, 2012)

I did not end up buying this BG fund, and instead created my own small/midcap portfolio instead.

Here is how Beutel Goodman Small Cap (series D) is performing


*BG Small Cap**XIC (TSX Composite)*Last 3 years10.0%​9.9%​Last 5 years10.3%​10.2%​Last 10 years6.9%​6.3%​Last 15 years8.7%​6.0%​

It seems like most of the outperformance happened a long time ago. Is there any reason to believe that the fund would outperform the TSX index going forward? I'm not sure. We've actually had a pretty good market in recent years for growth & small cap companies, so it seems kind of disappointing that BG would just match the index over the last 5 years.

Does anyone know if the history of the fund manager? Has it been the same manager for 15+ years?


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## Ponderling (Mar 1, 2013)

I hopped out of VBR near the end of 2019, and moved to VTI. Big companies have weathered covid ok, so VTI did fine, lucky me. 

But now that covid impacts are de-risking some I am back to VBR. 

I think the 'small' ie us companies the size of most mid cap canandian companies should do well as the economy gets back to a more upbeat normal.


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## fireseeker (Jul 24, 2017)

james4beach said:


> *BG Small Cap**XIC (TSX Composite)*Last 3 years10.0%​9.9%​Last 5 years10.3%​10.2%​Last 10 years6.9%​6.3%​Last 15 years8.7%​6.0%​
> 
> It seems like most of the outperformance happened a long time ago. Is there any reason to believe that the fund would outperform the TSX index going forward?


Is this the right comparison? 

The top 10 holdings in XIC make up almost 40% of the fund. The 10th-largest is TRP with a market cap of $163 billion.
The average market cap of the BG fund holdings is $2.5 billion.

Morningstar reports the return for BG's comparable index (Morningstar Canadian Small Cap) for the last five years is 1.52% -- way below XIC, which has presumably benefited from outperformance by large caps. 
By that comparison, the BG fund is killing it.


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## james4beach (Nov 15, 2012)

fireseeker said:


> Morningstar reports the return for BG's comparable index (Morningstar Canadian Small Cap) for the last five years is 1.52% -- way below XIC, which has presumably benefited from outperformance by large caps.
> By that comparison, the BG fund is killing it.


The reason I didn't compare to the small cap index, is that it has never performed well. Take a look at the long term history of XCS going back to inception. Over 13 years, it has never outperformed XIC.

From a portfolio design standpoint, I see my decision as either holding XIC, or a fund like this. But holding the small cap index is definitely not an option, unless I'm somehow holding out hope that after 13 years, maybe one day it will perform OK.

I suppose a question is, does it matter of BG's fund outperforms a small cap index? Or does it really have to outperform XIC to be a viable investment?


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## fireseeker (Jul 24, 2017)

james4beach said:


> The reason I didn't compare to the small cap index, is that it has never performed well. Take a look at the long term history of XCS going back to inception. Over 13 years, it has never outperformed XIC.


Is 13 years enough time to definitively conclude that small caps will always be a lousy investment? Lots of asset classes have underperformed for a decade. Until last year, gold had gone sideways for 10 years. Yet, you owned gold.



james4beach said:


> From a portfolio design standpoint, I see my decision as either holding XIC, or a fund like this. But holding the small cap index is definitely not an option, unless I'm somehow holding out hope that after 13 years, maybe one day it will perform OK.


From my portfolio design chair, I see two choices:
1) Accept market returns and go with a total market ETF.
2) Do some strategic allocating, in which case the long-term underperformance of small caps may well be enticing. Past returns etc. etc.

I don’t think the XIC vs small cap returns outlined above tells us anything about the future.


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## james4beach (Nov 15, 2012)

fireseeker said:


> Is 13 years enough time to definitively conclude that small caps will always be a lousy investment? Lots of asset classes have underperformed for a decade. Until last year, gold had gone sideways for 10 years. Yet, you owned gold.


I get your point, though by the way you are wrong with the gold example. Even from 2009-2019 the return was quite good in CAD terms. But yes I do see your point here. Canadian large caps could also do badly for 10 or 15 years, and still be a good long term investment.

But I'm worried about whether the Canadian small cap space is even _capable_ of solid performance. Over the same period that XCS existed, for those 13 years, the American small cap index ETF (IWM) performed nearly as well as large caps (SPY). Certainly within ear shot.

If this was just a bad period for small caps, why did American small caps do so incredibly well _vs their_ large caps? There might be some structural problem with Canadian small caps that makes them a bad place to invest.


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## Jimmy (May 19, 2017)

Small caps offer better returns over large caps over 20 yrs and most other time periods in every market



https://www.pwlcapital.com/resources/market-statistics-february-2021/


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