Diversifying within US index funds

aroominyork

First a question: within global index funds to what degree does the US exposure reflect a market cap weighted S&P fund? 

And then a thought... if the answer is 'largely' and you wanted to diversify that a little and reduce your exposure to the monoliths (as discussed a little in this thread) how would you do it? Here are three options: 

a) an equal weight S&P fund, so you are still investing in the top 500 companies but spreading the exposure more evenly (XDWE)

b) a Russell Midcap fund which invests the 800 smallest companies out of the 1000 largest companies in the US (XRSS)

c) a Russell fund which invests in the 2000 smallest companies out of the 3000 largest companies in the US (XRSG).

bostonerimus

The US is my home market and I use mostly Vanguard Total Stock Market Index, but the percentage of "small cap" included in that is very small. So as you point out you need to overweight sectors to get away form that. How you do that is the question and Nobel Prize winners have done a lot of work on it.

fun4everyone

US small cap active fund for me (Artemis).  Still have a large % of S&P 500 index fund in my portfolio as well.

Thrugelmir

aroominyork said:

a) an equal weight S&P fund, so you are still investing in the top 500 companies but spreading the exposure more evenly (XDWE)

If you are looking at historic data. Then you need to factor in the (5 year ?)  performance of the FAANGS on the indexes. Strip them out and the figures will tell a a rather different story. 

aroominyork

Thrugelmir said:

aroominyork said:

a) an equal weight S&P fund, so you are still investing in the top 500 companies but spreading the exposure more evenly (XDWE)

If you are looking at historic data. Then you need to factor in the (5 year ?)  performance of the FAANGS on the indexes. Strip them out and the figures will tell a a rather different story. 

Sure it will tell a different story - what point are you making?

One take is that if the rest of the S&P might play a little catch up with the FAANGs. The median S&P market cap (ie the 250th) is around $22bn and the lower end is around $4bn which is well into mid cap territory, which could make a case for investing in an equal weight index.

Thrugelmir

aroominyork said:

Thrugelmir said:

aroominyork said:

a) an equal weight S&P fund, so you are still investing in the top 500 companies but spreading the exposure more evenly (XDWE)

If you are looking at historic data. Then you need to factor in the (5 year ?)  performance of the FAANGS on the indexes. Strip them out and the figures will tell a a rather different story. 

One take is that if the rest of the S&P might play a little catch up with the FAANGs. 

I'd be surprised. Across the index US earnings generally have been pretty flat in the past 5 quarters. With share buybacks enhancing EPS. 

DairyQueen

This article may be of interest.

It suggests small cap value stocks are an effective way of diversifying the weightings of both the S&P 500 and US 'Total Market' indexes. The comparative performance tables from 1928 thru 2018 are worth reviewing.

I also hold Artemis US Smaller Companies but it currently makes up only 6% of my US allocation. I intend to increase that to around 12.5% in line with my small cap allocation to the UK market.

Prism

Thrugelmir said:

aroominyork said:

a) an equal weight S&P fund, so you are still investing in the top 500 companies but spreading the exposure more evenly (XDWE)

If you are looking at historic data. Then you need to factor in the (5 year ?)  performance of the FAANGS on the indexes. Strip them out and the figures will tell a a rather different story. 

Absolutely. If we take an example over the last 5 years Facebooks revenue has grown from 12Bn to 70Bn, Alphabet from 66Bn to 166Bn while JPMorgan 103Bn to 140Bn and J&J 74Bn to 82Bn.
There is no catching up to be done here for the time being as the recent performance of the FAANGs is mostly in line with the companies performance while pretty much everything else has been drifting along

in_my_eyes

DairyQueen said:

This article may be of interest.

It suggests small cap value stocks are an effective way of diversifying the weightings of both the S&P 500 and US 'Total Market' indexes. The comparative performance tables from 1928 thru 2018 are worth reviewing.

I also hold Artemis US Smaller Companies but it currently makes up only 6% of my US allocation. I intend to increase that to around 12.5% in line with my small cap allocation to the UK market.

I'm inclined to agree with that article's idea that you may get something more diverse by adding small cap value to a total market index. Though this is debatable: others would argue that the total market index does already give you exactly the correct weighting in small cap value stocks (and ditto in small cap growth, large cap value, and large cap growth).

However, the article is US-centric when it says that you can buy small cap value very cheaply via tracker funds, which is true in the US but not here. So the idea of gaining diversity for a barely significant increase in cost is not easily implemented here. And whether it is worth doing if the increase in cost is much greater (whether that involves buying active funds for small cap value, or more obscure and expensive "passive" ETFs/funds) is more doubtful.

One thing to consider is compromising on the value part, and buying small cap instead of small cap value. Since there are some relatively cheap small cap trackers available. E.g. following the MSCI World Small Cap Index (for global funds), or the FTSE 250 (for the UK ... though debatable whether that is mid-cap or small).

aroominyork

in_my_eyes said:

DairyQueen said:

This article may be of interest.

It suggests small cap value stocks are an effective way of diversifying the weightings of both the S&P 500 and US 'Total Market' indexes. The comparative performance tables from 1928 thru 2018 are worth reviewing.

I also hold Artemis US Smaller Companies but it currently makes up only 6% of my US allocation. I intend to increase that to around 12.5% in line with my small cap allocation to the UK market.

However, the article is US-centric when it says that you can buy small cap value very cheaply via tracker funds, which is true in the US but not here.

Maybe not small cap value, but a small cap index such as XRSG gets you the 2000 smallest companies out of the 3000 largest companies in the US for 0.15% OCF.

aroominyork

Prism said:

Thrugelmir said:

aroominyork said:

a) an equal weight S&P fund, so you are still investing in the top 500 companies but spreading the exposure more evenly (XDWE)

If you are looking at historic data. Then you need to factor in the (5 year ?)  performance of the FAANGS on the indexes. Strip them out and the figures will tell a a rather different story. 

Absolutely. If we take an example over the last 5 years Facebooks revenue has grown from 12Bn to 70Bn, Alphabet from 66Bn to 166Bn while JPMorgan 103Bn to 140Bn and J&J 74Bn to 82Bn.
There is no catching up to be done here for the time being as the recent performance of the FAANGs is mostly in line with the companies performance while pretty much everything else has been drifting along

By 'catching up' I didn't mean the non-FAANGs would make the kind of share price gains the FAANGs have in recent years; I meant the gap might narrow. Companies priced on a forward P/E of 90 have a high bar to clear.

I think Terry Smith and Nick Train, of whom I think you are an avowed acolyte, would be quite happy holding companies increasing their revenues from 103bn to 140bn over five years (though I am happy to be corrected), yet your post reads more like a Baillie Gifford American investor.