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Which Small Cap to Add?
Old 06-24-2011, 02:53 AM   #1
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Which Small Cap to Add?

I feel that I need to add a small cap stock fund to my mutual fund (taxable) portfolio. TRPrice has some good ones but the expense ratio is quite high. I notice Vanguard has some good ones at a better expense ration. But they have so many...
Visgx
Naesx
Visvx

How do you know which one to choose? They all seem to perform similiarly?

Or should I go for something else?
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Old 06-24-2011, 03:33 AM   #2
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This is where you have to have an investment philosophy. These three funds represent growth small caps, all-small-caps, and value small caps. You need to decide if you lean toward growth or value or have no leaning.

If you believe in the total market weighting, then you would probably not want to overweight small caps at all. So if you needed small caps because you only had large cap index funds available, you would pick NAESX because it has small caps that represent all small caps.

If you believe like many who follow a Fama-French 3 factor model that value stocks yield a long-term premium over growth, then you would be in good company with many books advocating this. The authors are Rick Ferri, Larry Swedroe, William Bernstein, Benjamin Graham, and many others. If you are in this camp you want to overweight value stocks, so you would pick VISVX.

Studies show that over the long-term small-cap growth does worse than the other two, but in the last couple of years (i.e. the short-term) small-cap growth has done extremely well. It is probably also the most tax-efficient because growth stocks generate fewer taxable dividends.

For myself, I like a small-cap and value tilted portfolio, so I am going to pick small-cap value whenever I have a choice. I own VBR which is the ETF share class of VISVX. I would own small-cap blend before I would ever use small-cap growth.
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Old 06-24-2011, 10:01 AM   #3
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Thanks LOL. I have the Total Market. I just wanted an extra hand in small caps. I foresee them going up, once this market gets rolling.
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Old 06-24-2011, 10:18 AM   #4
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I am looking at my 401k and it has SC Index Fund, SC Core Fund and SC Blend Fund. I would like to simplify this. Any thoughts?
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Old 06-24-2011, 12:53 PM   #5
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Generally, "blend", "core", and "index" all mean the same thing. What are the ticker symbols?

I suspect that 2 of the funds are not index funds and thus I personally would not use them. I would look at the costs and expense ratios of each of the funds. But first impression is that they are redundant.

If you have tickers you can look them up at a place like morningstar.com and compare them. I would NOT compare based on performance though. Also perhaps one of them is US small cap, another is only foreign small cap, and the third is a mix of US and foreign small cap. Without tickers or the prospectuses, one cannot really say more.
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Old 06-24-2011, 12:55 PM   #6
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Thanks LOL. I have the Total Market. I just wanted an extra hand in small caps. I foresee them going up, once this market gets rolling.
In that case, if you do not want a growth or value tilt, just go with the small cap index fund NAESX.
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Old 06-24-2011, 06:31 PM   #7
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In order to weight more towards smaller caps for the reasons mentioned in the earlier posts to this thread, in my 403(b) I have equal amounts of a total stock market index fund and an extended market index fund (which, if I am not mistaken, is the total market minus the S&P 500). My choices are restricted to Fidelity funds so I use those, but I imagine something similar could be done with any of the larger fund families.

Interestingly, when I use the Morningstar X-Ray tool to compare total returns over various time periods, indeed the extended market comes in substantially better than the total market. However, there is only comparison data for the past ten years and I am not sure if the past decade has really been representative.
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Old 06-25-2011, 07:49 AM   #8
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Thanks LOL. I have the Total Market. I just wanted an extra hand in small caps. I foresee them going up, once this market gets rolling.
If you are unwilling to make a significant tilt to small cap as well as stomach the tracking error vs. the total market, I wouldn't bother.
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