ETF questions: international & microcaps

[Nords]

I've been watching the latest international & microcap ETFs with some interest. Our retirement portfolio is at the point where we'd have to sell something to buy any of the latest offerings, but I wouldn't hesitate to throw overboard some Tweedy, Browne for an international ETF or even a microcap.

This paid advertising article claims that Vanguard's VIPERs (VGK & VPL) are an equivalent way to achieve international exposure with an ETF at half the cost of EFA. A similar claim is made for emerging markets (VWO vice EEM). Anyone have thoughts on this?

While I'm intrigued by the latest microcaps, I've also been trained to expect low ERs. I'm not quibbling over 40 bp, but I wonder if I should feel "Yikes!" about paying 60 bp for an index ETF that's additionally burdened by issues of liquidity, spreads, & turnover. I wonder if Vanguard is going to poke a pin at Powershares /iShares by putting out a microcap VIPER, in which case I'm happy to wait a few months (and until a new tax year) before jumping into anything.

I'd also post this on RADDR's board but I get the feeling that both boards have about the same readership. Am I missing anyone by not double-posting?

 

[Olav23]

To summarize: (pasted)

Vanguard’s Emerging Markets VIPER tracks a modified version of the MSCI Emerging Markets Index that omits stocks from certain countries that are not as liquid or open to foreign investment, such as Russia. The Pacific VIPER also has close to three fourths of its assets in Japanese stocks.

More significantly, the Vanguard ETF covered 684 securities whereas the IShares ETF covered just 262.

I think that it really comes down to which indexation method makes you comfortable and compared across ERs.

A few interesting links:

http://www.etfinvestor.com/2005/06/comparing_emerg.html

(and I don't usually post blogs, but this has some extra commentary)
http://randomroger.blogspot.com/2005/07/morningstar-writes-back.html

And on the microcap side, sorry if this is in bad form to post links to raddr, but did you catch this lengthy thread?
http://www.raddr-pages.com/forums/viewtopic.php?t=1565

 

[wildcat]

While I'm intrigued by the latest microcaps, I've also been trained to expect low ERs. I'm not quibbling over 40 bp, but I wonder if I should feel "Yikes!" about paying 60 bp for an index ETF that's additionally burdened by issues of liquidity, spreads, & turnover.

I find the micro area interesting. Higher EP is to be expected. Some active micro management is better than a total passive approach. Some may disagree with my move but I replace small cap growth with micro as part of the split in my portfolio. My new will be 15% still in vang value index + 10% micro & no small growth fund

So worth the return in my book and fits my risk profile/time horizon. Lower correlation should suit my portfolio better than small growth.

 

[poyet]

Just a couple of comments:

1) the availability of the 3 ETFS VGK, VPL and VWO enables to better balance your exposure to selected market types than a bundle tracking a very large index (whatever costs or spreads to be considered) ;

2) what's the sensitivity of these products to the $ exchange rate with other currencies in which areas where exposure is sought ? Are they hedged against the variations of USD/local currency ? what I mean is that you often take a dual position with those instruments. For example yesterday I took a large position of a product which tracks the NDX but is listed in Euro (ust.pa). The end result is (NDX / Euro-USD) which enables me to play both a downturn in the Euro and a rise in the NDX.

My two cents.
Patrice.

 

[brewer12345]

I would not touch the micro ETF with a 10 ft stick. Money will flood into this thing and it will either badly distort the market for the stocks it holds or it will morph into something else (small cap ETF). No thanks.

 

[Nords]

Money will flood into this thing and it will either badly distort the market for the stocks it holds ... 

There's a big risk of a Ponzi pyramid. We call that "momentum investing" as Powershares, Barclays, & Vanguard all chase after market makers while waving fistfuls of dollars to create ETF units.

As you said, that means the buyers will gradually destroy their own indices as they drive up the capitalization of the companies whose stocks they're buying. When can these guys kick a growing microcap out of their index? How can they sell off the stocks (while keeping an orderly & liquid market with small spreads) they bought last year and where will they find more? At this rate they'd have to find at least two or three new microcap companies for every one that leaves their index.

While I'm happy to chase momentum with my personal portfolio, I'm reluctant to do so with my retirement portfolio.

 

[ats5g]

John Montgomery of Bridgeway talked about BRSIX, microcaps, and other stuff in a 2001 M* article:

John Montgomery of Bridgeway Funds. Personally, I'd rather own the Bridgeway micro cap [tax managed] fund [BRSIX], rather than the ETF's right know because I could by it directly from Bridgeway, rather than waiting for the spreads on the ETF's to come down.

- Alec

 

[Nords]

Personally, I'd rather own the Bridgeway micro cap [tax managed] fund [BRSIX], rather than the ETF's right know because I could by it directly from Bridgeway, rather than waiting for the spreads on the ETF's to come down.

First there's the "active management alpha" philosophical debate. I'm not willing to pay extra for that.

Second there's the higher costs of DCA'ing into ETFs, but that's not an issue for retirees making buy & hold bulk purchases on $8 commissions.

Third there's the expense ratio. How does Bridgeway's ER compare to the ETF? One would expect that they'd have similar costs for spreads & turnover, although Bridgeway presumably has a bit more leeway on when to sell the overcapped winners.

Fourth-- is anything from Bridgeway even open any more?

 

[wildcat]

Personally, I'd rather own the Bridgeway micro cap [tax managed] fund [BRSIX], rather than the ETF's right know because I could by it directly from Bridgeway, rather than waiting for the spreads on the ETF's to come down.

That is how I am playing it.  ETFs...on your own if you get in that.

Third there's the expense ratio.  How does Bridgeway's ER compare to the ETF?  One would expect that they'd have similar costs for spreads & turnover, although Bridgeway presumably has a bit more leeway on when to sell the overcapped winners.

Fourth-- is anything from Bridgeway even open any more?

Nords -

BRSIX or the Ultra Small Mkt Index is now open.  ER is around .67.  True, they have more control over what goes in the index and out, avg market cap in fund is 275 mil.     

 

[ats5g]

First there's the "active management alpha" philosophical debate. I'm not willing to pay extra for that.

Second there's the higher costs of DCA'ing into ETFs, but that's not an issue for retirees making buy & hold bulk purchases on $8 commissions.

Third there's the expense ratio. How does Bridgeway's ER compare to the ETF? One would expect that they'd have similar costs for spreads & turnover, although Bridgeway presumably has a bit more leeway on when to sell the overcapped winners.

Fourth-- is anything from Bridgeway even open any more?

Hey Nords,

M* has the expense ratio of BRSIX at 0.67%, but the fund's site says 0.73% [as of 6/30/05]. It looks like the micro cap etfs' expense ratios [russell micro + powershares] are 0.60%. As wildcat said, BRSIX is open to new investors.

I don't think that BRSIX is actively managed, but it does sample the CRSP 10, and only holds around 500 stocks [not the 1,000+ that the index holds], so it can have significant tracking error [like it has recently] from the sampling as well as the tax management and holding onto stocks.

- Alec