Long/Short Investments
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Long/Short Investments in L/S Equity: Valuation and Ideas,

The Market’s Top Small-/Micro-Cap Fund

It’s of benefit to have diverse exposure across multiple asset classes and within them. For those who invest in mostly individual stock selections or by indexing in an S&P fund (or similar), branching out into other asset classes is advisable, or, at the very least, stocks that correlate more mildly with existing allocations. As such, putting money into small- and micro-cap stocks can provide a degree of diversification and slightly improve the risk-adjusted returns of the portfolio.

Most stock ETFs are weighted most heavily toward to the bigger names due to the cap-weighted structure most of them have. As such, even with funds with several hundred holdings (as many do), the top 10-15 names will often control 50% or more of the portfolio.

With Vanguard’s VIOO fund, no stock – out of the 601 available – has more than a 0.50% allocation. Consequently, one stock won’t move the fund too significantly. Overall, the fund has a +0.84 correlation with the broader S&P 500 since it was first introduced in late-2010.

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Moreover, investing into small- and micro-caps isn’t so much for diverse exposure, but rather to improve a portfolio’s returns. The idea is that smaller firms are likely to grow more quickly than larger firms, generating higher returns over time. Nearly every stock has a market cap of under $5 billion.

Within the context of an ETF, there is some safety inherent in having a large number of holdings to offset the inevitable failures, high losses, and general volatility of many in the bunch. On top of that, there is no bias in this particular fund for either “growth” or “value” stocks, which provides some level of balance. Best yet, unlike some funds which charge upwards of 50 bps (or more) for small- and micro-cap exposure, VIOO’s expense ratio is just 0.15%.

As such, VIOO could make sense for those wanting inexpensive, small-cap exposure to diversify one’s equity holdings (or general asset mix).

Complete holdings