MDY vs VTI?

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gonetowindsurf
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MDY vs VTI?

Post by gonetowindsurf » Fri Jan 28, 2011 8:18 am

It appears MDY - the mid cap etf is making new highs. In looking at a 10 year history, the component seems  to perform similar to VTI in overall fluctuation, but it is responding quite well to the current market environment.
Is there a downside that I am not seeing in MDY vs VTI? I am intrigued by its rebound from the crash of 08.
Would be interested in other analysis.
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Re: MDY vs VTI?

Post by AdamA » Fri Jan 28, 2011 9:23 am

There's no downside that you're missing...but there's also no downside that everyone else is missing. 

It's basically impossible to predict which slice n' dice portion of the market will outperform, but it usually isn't the one that's outperformed recently. 

Expense ratio for MDY is .25...VTI's is .07.

Midcaps may continue to do well, but I very much doubt the outperformance will be permanent. 

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Re: MDY vs VTI?

Post by Drewskers » Mon May 09, 2011 2:52 pm

I think this question deserves much closer examination. In Fail Safe Investing (p. 108 in my copy) Harry Browne says "... choose funds that invest in a broad cross-section of stocks ... in addition you want funds that invest in volatile stocks, in the hope they will move farther than the general stock market when times are good" .

This volatility argument is the exactly the same kind of reasoning long-term bonds are preferred to intermediate-term bonds for the bond portion of the PP.  So why not be open to considering whether there are broad-based US stock funds available that are more volatile than VTI or SPY?

I think by any measure, MDY is a reasonably broad-based fund, tracking an index comprised of 400 stocks, well-diversified with holdings in all sectors; the most concentrated holding being .82% of the fund, and the top 10 holdings represent only 6.87% of the fund's holdings. Those top ten holdings represent 7 different US market sectors fairly evenly. (Source: http://portfolios.morningstar.com/fund/ ... region=USA)

Looking at VTI, it has 3,387 holdings, and by that measure there is no contest with MDY. But check this out: the top holding in VTI represents 2.61% of the fund (3 times higher than MDY), and the top 10 holdings represent 15.03% of the fund (a little more than twice VTI)! The top ten holdings represent 6 sectors but there is quite a heavy concentration in technology and energy. (For what it is worth, the top ten holdings in VTI are the same as the top ten holdings in SPY, where they represent 18.56% of the fund, see http://portfolios.morningstar.com/fund/ ... region=USA). In terms of concentration , I don't think it is over-stating anything to say that VTI is somewhat less diversified than MDY.

With regards to volatility, here is the data on Morningstar for VTI:

http://performance.morningstar.com/fund ... ture=en-US

And here is the data for MDY:

http://performance.morningstar.com/fund ... ture=en-US

Be sure also to look at the "Upside & Downside Capture Ratio" at the bottom of those pages. Some good news here is that VTI is somewhat more volatile than the S&P 500. But look at MDY! Over any time frame over the last 15 years, and by any measure, it is significantly more volatile than the S&P 500.

Harry Browne suggested holding the stock portion of the PP in three different mutual funds, and I think by his own criteria, MDY is a perfectly good choice for one of those funds!
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Re: MDY vs VTI?

Post by MediumTex » Mon May 09, 2011 2:57 pm

What happens if the market goes into another "Nifty 50" group delusion as it did in the early 1970s?

You would miss it if you were in mid-caps.

Be careful...remember what we are trying to do with the equity piece of the PP.
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Re: MDY vs VTI?

Post by Drewskers » Mon May 09, 2011 3:01 pm

Hmmm here's something else I just noticed, for what it is worth. I won't provide links because it's in the subscriber section of Morningstar. Harry Browne called for holding stocks in one's own country, right? Well, per Morningstar VTI holdings are 94.38% US equities, 4.05% greater Europe, and 1.57% greater Asia (identical to SPY, by the way). Whereas, MDY is 97.79% US, 1.68% greater Europe, and .53% greater Asia. Not a big deal but for PP purposes, MDY is a little more "pure" than VTI.
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Re: MDY vs VTI?

Post by Drewskers » Mon May 09, 2011 3:05 pm

Not if you follow HB's advice and hold three different stock funds. (My assumption is "different" means "different" so all three would not be mid-cap trackers).
MediumTex wrote: What happens if the market goes into another "Nifty 50" group delusion as it did in the early 1970s?

You would miss it if you were in mid-caps.

Be careful...remember what we are trying to do with the equity piece of the PP.
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Re: MDY vs VTI?

Post by MediumTex » Mon May 09, 2011 3:12 pm

Drewskers wrote:
MediumTex wrote: What happens if the market goes into another "Nifty 50" group delusion as it did in the early 1970s?

You would miss it if you were in mid-caps.

Be careful...remember what we are trying to do with the equity piece of the PP.
Not if you follow HB's advice and hold three different stock funds. (My assumption is "different" means "different" so all three would not be mid-cap trackers).
I believe HB's final advice was to own an S&P 500 fund for the stock piece.

Also, I thought the OP was asking about using a mid-cap fund instead of an index fund capturing the entire market.
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Re: MDY vs VTI?

Post by AdamA » Mon May 09, 2011 3:13 pm

My bet is that it probably won't matter very much.  Sometimes it will beat the S&P, sometimes it won't.  

I was reading about volatility somewhere a few months ago (wish I could remember where, probably on this site), and the point was made that just because an asset class has been volatile in the past doesn't mean it will stay volatile in the future.  

I don't think there's any harm to be done choosing mid caps over large caps, as long as you feel comfortable enough to stick to your plan during periods wherein your version of the PP is underperforming the more traditional PP.  
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Re: MDY vs VTI?

Post by moda0306 » Mon May 09, 2011 3:13 pm

Why did HB recommend holding in 3 different funds?  What if they were all 3 Vanguard?

What would/did HB say about ETF's...

Maybe insist that 1 of your 3 are a mutual fund?  
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Re: MDY vs VTI?

Post by AdamA » Mon May 09, 2011 3:15 pm

moda0306 wrote: Why did HB recommend holding in 3 different funds?  What if they were all 3 Vanguard?
I believe he meant that the funds should be similar, just with different brokerages in case one has a problem. 
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Re: MDY vs VTI?

Post by moda0306 » Mon May 09, 2011 3:19 pm

Well my worthless as balls 401(k) (with no gold or LTT option) should serve that purpose just fine, since they do offer every random stock fund under the sun.

At least it's good for SOMETHING now.
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Re: MDY vs VTI?

Post by Drewskers » Mon May 09, 2011 3:20 pm

I don't know what HB's last words were. But on p. 108 of Fail Safe Investing (published in 1999) Harry Browne wrote "... choose funds that invest in a broad cross-section of stocks ... in addition you want funds that invest in volatile stocks, in the hope they will move farther than the general stock market when times are good" . The reasoning there seems pretty solid, and, as I noted before, very much similar to the reasoning one uses for selecting long-term bonds rather than short or medium-term.

If these things have changed since 1999, then as far as I am concerned, it's not much of a "permanent" portfolio.
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Re: MDY vs VTI?

Post by upside » Mon May 09, 2011 3:28 pm

Drewskers wrote: I don't know what HB's last words were.
Listen to the radio show archives then.
Drewskers wrote: If these things have changed since 1999, then as far as I am concerned, it's not much of a "permanent" portfolio.
Wow, what a zinger. Things did change. Reread MT's last post.
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Re: MDY vs VTI?

Post by Drewskers » Mon May 09, 2011 3:32 pm

Page 108 of FSI again: "Use three funds, rather than one, so you're protected against mistakes any individual fund might make."

Page 110: "I haven't changed any of my fund recommendations in ten years".

Here's his list of funds on page 156 (followed by issuing companies, where he listed them):

Aggressive Growth Portfolio / Permanent Portfolio Family of Funds

American Century Growth Fund

Columbia Growth Fund

Evergreen Fund / Evergreen Keystone Service

Manhattan Fund / Neuberger & Berman

Morgan Growth Fund / Vanguard

Scudder Large Company Value Fund

Tudor Fund / Weiss, Peck, Greer
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Re: MDY vs VTI?

Post by moda0306 » Mon May 09, 2011 3:37 pm

I know we discuss Value vs Growth stocks, but I have to imagine that eliminating dividend paying stocks has to result in a more volatile portfolio... though this probably has been discussed and disproven and I'm just behind the curve here.

It just seems like if you could get a VTI without the large-cap dividend stocks (people (used to) often view these much like bonds) you could get the higher volatility you want out of your stock portion... and it'd be more tax-efficient too.
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Re: MDY vs VTI?

Post by MediumTex » Mon May 09, 2011 3:40 pm

Almost any stock market exposure is going to give you roughly acceptable results in a PP setting, whether it's small cap, mid cap, or total market, although an all large cap probably wouldn't give you the volatility you need.

I think we are talking about what might work best under all market conditions.  Given that small cap, mid cap and large cap all seem to have their day in the sun, I think HB came to believe that buying the whole market was the best approach.

On page 73 of my 2003 version of "Fail Safe Investing" HB wrote: "The most appropriate mutual funds are the S&P index funds."

I believe that HB spoke on his radio shows about his rationale for revising his earlier views and just buying the market rather than trying to pick which part of the market was going to provide the additional volatility that the PP is looking for in each asset class.
Last edited by MediumTex on Mon May 09, 2011 3:43 pm, edited 1 time in total.
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Re: MDY vs VTI?

Post by l82start » Mon May 09, 2011 3:46 pm

i thought at one point he even updated from recommending the s&p 500 to suggesting a total stock market index, but i could be wrong on that, and i don't know where to look to try to confirm it.
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Re: MDY vs VTI?

Post by moda0306 » Mon May 09, 2011 3:48 pm

So MT,

Regardless of MC, LC, SC, if you could get a VTI sans high-dividend stocks would you?  

l82,

I think this was a tweek made by Craig.  I could be wrong, as well.  Overall, I like VTI a lot, but I don't like that there are high-dividend paying stocks in what I want to be my volatile stock piece.
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Re: MDY vs VTI?

Post by MediumTex » Mon May 09, 2011 3:51 pm

I would still want the dividend payers, because I know crazy things like the Nifty 50 can occur (where in the middle of a bear market big blue chips can see their P/Es run up to the 60s and 70s against a backdrop of falling or stagnant equity values in the rest of the market).
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Re: MDY vs VTI?

Post by dualstow » Mon May 09, 2011 5:17 pm

MediumTex wrote: On page 73 of my 2003 version of "Fail Safe Investing" HB wrote: "The most appropriate mutual funds are the S&P index funds."

I believe that HB spoke on his radio shows about his rationale for revising his earlier views and just buying the market rather than trying to pick which part of the market was going to provide the additional volatility that the PP is looking for in each asset class.
I hold VTI and Vanguard's 500 Index fund, but I've often wondered about this. In 'Best Laid Plans..' (1987), Harry does stress volatility, and I see a list of funds much like those in Drewskers' post. (Hardcover, page 340).  In 'Fail Safe' S&P. In the radio shows, S&P. But, I never did find a show or book in which he commented on the change.
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Re: MDY vs VTI?

Post by Jan Van » Tue May 10, 2011 5:01 pm

Was think along the same lines as dualstow, also because I just read 'Best Laid Plans...'. If I went for midcap I'd probably go for the Vanguard ETF, VO. Expense ratio 0.12%. Or maybe for the extended market ETF, VXF. But then again, in the long run it probably won't matter that much, vti, vo, vxf... So why bother, except to satisfy that ever present tinker-itch?
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Re: MDY vs VTI?

Post by Drewskers » Tue May 10, 2011 10:24 pm

There is a free ETF portfolio back-test at ETFReplay:

http://www.etfreplay.com/combine.aspx

Using that site, I back-tested a portfolio of 25% each GLD, TLT, SHY, and VTI from January 3, 2006 to May 10, 2011. (The time frame was as long as I could make it given the date of inception for the youngest ETF).

Over that period of time there was a total return of 63.7%, volatility of 9.0%, Sharpe Ratio 0.65 and CAGR 9.7%.

The same back-test substituting VO for VTI gave a 66.4% return, volatility 9.3%, Sharpe Ratio 0.66 and CAGR 10.0%.

This seems under-whelming, but VO gained 35.6% over that time period, while VTI only gained 24.8%. Both are absolutely swamped by GLD, which gained 174.8%. If GLD had not been so strong (not to omit from mention, both long and short treasuries were also very strong at 29.2% and 22.4%, respectively), the beneficial effect of using VO rather than VTI would be more evident.

Of course, that is an extremely limited back-test period, and probably a very unique period at that!
Last edited by Drewskers on Tue May 10, 2011 10:40 pm, edited 1 time in total.
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