Building clients' portfolio investment recipe is both art and science. We created three flavors for our client portfolios in order to build the right mix for each client.
The first "flavor" is a nice solid vanilla core model, the second is slightly spiced with some environmental and sustainable funds, and the third is our 100% "organically sourced" models. Our ingredients are high quality and we screen them carefully using various third-party data providers such as AsYouSow.org and YourStake.org software. We also apply additional screens for our 100% ESG models. All of our portfolios are well diversified among large, medium, small companies' funds, as well as international and emerging markets funds. We also add bonds and real estate funds. And we invest primarily in exchange-traded funds (ETFs) for their lower cost and tax efficiency and then include a few mutual funds where high quality ETFs are not yet available.
In this blog post we describe four of the small company stock funds that we use:
Vanguard Small-Cap Value ETF (VBR) is one of the best small-value funds available, with a 0.07% expense ratio and a Morningstar Analyst Rating of Gold. This index selects stocks from the CRSP U.S. Small Cap Index, which excludes the largest 85% and smallest 2% of the total investable stock market by total market cap. It ranks firms by a composite style score that embodies several measures of growth (like historical growth in earnings) and value (like price/book ratio). CRSP sends stocks that constitute the cheaper half to this index, while the other half shapes the CRSP U.S. Small Cap Growth Index. [In other words, it looks for small company stocks that are on "sale." Everyone likes a sale!]
Vanguard S&P Small-Cap 600 Value ETF (VIOV) maintains a sizable cost advantage over competitors, priced within the lowest fee quintile among peers. 0.15% expense ratio and a Morningstar Analyst Rating of Silver. This portfolio diversifies risk effectively. Its broad reach eases concern over firm-specific risk, and financial stocks' 23% share of the portfolio is its largest sector exposure. Blended stocks improve diversification as well. [Basically this fund owns stock from the 600 smallest US companies. We believe that small companies have more room to grow and over time this fund adds 1% to 2% more in investment returns over time than larger companies.]
Dimensional U.S. Small-Cap ETF (DFAS) receives a Morningstar Quantitative Rating of Silver. The portfolio maintains a cost advantage over competitors, priced within the cheapest fee 1/5th among peers, 0.28% expense ratio. The fund excludes REITs, recent IPOs, acquisition targets, and stocks below $10 million in market cap. It also excludes the most expensive (based on price/book) and least-profitable stocks that meet its size criterion. Traders have the flexibility to substitute stocks with similar characteristics and patiently work into and out of positions. And they'll often delay buying and selling stocks with negative and positive momentum, respectively. [We like this fund because it takes on a hybrid active approach to investing while maintaining the pricing benefits of a passive index fund.]
Nuveen ESG Small-Cap ETF (NUSC) has a 0.3% expense ratio and a Morningstar Analyst Rating of Silver. The index is comprised of small US companies that meet certain environmental, social, and governance ("ESG") criteria. The portfolio is composed of 607 holdings and is diversified among those holdings. [We like this fund because it has a solid track record in selecting small US company stocks while screening out companies that don't meet investor objectives with respect to pollution, guns, private prisons, etc.]