No. of Recommendations: 3
Hi Manlobbi,
You wrote, in the OP of this thread:
"
This chart shows the ratio of S&P MidCap 400's PE ratio to S&P 500's PE:
https://www.rbcwealthmanagement.com/_assets/images...This relative valuation can be taken advantage of by either moving funds from a cap weighted index such as SPY to an equal weighted such as RSP, or alternatively purchasing a mid cap index such as MDY. In either case you are dramatically (or completely) reducing exposure to the large cap firms. If you are holding QQQ, it would be an especially good time now to change it to QQQE.
"
Sadly, it appears the image is no longer available there, but I found the article at RBC:
https://www.rbcwealthmanagement.com/en-asia/insigh...It shows the charts that compare both small cap and mid cap PE ratios to that of the S&P 500, and, when written in Jan 2023, both small and mid cap indexes were significantly lower PE compared to the S&P than average. At that time the ratios of their PEs to S&P500 PE were about .8 vs average of ~1.1-1.2.
Since January 1 2023, the S&P 500 has outperformed the S&P 600 small cap index substantially, gaining ~22% vs ~12% for Small Cap or ~14% for Mid Cap, so the valuation gap has widened, if we assume longer term forward prospects for those collections of companies are the same as they were.
I've been building up my allocation to Small Cap Value (SCV), through the Dimensional Funds Small Cap Value ETF DFSV. I believe the academic research identifying SCV as a typically out-performing sector of the stock market is backed up by both past results and tenants of behavioral psychology, i.e. people want to buy and own stocks of companies they know (typically large cap) and which have been performing great (typically growth), so those stocks tend to be highly valued. The inverse, small-cap value, tends to be less popular, hence less highly valued, and so outperforms, on average.
I know some prominent investors/posters here dismiss that reasoning, but it rings true to me, and I wish I'd stuck to my SCV-heavy portfolio of mostly index funds + Berkshire instead of wandering off into the bushes seeking value in individual stocks where, to be frank, I don't have a good record of returns, overall.
