Barron's had an interesting writeup about value funds having done well this year including the iShares MSCI USA Value Factor ETF (VLUE). It is up a whopping 44% this year versus 7% for the iShares S&P 500 Value ETF (IVE).
When you see that sort of dispersion, I think the first question to ask is what the hell is causing that sort of outperformance (or lag as the case may be)? In the case of VLUE, it owns Micron (MU) at a current 22% weighting. MU is up 243% YTD so at 22% of the fund, it has not been rebalanced yet. Barron's neglected to make the point about Micron but several reader comments made the same observation I am making. The number two stock is Cisco (CSCO) with just under 5% of the fund.
A big point being made was that the line between value and growth appears to be blurring as more and more tech is showing up in value funds. The tech sector comprises 42% of VLUE, for IVE it is only 22% which seems kind of high. Apple is the largest holding in IVE at almost 8%, tech adjacent Amazon is second at 4%. The DFA US Large Cap Value Fund (DFLVX) has only 14% in tech for context.
iShares has several large cap growth ETFs. BGRO and ILGC both have 52% in technology. If both growth and value are heavy in tech and tech adjacent, the odds of doubling up on the same stocks are pretty high as well as having just a ton of tech. Apple and Amazon are both top four holdings in growth funds BGRO and ILGC along with value fund IVE but don't appear to be in VLUE.
I've never done anything with funds that target growth or value. I think managing sector weightings is very important and if the lines are blurring between growth and value then managing sector weightings becomes harder to do. If someone buys VLUE today thinking they're going to get X% of their tech from the fund, whenever MU gets rebalanced down it will change the tech exposure of the portfolio. VLUE is 42% tech with half of it being one stock.
It's a lot simpler to use sector funds and some thematic funds for any portfolio that doesn't use individual stocks. Utilities are always going to be utilities and a defense contractor themed ETF is usually going to be a mix of industrials with a little bit of specialized tech thrown in unless the name indicates otherwise.
Quick pivot to the behavioral challenge of spending down from a retirement account. When you build up some sort of account balance, retirement or otherwise, it creates a sense of security. Pulling from that account combined with seeing it shrink doesn't sound easy to me. Over the last many years, chances are someone taking a reasonable amount out has seen their account balance still grow because of how well markets have done. Taking 4-5% out is very unlikely to result in running out of money early but with a decade like 2000-2009, taking 4-5% out could have easily cause the balance to decline.
Looking back in hindsight, yes just staying the course was the obvious thing but maybe not so easy to actually stick to at the low in 2008 or early 2009.
This is something I've long recognized in myself. I think it will be emotionally challenging to pull money out whenever the time comes but my thinking on this has evolved a little, maybe someone will find this helpful or useful.
More than just generally spending down if the market sequence is not great causing discomfort, I think when the time comes, there will be some number in my account that would be difficult to go below. Right here, right now there is number that makes me feel comfortable and the dollars above that are gravy. I'd be ok spending the extra, spending the gravy. If I can continue to work to RMD age, 75 in my case, that's still quite aways from here so I have no idea what my comfort number would be by then between price inflation and hopefully account growth (price appreciation and any contributions I might make) or obviously what my gravy number will be but this is a useful tweak to my thought process.
You can't take out $15,000/mo from a $1.8 million account and expect it to last but if you have that much money when you retire, it would be nice to take your $80.000-$90.000/yr without being constantly stressed out about it.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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