what are ETFs and/or financial products that take this into consideration? what difference does it make in terms of volatility and/or expected returns to invest in something like SP500 or $VT compared to Shiller-PE-adjusted products? does this matter in the long-term, or better, when exactly is "long-term" long enough so that Shiller PE doesn't matter and one can just go with SP500/$VT without sleepless nights?
> what are ETFs and/or financial products that take this into consideration?
They often have something like "Value" in the name, e.g. VTV, IUSV, SPYV. While not explicitly targetting now Shiller PE, they usually have significantly lower PE than "growth orienten" stocks (such as most of the tech megacaps that currently dominate SP500, VT and other market cap weighted funds). What exactly goes into "Value" funds is either too opaque or takes too long to explain in a comment.
> what difference does it make in terms of volatility and/or expected returns to invest in something like SP500 or $VT compared to Shiller-PE-adjusted products?
Volatility is likely (but not certainly) lower. Expected returns: convincing narratives could be told either way, but nobody knows with any certainty.
> does this matter in the long-term, or better, when exactly is "long-term" long enough so that Shiller PE doesn't matter and one can just go with SP500/$VT without sleepless nights?
Again, nobody knows, and you should be skeptical about pretty much any opinion that smells like investment advice. The posted graph shows that the current S&P 500 PE (or some approximation thereof, SP500 didn't exists until the 1950s) is high by historical standards. What to make of that is open to different interpretations.
Many people might intuit some sort of mean-reversion process behind (Shiller-)PE, but
- it's unclear which to "mean" and at what time frame it would revert
- as another poster pointed out, mean-reversion could take place by E going up as well as P going down
For the OP, if you are looking for a classic on "value investing," Benjamin Graham's "The Intelligent Investor" will lay it out. I invest broad index rather than value, but it's a good read.
One of the more straightforward things you can buy is a "value" index fund, which will tend to be more durable / low beta / lower P/E / a bit more recession-proof. The tradeoff is lower vol and lower* returns -- you'll partly miss out on the rest of this big run-up.
Value funds are widely available (often paired with the opposite "growth" funds), and you can put some money there if it helps you sleep. The concept might already be oversubscribed, idk, but at least it's simple and you're still owning equities at 1x, no weird derivatives. It's not a big fancy ripoff like some sort of "structured product" that you'll get if you ask your question here of a self-interested financial advisor.
If you think you've got too much Mag 7, you could also go for small and midcap funds. Often means higher beta & vol, but less concentrated. But who knows, aggregation theory might still not yet be fully played out, and the giants could keep eating more and more of the pie.
Bond funds have a place, too.
* Or maybe not, see reducesuffering's comment below.
I know there's consensus that smaller caps are actually higher beta and thus higher risk. However, I don't believe there's any consensus on value being lower beta, less risky, or less returns. After all, large cap and mid cap value also outperformed total market: https://www.portfoliovisualizer.com/backtest-asset-class-all...
I think it's still accurate to say that you'll lag the total market during the run-up, right? So anyone buying value should be prepared for that feeling of FOMO, in exchange for long-term peace of mind.
Then again, the beta on your small cap portfolio is 1.04 (higher than your mid/large cap portfolio .93). This matches my intuition: going for value means lower beta, but going small means higher beta. So for small cap value, these effects sort of cancel out and you end up slightly above 1.
Altogether, small cap value is an interesting choice. Not bad.
No that wouldn't be accurate either, as a total market bull run like '91 - '96 or definitely '01 - '07 still had value outperforming. There's enough uncorrelated returns that it's too tough to say how it will behave during each decade.
Yes, I agree 99% of financial funds are rip offs with 1% fees and dubious payout. Personally, only 0.10% or less total market index funds make sense to me, but Small Cap Value as a low cost index strategy could be an ok addition.
