Small-cap value ETFs are all about the value. Investors know this and ensure that one or two of such funds are in their portfolios. But that is just the simple explanation – there is more to these popular funds than meets the eyes. Join me as I take you through the world of small-cap value ETFs, how they work, and their upsides and downsides.
Are you on a hunt for the top small-cap value options out there? Then my list of the top small-cap value ETFs is a good place to start. I am confident you will find the right fund that fits your investment goals and principles on the list.
So, without wasting any time, let’s get to it!
Here are the key takeaways from this comprehensive review;
- The top 9 small-cap value ETFs include AVUV, IWN, IJS, SVAL, SLYV, VTWV, VBR, VIOV, and RZV.
- A small-cap value exchange traded fund (ETF) offers investors exposure to the U.S. small-cap value sector of the equity market.
- This small-cap value sector comprises small-cap companies with lower valuations and slower growth than the other small-cap companies.
- These funds are parts of most well-constructed portfolios because of their higher potential returns than large-cap stocks.
- Although value stocks are less volatile than growth-oriented stocks, they are still considered risky and unstable due to their smaller sizes and fewer financial resources.
- An investor’s choice(s) among these options will depend on a few factors, including fund size, diversification, historical performance, issuer, expense ratio, sector exposure, and the number of holdings.
Small-Cap Value ETFs: Overview
The name, small-cap Value ETFs, has two essential parts – ‘Small-Cap’ and ‘Value.’ We must understand these two separately to grasp what these types of ETFs are all about. Small-Cap Value ETFs are small-cap because they invest in a basket of stocks or companies with relatively small capitalizations. Small-cap companies have a market value of between $250 million to $2 billion and are relatively under the radar compared to their larger counterparts, so institutional investors largely ignore them. But it presents a perfect opportunity for value investors to level up and position themselves for the potentially higher returns, provided they can deal with the volatility.
The value part is defined based on two elements: low valuations, i.e., low price ratios and high dividend yields, and low growth rates for cash flow, sales, and earnings. Value investing is about finding undervalued stocks and holding them based on their intrinsic value for the long term to maximize gains. Value stocks may pay dividends to their investors, but their growth over time is the actual benefit.
Calling a fund small-cap value might sound like an oxymoron because the two conjoining terms appear contradictory. But it is not. They are ETFs that invest in value stocks that fall into the small-cap category. small-cap value ETFs are specially devised to offer investors exposure to small-cap companies or small-cap stocks based on various value factors, including dividend yield, cash flow, debt-to-equity, and price-to-book ratio.
The following section takes a closer look at the upsides and downsides of these funds.
Small-Cap Value ETFs: Pros and Cons
It is important to note that small-cap value ETFs are not perfect – no index fund is. Some investors avoid them for their cons, while others prefer them for their pros. Let’s start with the positives.
Pros of Small-Cap Value ETFs
1. They offer higher growth potential.
Investing in new or upcoming companies means you get to grow with them. Such companies often develop new and exciting ideas that translate to exponential small-cap growth over time. The more they grow, the more you will likely see impressive gains as an investor. This is the primary reason investors choose small-cap funds over their large-cap counterparts.
2. They are highly diversified.
One of the best ways an investor can invest in multiple smaller companies at a go is through small-cap value ETFs. Investors can put their money in a basket of small-cap value stocks by investing in only one security, limiting volatility, and maximizing diversification.
3. Impressive track record.
Small-cap ETFs are more likely to deliver solid returns to investors if the stocks in their portfolio grow and appreciate over time. Past performance records have shown that small value stocks have returned more investors than their large value counterparts or growth stocks over time. The returns are even bigger if compounded over time.
4. Relative stability during market volatility.
A small-cap ETF would hold its own during periods of stock market volatility. Unlike large-cap and mid-cap stocks, they are less susceptible to shedding value when there are price fluctuations or corrections.
5. They cost less.
Every small-cap ETF is known for its lower expense ratio. This helps investors minimize how much they pay in management and maximize the returns they get to keep. So, they are excellent choices if you are looking to cut costs.
Cons of Small-Cap Value ETFs
1. They can be volatile.
The inherent downside of this group of ETFs is their volatility. The stocks in the portfolio of most small-cap value ETFs are relatively newer and still in the early stages. Therefore, they are more susceptible to volatility than other funds, translating to a higher level of risk for investors than mid-cap and large-cap value options.
2. Good performance takes time.
When investing in small-cap value ETFs, you must be ready to play the waiting game. The small-cap value stocks you invest in will take some time to grow and appreciate. You may need to look elsewhere if you are in the game for short-term returns.
9 Best Small-Cap Value ETFs To Consider
Here is a list of the top small-cap value ETFs specially curated for you;
1. Avantis® U.S. Small-Cap Value ETF (AVUV)
The first entry on my list is the Avantis® U.S. Small-Cap Value ETF (AVUV). Issued by Avantis Investors, AVUV is an actively-managed portfolio comprising U.S. small-cap value companies based on fundamental criteria selected by the fund manager. These include shares outstanding, expenses, revenue, cash flow, and price-to-book value.
Although AVUV does not seek to track the performance of any specific index, it adopts the Russel 2000 Value Index as its benchmark. Its goal of long-term capital appreciation is pursued by focusing on firms trading believed to be of low valuations and high profitability ratios. While it pursues indexing-related benefits, the fund is designed to add value by using the information in current prices to make investment decisions.
It was launched in September 2019, so it is relatively new. However, within that period, it has outperformed its benchmark considerably. For instance, while the Russel 2000 Value Index delivered 3.32% last year, AVUV returned an impressive 12.29% within the same period. It is also cheap, with an expense ratio of 0.25%.
iShares Russell 2000 Value ETF (IWN) is the first of the three iShares Small-Cap Value ETFs on my list. It offers exposure to a specific category of small-cap U.S. companies, making it the ideal fund for investors looking to tilt their portfolios towards value stocks. IWN’s objective is to track the investment results of an index comprising the small-cap U.S. equities with measurable value characteristics.
As indicated in its name, the IWN benchmark is the Russel 2000 Value Index. While it does not replicate this index, it relies on the representative sampling indexing method to reconstitute its index. There are 1,413 holdings in the IWN portfolio, with a net asset of over $11 billion. Its significant exposure is in Financials (27.87%), Industrials (12.67%), Real Estate (11.75%), and Health Care (11.01%).
Since its launch in July 2000, the iShares Russell 2000 Value ETF (IWN) has rewarded investors with impressive returns. For example, its total return since inception is 9.42%, and 12.51% in the last three years. It is also relatively cheap, with an expense ratio of 0.24%.
The second iShares entry on my list is the iShares S&P Small-Cap 600 Value ETF (IJS). It tracks the investment returns of an index comprising small-cap U.S. equities of economic value characteristics. However, it is cheaper and more tax-efficient than IWN.
Interestingly, the benchmark index of IJS is the S&P SmallCap 600(R) Value Index, and it tracks the performance of this index using the representative sampling technique. In terms of performance, its total return since its inception in July 2000 is 10.13%. There are 514 stocks in its holdings and about $8.5 billion in assets under management. It is also cheaper, with an expense ratio of 0.18%.
Now to the third iShares value ETF on the list, the iShares US Small-Cap Value Factor ETF (SVAL). It exposes investors’ portfolios to the historically rewarded value and size factors through 250 U.S. small-cap companies of considerable economic value. The fund screens the stocks in its collection using factors like liquidity, risk, leverage, and sentiments.
SVAL tracks similar investment results to the other two iShares Small-Cap Value ETFs on the list. It has 283 assets in its holdings and $144.2 million in net assets under management. It was launched in 2020, so there is relatively limited data to assess its performance. However, it has delivered 39.87% in returns since 2020 and 2.79% last year.
The net expense ratio of SVAL is 0.20%.
5. SPDR® S&P 600 Small-Cap Value ETF (SLYV)
Investors looking to go bullish on value stocks will find the SPDR® S&P 600 Small-Cap Value ETF (SLYV) a suitable investment vehicle. According to SSGA, the fund seeks to reflect the total return performance of the S&P SmallCap 600 Value Index, which comprises stocks with the most substantial value characteristics based on sales to price ratio, earnings to price ratio, and book to price ratio.
Since its launch in September 2000, SLYV has amassed $3,851.27 million in assets under management and currently invests in stocks of 460 different small-cap companies. It has returned 10.92% since its inception, but the three- and five-year returns are also impressive (14.18% and 9.31%, respectively).
SLY’s gross expense ratio is just 0.15%.
6. Vanguard Russell 2000 Value ETF (VTWV)
Vanguard Russell 2000 Value ETF (VTWV) is the first of three Vanguard small-cap value ETFs on this list. According to Vanguard, the stocks in VTWV’s holdings were arrived at by dividing the Russell 2000 Index (its traditional benchmark index) into growth and value subsets using the price-to-book value as the only factor. The holdings were also selected and weighted using this same factor.
Although the fund’s sector breakdown represents the broader market, the index is reconstituted yearly. The goal is to offer investors a solid exposure to small-cap stocks basket with a side of micro-caps. If you are an investor that prioritizes long-term investment growth, VTWV may be right for you. VTWV was launched in September 2010. While it has not been the best performer in the last year or two, it has grown by 10.13% since its inception and 12.17% in the previous three.
Its expense ratio is 0.15%.
7. Vanguard Small-Cap Value ETF (VBR)
The Vanguard Small-Cap Value ETF (VBR) is designed to reproduce the results of a benchmark offering exposure to U.S. small-cap firms of value characteristics. However, it tracks the CRSP U.S. Small-Cap Value Index, which chooses stocks in the 85-99% market cap range based on five value factors.
The 928 stocks in VBR are spread across 11 sectors, with Financials (21.40%), Industrials (19.70%), and Consumer Discretionary (13.80%) claiming the top three spots. The fund’s total net asset is worth $47.4 billion, and the expense ratio is 0.07%, making it the cheapest small-cap value ETF on this list.
8. Vanguard S&P Small-Cap 600 Value ETF (VIOV)
Vanguard S&P Small-Cap 600 Value ETF (VIOV) is Vanguard’s version of SLYV issued by SSGA. Both VIOV and SLYV have the S&P Small-Cap 600 Value as their underlying index, with 461 and 462 holdings in their portfolios, respectively. Despite the same number of holdings, VIOV has lesser assets under management – $1.19 billion compared to SLYV’s $3.9 billion.
Regarding returns, VIOV has returned 12.56% since its inception and 14.22% in the last three years. However, it is essential to state that VIOV has only been around for 12 years.
VIOV’s expense ratio is also 0.15%.
9. Invesco S&P SmallCap 600® Pure Value ETF (RZV)
The last entry on the list is the Invesco S&P SmallCap 600® Pure Value ETF (RZV) issued by Invesco. It is also based on the S&P SmallCap 600® Pure Value Index, tracking the performance of securities of solid value characteristics in this index. So, if you are looking for pure value exposure for your portfolio, RZV will be the right call.
There are just 170 stocks in RZV’s holdings since its inception in 2006. However, these stocks are spread across 11 sectors of the market, ensuring considerable diversification. It has returned 7.10% since inception and 19.25% in the last three years.
The expense ratio is 0.35%.
How to Choose the Best Small-Cap Value ETF for You
It is impractical to add all the options I have recommended to your portfolio. You need to narrow the list down to one or two. So, how do you do this?
Start by looking at what the fund invests in. While all these funds focus on small companies’ stocks, the way they measure the value characteristics of these stocks are different. You can find this by investigating the index because this ultimately affects how the fund performs.
Next, look at how well the ETF tracks its chosen index. You will find funds that track the same index on this list, but no fund tracks the same index the same way. It would help if you also considered the price and expenses of the fund. If you prefer exposure to specific industry sectors, it is advisable to review the top five sectors of each fund to see which best captures your interest.
Applying these tips ensures you have a small-cap value ETF that is reliable enough to deliver as expected without going against your investment principles.
Exposing your portfolio to companies with small market cap through the best small-cap ETFs can be a great decision. You are not just investing in stocks of small-cap companies; you are also exposed to stocks specially chosen based on different value factors. However, this decision comes with some major prerequisites, including your readiness to play the waiting game and risk considerable volatility. In return, you are in line for impressive returns over time from a highly diversified stock fund that costs relatively less to buy and manage.
If you are ready to throw in one or two small-cap value ETFs into your portfolio, the list above is an excellent way to start. All you have to do is follow the tips, and you can choose the suitable small-cap options for you in the form of ETFs.