Financially reviewed by Patrick Flood, CFA.
Small-cap value stocks have outperformed every other segment of the market historically. Below we’ll review the 12 best small cap value ETFs for 2021.
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In a hurry? Here’s the list:
- IJS – iShares S&P SmallCap 600 Value ETF
- SLYV – SPDR S&P 600 Small Cap Value ETF
- VIOV – Vanguard S&P Small-Cap 600 Value ETF
- AVUV – Avantis U.S. Small Cap Value ETF
- DFAT – Dimensional U.S. Targeted Value ETF
- IWN – iShares Russell 2000 Value ETF
- VTWV – Vanguard Russell 2000 Value ETF
- VBR – Vanguard Small-Cap Value ETF
- ISCV – iShares Morningstar Small-Cap Value ETF
- DLS – WisdomTree International SmallCap Dividend Fund
- DGS – WisdomTree Emerging Markets SmallCap Dividend Fund
- AVDV – Avantis International Small Cap Value ETF
Introduction – Why Small Cap Value?
Small-cap value stocks have beaten every other style and cap size of stocks historically. Small-caps have outperformed large-caps historically, and Value has outperformed Growth historically. These are known as the Size premium and the Value premium, two of the Fama-French risk factor premia that explain the differences in returns between diversified portfolios. Here is small cap value vs. other small caps and the S&P 500 going back to 1977:
Here are some more impressive stats illustrating the glamour of small value: From 1928 through 2016, the S&P 500 index had a CAGR of 9.7%, while small-cap value stocks delivered 13.5%. Looking at 40-year periods since 1928, the average return of the S&P 500 was 10.9%, compared to 16.2% for small-cap value stocks.
Unfortunately the Size and Value factors have suffered in recent years, lagging the market. I don’t employ or advise market timing, but AQR maintains that Value is basically the cheapest it’s ever been right now, suggesting that now may be the worst time to give up on the factor, and that it’s due for a comeback. We would also expect factors to have negative premiums from time to time, even for extended time periods.
Factors are simply unique or independent sources of risk. A typical 60/40 portfolio has more risk than one might realize at first glance. Due to the comparatively greater volatility of stocks compared to bonds, over 80% of the portfolio’s risk is market beta. Conveniently, diversifying across factors actually leads to a “stronger” portfolio in terms of reducing the risk of black swan events, but you must be able to live with tracking error regret, a term for giving up on a strategy after its underperforming its benchmark for some period of time. Adding in factors necessarily means your portfolio’s performance does not resemble the market; there may be periods of underperformance.
So now that we know why small-cap value may be the golden segment of the market, let’s explore the best small cap value ETFs.
The 12 Best Small Cap Value ETFs
Below are the 12 best small cap value ETFs to capture the Size and Value factor premia.
IJS – iShares S&P SmallCap 600 Value ETF
The iShares S&P SmallCap 600 Value ETF (IJS) is one of the most popular funds for the small-cap value segment, with nearly $5 billion in assets. This ETF seeks to track the S&P SmallCap 600 Value Index and was established in 2000. The fund has over 450 holdings and an expense ratio of 0.25%.
SLYV – SPDR S&P 600 Small Cap Value ETF
A very similar fund to IJS above that tracks the same index is the SPDR S&P 600 Small Cap Value ETF (SLYV). The ETF was also founded in 2000. It is slightly cheaper than IJS above, with an expense ratio of 0.15%. Of interest to day traders is the fact that spreads may be slightly larger for SLYV than for IJS since this is a slightly lower volume ETF than IJS.
VIOV – Vanguard S&P Small-Cap 600 Value ETF
The third and last ETF that tracks the S&P 600 SmallCap Value Index is the Vanguard S&P Small-Cap 600 Value ETF (VIOV). Similar to SLYV above, this ETF also has an expense ratio of 0.15%, but lower assets under management.
Any of these 3 funds would be fine choices to track the S&P 600 SmallCap Value Index. Their factor loading and historical performance are nearly identical. As an added bonus, the earnings screen from this S&P index conveniently provides some decent exposure to the Profitability factor as well.
AVUV – Avantis U.S. Small Cap Value ETF
Dimensional Fund Advisors (DFA) is probably the gold standard in this space of factor tilts in terms of investable financial products, but most of their funds – in this case, their small cap value funds – are not available to individual retail investors. A few former employees of DFA started a company called Avantis, which recently introduced some new funds for retail investors. Of interest to us here is AVUV, the Avantis U.S. Small Cap Value ETF.
Previously, the S&P SmallCap 600 Value Index (via IJS, VIOV, or SLYV) was the go-to index to capture small-cap value. The earnings screen employed by the index even conveniently provides some decent exposure to the Profitability factor. AVUV is a very new product, but in its short lifetime, it has achieved slightly better exposure to the Value premium, and comparatively much more exposure to the Profitability factor.
In a nutshell, AVUV has been doing a great job so far of capturing very small, very cheap stocks with strong financials. Because of this, AVUV has now replaced VIOV in my own portfolio. I crowned it the king for U.S. small value in a separate post here. I’ll be keeping an eye on the future factor exposure of this new, exciting ETF.
VIOV has an expense ratio of 0.15%. AVUV’s expense ratio is 0.25%. This difference of 0.10% is worth it for the better factor exposure in my opinion.
DFAT – Dimensional U.S. Targeted Value ETF
As of June, 2021, Dimensional has converted their Tax-Managed US Targeted Value Portfolio mutual fund DTMVX to the ETF DFAT. It’s a tax-managed fund that, as the name suggests, targets Value across small- and mid-caps in the U.S. Don’t get too excited. Basically, it’s neither as small nor as value-y as AVUV above yet it costs over 1/3 more at 0.34%. Its historical loading on Profitability and Investment was even lower than Vanguard’s VIOV. I’m still sticking with AVUV, and I may even rank VIOV over DFAT.
IWN – iShares Russell 2000 Value ETF
Those seeking broader diversification in the small cap value segment may desire to invest in the Russell 2000 Value Index, composed of 2,000 small cap value stocks, for which the iShares Russell 2000 Value ETF is the most popular fund. This ETF has nearly 1,500 holdings, over $8 billion in assets, and an expense ratio of 0.24%. Investors deciding between the S&P SmallCap Value Index and the Russell 2000 Value Index don’t have to make any tradeoffs in terms of factor exposure for Size and Value. The iShares Russell 2000 Value ETF and the 3 ETFs above have identical loading on the Size and Value factors. Though note that the S&P index employs an earnings screen, so the 3 ETFs above should have comparatively more loading on the Quality factor than IWN. Day traders will appreciate the high liquidity of IWN.
VTWV – Vanguard Russell 2000 Value ETF
Another ETF that tracks the Russell 2000 Value Index is the Vanguard Russell 2000 Value ETF (VTWV). This fund is cheaper than IWN above with an expense ratio of 0.15%, but has a much lower AUM of only about $350 million. Performance of these 2 funds has been nearly identical.
VBR – Vanguard Small-Cap Value ETF
The Vanguard Small-Cap Value ETF
is was the cheapest on the list with an expense ratio of 0.07% (now ISCV below is cheaper). The fund seeks to track the CRSP US Small Cap Value Index and has nearly 900 holdings.
Note that this ETF is not a pure small cap value play, as it has some exposure to mid-cap value as well. This may be desirable to investors seeking a value tilt across multiple cap sizes. This ETF also has comparatively smaller loading on the Size, Value, and Profitability factors compared to the funds above. I delved into those details in a separate post here.
ISCV – iShares Morningstar Small-Cap Value ETF
iShares came along in March, 2021 and undercut Vanguard’s VBR above by 1 basis point while providing superior exposure to U.S. small cap value stocks with ISCV (formerly JKL), the iShares Morningstar Small-Cap Value ETF. For those who for some reason only want the cheapest fund, ISCV seems to be it and is a clear winner over VBR.
DLS – WisdomTree International SmallCap Dividend Fund
All the above funds focus on U.S. small cap value stocks. Those seeking international small cap value exposure can do so using the WisdomTree International SmallCap Dividend Fund (DLS).
This fund tracks the WisdomTree International SmallCap Dividend Index and has an expense ratio of 0.58%. This index is composed of small-cap dividend stocks in developed countries outside the U.S. and Canada. Historically, this fund has arguably been the best proxy for retail investors to access the Size and Value (and some Profitability) premia outside the U.S.
WisdomTree uses some liquidity screens to weed out stocks that aren’t investable, so DLS’s holdings are not really as small as we’d ideally like to see. These screens – as well as the fund’s weighting by dividend yield – also end up causing the it to be concentrated in a small handful of countries, namely Japan, the UK, and Australia, which comprise over half of the fund’s assets.
DGS – WisdomTree Emerging Markets SmallCap Dividend Fund
DGS is the Emerging Markets version of DLS above. It is slightly more expensive, with a fee of 0.63%, but investors seeking a diversification benefit will appreciate the slightly lower correlation of DGS to U.S. small cap value compared to DLS above.
Like DLS, DGS ends up having concentrated exposure in just a few countries, in this case Taiwan, Hong Kong, Korea, India, and Thailand, which account for about 75% of the fund’s holdings.
DGS and DLS have had similar Value factor exposure over their lifetime, but DGS’s loading on the Profitability factor has been greater than that of DLS. DGS has outperformed DLS historically.
AVDV – Avantis International Small Cap Value ETF
Avantis also introduced AVDV in late 2019 for international (ex-US developed) small-cap value at a cost of 0.36%. This is effectively the same segment targeted by DLS above. In its short lifespan so far, AVDV has delivered comparatively worse exposure to the Value and Profitability factors but more loading on the Size factor, i.e. it holds smaller stocks. Despite this, AVDV has also outperformed DLS over that brief time period:
The choice here between DLS and AVDV for international small cap value in Developed Markets is not as clear as it is for U.S. small cap value. While AVDV is cheaper, I’ll be hedging my bets by using both DLS and AVDV for now, while keeping an eye on their future factor loading going forward.
Where to Buy These Small Cap Value ETFs
All these small cap value ETFs should be available at any major broker. My choice is M1 Finance. M1 has zero trade commissions and zero account fees, and offers fractional shares, dynamic rebalancing, and a sleek, user-friendly interface and mobile app. I wrote a comprehensive review of M1 Finance here. Investors outside the U.S. can use eToro.
Disclosures: I am long AVUV, DGS, DLS, and AVDV in my own portfolio.
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.