Financially reviewed by Patrick Flood, CFA.
Small-cap value stocks have outperformed every other segment of the market historically. Below we’ll review the 7 best small cap value ETFs.
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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
- IWN – iShares Russell 2000 Value ETF
- VTWV – Vanguard Russell 2000 Value ETF
- VBR – Vanguard Small-Cap Value ETF
- DLS – WisdomTree International SmallCap Dividend Fund
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. the S&P 500 going back to 1972:
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.
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 7 Best Small Cap Value ETFs
Below are the 7 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.
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 the cheapest on the list with an expense ratio of 0.07%. 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 and Value factors compared to the funds above.
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%.
Where to Buy These Small Cap Value ETFs
All these small cap value ETFs are available at 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.
Disclosures: I am long VIOV and DLS.
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.