Financially reviewed by Patrick Flood, CFA.
Small-cap value stocks have outperformed every other segment of the market historically. Below we'll review the 13 best small cap value ETFs for 2023. The list below includes my 3 specific picks for U.S., ex-US Developed Markets, and Emerging Markets small cap value stocks respectively.
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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
- DFSV – Dimensional US Small Cap 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
- AVDV – Avantis International Small Cap Value ETF
- DGS – WisdomTree Emerging Markets SmallCap Dividend Fund
- AVES – Avantis Emerging Markets Value ETF
Small Cap Value ETFs Video
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Introduction – Why Small Cap Value ETFs?
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, due to what we think are independent sources of risk.
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 from 1977 through 2022:
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 still 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. 2021 and 2022 were actually great years for small value, relatively speaking, so that comeback may indeed be happening. Fingers crossed.
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 by helping to mitigate adverse outcomes, 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, for better or for worse.
Including small caps also took the famous 4% Rule up to 4.5% historically.
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 13 Best Small Cap Value ETFs
Below are the 13 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 0.18%.
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 U.S. small-cap value stocks. The earnings screen employed by the index even conveniently provides some decent exposure to the Profitability factor.
AVUV is a relatively new product, but in its short lifetime, it has achieved demonstrably superior factor exposure, and while it shouldn't mean much, it may also comfort you to know that it has outperformed its competitors on this list in its short lifespan thus far.
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 replaced VIOV in my own portfolio. I crowned it the king for U.S. small value in a separate post here.
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, and AVUV would be my choice from this list for U.S. small cap value.
DFSV – Dimensional US Small Cap Value ETF
DFSV is a relatively new small cap value fund from Dimensional that launched in early 2022. It is very comparable to AVUV and would also be a great choice for the dedicated factor investor.
DFSV still costs a bit more than AVUV, though, at 0.31%.
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 0.23%. 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 Profitability 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 is probably a prudent move, as the small cap value premium has been larger and statistically stronger in international stocks outside the U.S.
DLS 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.
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 impressive exposure comparable to that of DLS and would thus be a fine choice for small cap value in ex-US developed markets. If you already own DLS in a taxable account, AVDV provides a great alternative to harvest losses with.
AVDV would be my choice for a small cap value fund for ex-US Developed Markets, and I own it in my own portfolio.
DGS – WisdomTree Emerging Markets SmallCap Dividend Fund
DGS is the Emerging Markets version of DLS above. It also has the same fee of 0.58%, but investors seeking a diversification benefit will appreciate the slightly lower correlation of DGS to U.S. small cap value compared to DLS above. For a dividend fund, DGS provides some very impressive factor exposure.
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 is my choice for Emerging Markets small cap value, and I own it in my portfolio.
AVES – Avantis Emerging Markets Value ETF
As you might expect, Avantis also launched an option for targeted factor exposure in Emerging Markets stocks. That fund is AVES.
This may seem like the obvious choice considering my comments on Avantis's other funds, but in this case DGS from WisdomTree still seems to provide superior factor exposure, albeit somewhat naively. In other words, it appears to be holding smaller, more value-y, more profitable stocks.
I already owned DGS when AVES launched and I don't feel the need to switch, but that doesn't mean AVES is not still a fine choice for this narrow market segment.
Avantis fans will also enjoy the comparatively lower fee here of 0.36%.
Where to Buy These Small Cap Value ETFs
To recap, my personal picks are as follows:
AVUV for U.S. small value,
AVDV for ex-US Developed Markets small value, and
DGS for Emerging Markets small value.
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.
Small Cap Value FAQ's
Lastly here are some frequently asked questions about small cap value stocks in general.
What does small cap value mean?
The phrase “small cap value” in reference to stocks just means stocks that are smaller in size, measured by market capitalization, that are also thought to be underpriced relative to their fundamental earnings (which is the “value” part). In a market cap weighted total market index fund, small cap value stocks only make up about 3%.
What are small cap value funds?
Small cap value funds are simply investable funds that capture a basket of small cap value stocks, which are smaller stocks by market capitalization that are also thought to be underpriced according to some value metric like price-to-earnings ratio. A small cap value fund may or may not track some underlying index.
When does small cap value outperform?
It's impossible to know when the small cap value market segment will outperform, which is why a small cap value tilt in one's portfolio is necessarily a long-term bet. Broadly speaking, we would expect small cap value stocks to perform best when the market is recovering after a crash.
How much small cap value should I have in the portfolio?
This question has no simple answer and obviously depends on the investor's personal goal(s), time horizon, and risk tolerance. Tilting toward small cap value stocks may or may not be suitable for the investor. In a market cap weighted index fund, small cap value stocks only comprise about 3%.
Are small cap value stocks a good investment?
It's impossible to say whether or not small cap value stocks will be a good investment in the future. Historically, small cap value stocks have beaten every other segment of the market due to what we think are independent risk premiums for small stocks and value stocks.
Is small cap value dead?
It's impossible to say whether or not small cap value is “dead.” Historically, small cap value stocks have outperformed every other market segment due to what we think are independent risk premiums for small stocks and value stocks. There is no reason to think these premiums have disappeared. Remember that we would expect factor premiums to potentially have extended periods of underperformance. Small cap value stocks also beat the market in 2021 and 2022, so I certainly wouldn't call it “dead.”
Will small cap value recover?
It's impossible to predict whether or not a market segment like small cap value will recover. There is no reason to think these premiums have disappeared. Remember that we would expect factor premiums to potentially have extended periods of underperformance. Small cap value stocks also beat the market in 2021 and 2022, so it may indeed be recovering right now.
Why is small cap value underperforming?
It's impossible to say why exactly a particular market segment like small cap value is underperforming. Remember that we would expect factor premiums to potentially have extended periods of underperformance. There is no reason to believe the small cap value premium has disappeared. Small cap value stocks also beat the market in 2021 and 2022.
Disclosures: I am long AVUV, AVDV, and DGS in my own portfolio.
Disclaimer: While I love diving into investing-related data and playing around with backtests, this is not financial advice, investing advice, or tax advice. The information on this website is for informational, educational, and entertainment 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. I always attempt to ensure the accuracy of information presented but that accuracy cannot be guaranteed. Do your own due diligence. All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future results. Opinions are my own and do not represent those of other parties mentioned. Read my lengthier disclaimer here.
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