Investors looking for small cap value ETFs have a multitude of low-cost choices, but the differences among some of them are not immediately obvious. We’ll investigate them here. Stay tuned; there’s a pretty clear winner.
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Introduction – Small Cap Value
I’ve delved into small cap value in detail previously here in terms of the premiums themselves and here in terms of ETFs to capture those premiums, as well as mentioning it in my brief reviews of several lazy portfolios that tilt small cap value. Because of that, I won’t bore you with the details yet again here.
The quick summary is that small cap value stocks have outperformed other cap size and style combinations historically due to the Size and Value risk factor premia. Conveniently, the other factor premia are most prominent in the small-cap universe, and small value offers a diversification benefit separate from its greater expected returns that can improve portfolio outcomes in relation to risk metrics (e.g. max drawdown) and sequence risk.
The good news is that investors – at least U.S. investors – have a number of great options for small cap value in the form of highly-liquid, low-cost ETFs. Unfortunately, the differences among these ETFs are not always immediately obvious, and their factor loading varies greatly. Let’s dive right into the specific differences among the most popular small cap value ETFs – VIOV, VBR, AVUV, IJS, SLYV, DFAT, and ISCV.
Small Cap Value ETF Showdown – VIOV, VBR, AVUV, IJS, SLYV, DFAT, & ISCV
Let’s start with analyzing VBR from Vanguard as a basis for the discussion.
VBR is far and away the most popular small cap value ETF, probably because it’s one of the oldest and one of the cheapest, with a fee of only 0.07%. VBR casts a wide net that holds nearly 1,000 stocks. Because of this, it’s not actually a pure small cap value play; it has some decent mid cap value exposure as well.
This might sound like a good thing, but in targeting the Size and Value premia, we’re looking for the smallest and cheapest stocks simultaneously. Put another way, we’re looking to capture the cheapest stocks (in terms of their relative book value) from a basket of the smallest stocks (recall that the Value premium is most prominent within the smallest stocks). Moreover, the Size premium specifically is the return of small stocks minus the return of large stocks, written as small minus big or SmB. Consequently, VBR’s wider net and subsequent mid-cap exposure sort of work against our goal.
More importantly, the CRSP US Small Cap Value Index that this ETF tracks does a comparatively worse job of capturing the Value premium. That is, VBR’s exposure to Value (and Size) has been lower than the other ETFs on this list. Basically, other funds deliver objectively superior factor exposure at only a slightly higher cost. In summary, VBR is neither very small nor very value-y.
Update – March 30, 2021: iShares recently slashed fees on some of its ETFs, one being ISCV (formerly JKL), the iShares Morningstar Small-Cap Value ETF. In short, ISCV provides superior factor loading to VBR and is conveniently cheaper by 1 basis point. It’s a clear win for ISCV over VBR. Props to iShares. If you’re just looking for the budget option, ISCV is it. I see no reason not to choose it over VBR.
This brings us to VIOV, SLYV, and IJS. VIOV is another small cap value fund from Vanguard that is slightly more expensive and tracks a different index. SLYV comes from SPDR, and IJS from iShares. All three of these funds seek to track the same index: the S&P SmallCap 600 Value Index. Conveniently, they are all great options to track that index and are pretty comparable. Their historical performance and factor loading have been nearly identical, so I’d say the choice is basically down to fees. VIOV and SLYV both cost 15 basis points. IJS costs slightly more at 18.
Again, the important takeaway is that these three ETFs deliver better exposure to Size and Value than VBR and ISCV that more than makes up for the slight increase in cost. They cost a bit more because they use the S&P name. But that’s okay in this case. Conveniently, that S&P index employs an earnings screen to weed out companies with bad financials, so these three funds provide some decent exposure to the Profitability and Investment risk factors as well, again much more so than VBR. Basically, for every relevant risk factor, VIOV, SLYV, and IJS provide much better exposure than VBR. We’re getting more bang for our buck, even though we’re paying a slightly larger fee.
Unless you just prefer iShares products, we’re down to VIOV and SLYV after taking fees into consideration. Again, they should be comparable and interchangeable. I used VIOV in my own portfolio.
But now there’s a new kid in town…
The go-to fund provider for factor tilts is Dimensional Fund Advisors (DFA), but most of their funds – particularly their small cap value funds, in this case – aren’t available to retail investors like you and me. A few employees recently left DFA and started their own shop called Avantis, and Avantis launched its U.S. small cap value product AVUV in late 2019. DFA funds are typically pretty expensive. Surprisingly, AVUV from Avantis has a relatively low expense ratio of 0.25%. This may sound high at first glance, but hear me out.
In its short lifespan, compared to VIOV, AVUV has delivered slightly better exposure to the Value and Investment factors and comparatively much better exposure to the Size and Profitability factors. Remember, size matters; we’re aiming for the smallest stocks, inside which the other factors are more powerful. AVUV’s P/E (price to earnings) ratio is also roughly 1/4 that of VIOV.
In targeting U.S. small value, AVUV is exactly what we’re looking for, with decent Profitability and Investment exposure as an added bonus. This superior exposure is worth the step up in cost of 10 basis points over VIOV and SLYV in my opinion. Put another way, for a given target factor exposure, it would require a greater amount (more allocation) of VIOV than it would with AVUV, so the lower fee for VIOV doesn’t really save you as much as it appears at first glance. Again, we’re getting more bang for our buck. Avantis also conveniently considers Momentum at the time of their trades.
For those reasons, AVUV has now replaced VIOV in my own portfolio as of February, 2021. Factor investors have been paying attention; the fund has also surged to nearly $1 billion in assets, so liquidity shouldn’t be a problem.
We should probably expect these results, as Avantis, like DFA, lives and breathes factors, and their products are designed to deliver the best exposure possible, whereas the other ETFs on this list just happen to provide decent factor exposure from a good index. The difference is subtle but important.
I’ll be keeping an eye on AVUV’s future factor loading, but it looks like a solid bet so far, and the switch to it from VIOV has caused me no dissonance.
Update – July 14, 2021: Dimensional has converted their Tax-Managed US Targeted Value Portfolio fund DTMVX to the ETF DFAT. It’s a tax-managed fund that, as the name suggests, targets Value across small- and mid-caps. Don’t get too excited. Basically, it’s neither as small nor as value-y as AVUV yet costs more at 0.34%. Its historical loadings on Profitability and Investment were even lower than VIOV. Still sticking with AVUV.
Targeting small cap value outside the U.S. is not as cut and dry. I explored international small cap value ETFs separately here.
What fund(s) are you using for your small cap value tilt? Does the recent emergence of AVUV from Avantis have you rethinking your small cap value fund choice? Let me know in the comments.
Disclosures: I am long AVUV in my own portfolio. Note that I am not affiliated with Avantis and I get no sort of kickback or compensation if you decide to buy AVUV (or any of the other funds listed here). I’ve also received no form of compensation from Avantis for the words I’ve written on this page. My discussing AVUV and crowning it the superior U.S. small cap value ETF are simply the result of my own independent research and analysis.
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.
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