Which funds should investors purchase to gain exposure to small cap value stock returns? Why should investors seek small cap value investments at all?
The Case for Small Cap Value
The value effect and the small firm effect are famous market anomalies. In a nutshell, the value effect is the observation that over long periods of time value stocks have outperformed growth stocks. The small firm effect is the observation of how small cap stocks have outperformed large cap stocks over long periods of time. The discovery of these phenomena by Fama and French won a Nobel Prize in economics and renewed investor interest in small cap stocks and value stocks.
Investors can benefit from the small firm effect and the value effect by buying firms with low market capitalizations and low price-to-book ratios. Investors seeking exposure to small cap value stocks have many funds to choose from.
Steven Geri is founder of InvestSimply, an RIA and Web-based portfolio management service for individuals and families. Previously, he worked with the institutional division of Charles Schwab, and
evaluated corporate mergers and acquisitions at the strategy consulting firm Booz Allen Hamilton.
Which single asset class are you most bullish/bearish about in the coming year? What ETF position would you choose to best capture that?
InvestSimply focuses on crafting long-term investment portfolios for clients with a time horizon beyond the next 12 months. As part of a well diversified portfolio, we feel domestic, small-company value stocks are a core holding with good prospects for total return investors. That being said, we employ a strategic asset allocation approach and don’t
We are working our way through the US equity ETFs, ranking each sub-class to derive a set of top performing ETFs that we will then use to build a plan of ETFs and measure the performance.
We now apply trading volume data for us to be able to reduce the number of ETFs that we examine. As with the other ETFs, we apply a minimum trading volume to maximize liquidity and minimize trading friction. In this case, there is a cliff around 150,000 and above, and then it drops down to around 50,000.
We are then left with three alternatives (click to enlarge images):
5 Yr AR%
Vanguard Small Cap Value ETF
iShares S&P SmallCap 600 Value
iShares Russell 2000 Value Ind
All three are relatively close although VBR is the winner