In this piece, we will take a look at the 12 best small cap value ETFs. If you want to skip our introduction to small cap investing, then check out 5 Best Small-Cap Value ETFs.
Small cap investing is a specialized strategy that exposes an individual to opportunities to potentially profit if the timing of the bets is right. One of the biggest reasons why most people are attracted to small caps is that their lower share prices allow for significant profits in case of good market performance. In addition to the small market capitalization, another advantage that small cap stocks offer is that, for American investors in particular, these firms are generally disconnected from global economies.
This insulation, which stems mostly from the fact that small cap stocks are of companies with limited economic scale, also means that if economic news isn't too great in other countries, the shares might drop. For example, Apple is one of the world's biggest smartphone companies and the undisputed king when it comes to the high end market. Additionally, its smartphones are the only ones that have often seen widespread media coverage for providing strong protection for their security features. Naturally, this instills of trust in the brand and makes the iPhone quite popular. However, in early September, reports started surfacing that China is banning government officials from using the smartphone. This had an impact on Apple's shares as well, as the stock dropped from a closing price of $189.70 on September 5th to close at $177.58 two days later. The scale of Apple's operations and its size (latest market capitalization is $2.8 trillion) also means that news similar to Chinese iPhone restrictions leads to re-balancing in the share price of other firms. In short, the world's most valuable company in terms of market capitalization, lost $156 billion in market value due to potential changes in a country thousands of miles away.
In the small cap world, such news would also affect companies but only those that have a significant business relationship with Apple. At the same time, this would also mean that while a $156 billion market cap loss to Apple represents a digestible 5.5% drop in market capitalization, depending on the nature of our hypothetical small cap company, the loss of market value could be larger. Players such as Apple often account for a large portion of small companies' revenue, and the severe effect of this unbalanced relationship can often transform firms from going to gone concerns.
The risk of losing large sums in small cap stocks also makes it important that the broader economic environment is considered when investing in them. After all, their insulation to global economic conditions also makes them even more sensitive to on-goings in America. As a result, common market wisdom says that small cap stocks are ones that make larger losses as the market prepares for a recession. This is because investors generally seek the safety offered by large cap companies, especially since their shares are more liquid and can be easily bought and sold on the market. Once any economic downturn, or its news, is over, then the small cap stocks are also typically faster to rise, as money piles in to bet that they will be able to capture demand that is sapped in an economic downturn.
Within the small cap stock classification, one can divide the companies across several parameters. Two of these are value stocks and growth stocks. A value stock can be defined with several metrics. Two of these are the price to earnings and price to sales ratios, which measure the premium that the market is paying over a company's ability to bring in money either through overall sales or after accounting for all costs of production, financing expenses, and tax obligations. The P/E and P/S ratios of established companies are generally lower depending on the industry, and these stocks are attractive particularly for portfolio diversification. This is because a value stock stands to lose less in a market downturn as investors have refrained from ascribing a premium to its shares similar to what they have done with growth stocks. At the same time, prudent stock market gurus also determine whether there is the potential for a value stock to grow in the future. After all, all the big companies of today were value stocks yesterday, and the smartest investors bought their shares back then to become rich right now.
Before we dig into small cap value exchange traded funds (ETFs), one great example of a value stock that delivered is American Express Company (NYSE:AXP). AXP's place in stock market history is tied to Warren Buffett, who started buying the shares at a time when they were quite cheap. Mr. Buffett bought AXP when the shares had dropped significantly, and he recalled this period years later by commenting:
There was one other little wrinkle which was terribly interesting. American Express was not a corporation. It then was the only major publicly traded security that was a joint stock association. As such, the ownership of the company was assessable. If it turned out that the liabilities were greater than the assets, [then] the ownership was assessable. So every trust department in the United States panicked. I remember the Continental Bank held over 5% of the company and all of a sudden not only do they see that the trust accounts were going to have stock worth zero, but it could get assessed. The stock just poured out, of course, and the market got slightly inefficient for a short period of time. . . .The whole American Express Company, synonymous with financial integrity and money substitutes around the world. When they closed the banks, when Roosevelt closed the banks, he exempted American Express Traveler's Checks, so they substituted as U.S. currency. It was not a business that should have been selling for $150 million, but everyone was terrified.
So, with these details in mind, we decided to take a look at some top small cap value ETFs out of which the top picks are Invesco S&P SmallCap 600 Revenue ETF (NYSE:RWJ), Invesco S&P SmallCap Value with Momentum ETF (NYSE:XSVM), and First Trust Small Cap Value AlphaDEX Fund (NASDAQ:FYT).
12 Best Small-Cap Value ETFs
Photo by Karolina Grabowska from Pexels
Our Methodology
To compile our list of best small cap ETFs we first made a list of the 20 largest small cap value ETFs and then ranked them by their trailing five year daily total returns. Out of these, the top 12 small cap value ETFs are as follows.
Best Small-Cap Value ETFs
12. Roundhill Acquirers Deep Value ETF (NYSE:DEEP)
5 Year Return: 1.41%
Roundhill Acquirers Deep Value ETF (NYSE:DEEP) starts off our list with having some of the lowest net assets. These stand at $40 million, and the fund is part of the Roundhill Investments fund family. Some of its largest holdings are in WW International, Inc. (NASDAQ:WW), Vital Energy, Inc. (NYSE:VTLE), and Veritiv Corporation (NYSE:VRTV). It joins Invesco S&P SmallCap 600 Revenue ETF (NYSE:RWJ), Invesco S&P SmallCap Value with Momentum ETF (NYSE:XSVM), and First Trust Small Cap Value AlphaDEX Fund (NASDAQ:FYT) as part of the list of the best small cap value ETFs.
11. iShares Morningstar Small-Cap Value ETF (NYSE:ISCV)
5 Year Return: 2.91%
iShares Morningstar Small-Cap Value ETF (NYSE:ISCV) has net assets worth $388 million and is part of the iShares fund family. It limits its attention to invest only in American small cap companies and was set up in 2004. The fund's trailing twelve month price to earnings ratio is 9.88, which fits the requirement of value stocks which typically have low P/E ratios.
10. Vanguard Russell 2000 Value Index Fund (NASDAQ:VTWV)
5 Year Return: 2.98%
Vanguard Russell 2000 Value Index Fund (NASDAQ:VTWV) invests primarily in U.S. small cap firms. The fund has net assets worth $965 million, making it one of the largest funds on our list. Its holdings are spread across a variety of industries, with financial services, real estate, industrial, and consumer cyclical stocks accounting for the largest share of the holdings. Company wise, the Vanguard Russell 2000 Value Index Fund (NASDAQ:VTWV)'s largest investments are in Commercial Metals Company (NYSE:CMC), Chord Energy Corporation (NASDAQ:CHRD), and Murphy Oil Corporation (NYSE:MUR).
9. iShares S&P Small-Cap 600 Value ETF (NYSE:IJS)
5 Year Return: 3.28%
iShares S&P Small-Cap 600 Value ETF (NYSE:IJS) is part of the iShares ETF fund family. It has a sizeable $6.85 billion in net assets and was set up in 2000 - which makes it one of the oldest small cap value ETFs on our list. Since it is a value fund, it selects companies that it believes offer a premium in comparison to their market share price. Like the Vanguard Russell 2000 Value Index Fund, the iShares S&P Small-Cap 600 Value ETF (NYSE:IJS) has most of its holdings spread across consumer cyclical, financial services, real estate, and industrial sectors.
8. Vanguard S&P Small-Cap 600 Value Index Fund (NYSE:VIOV)
5 Year Return: 3.40%
Vanguard S&P Small-Cap 600 Value Index Fund (NYSE:VIOV) focuses its attention on primarily investing in companies that are part of the S&P 600 Small Cap Value Index. The fund has net assets of $1.33 billion and its largest shareholdings are in Meritage Homes Corporation (NYSE:MTH), Insight Enterprises, Inc. (NASDAQ:NSIT), and Radian Group Inc. (NYSE:RDN).
7. SPDR S&P 600 Small Cap Value ETF (NYSE:SLYV)
5 Year Return: 3.45%
SPDR S&P 600 Small Cap Value ETF (NYSE:SLYV) is another exchange traded fund that tracks the S&P 600 Small Cap value stock index. It has nearly $4 billion in net assets, and has been operating for more than two decades since it was set up in 2000. Since it follows the S&P index, its largest holdings are also in Meritage Homes, Radian Group, and Insight Enterprises.
6. Invesco S&P SmallCap 600 Pure Value ETF (NYSE:RZV)
5 Year Return: 4.59%
The Invesco S&P SmallCap 600 Pure Value ETF (NYSE:RZV) is one of the smallest small cap exchange traded funds on our list since it has net assets of just $249 million. Roughly one thirds of its investments are in consumer cyclical firms, and the top three investments of the fund are in SkyWest, Inc. (NASDAQ:SKYW), M/I Homes, Inc. (NYSE:MHO), and Telephone and Data Systems, Inc. (NYSE:TDS).
Invesco S&P SmallCap 600 Revenue ETF (NYSE:RWJ), The Invesco S&P SmallCap 600 Pure Value ETF (NYSE:RZV), Invesco S&P SmallCap Value with Momentum ETF (NYSE:XSVM), and First Trust Small Cap Value AlphaDEX Fund (NASDAQ:FYT) are some best small cap value ETFs.
