ETF Spotlight: Small-Cap Value

February 23rd at 6:00am by Tom Lydon

Many exchange traded fund investors are indexing purists familiar with the research released by Eugene Fama and Kenneth French in the 1990s showing that small-cap value stocks tend to outperform the broader markets over longer time periods.

The phenomenon is known as the small-cap value premium.

The iShares S&P Small Cap 600 Value Index Fund (NYSEArca: IJS) is up 12.5% year to date, compared with an 8.6% gain for the S&P 500.

The improved outlook on the Eurozone financial status has helped investors feel less anxious over riskier equity picks, especially in small capitalization stocks. Additionally, the better-than-expected string of U.S. economic data has boosted confidence in U.S. stocks. [Small-Cap ETFs are Leading the Rally]

Decades of historical data and academic research indicate that small-cap value stocks tend to generate higher returns over the long-run, especially during the start of a bullish run when the smaller, more nimble companies take charge. However, potential investors need to be aware that this asset class may show larger swings in volatility. [ETF Chart of the Day: Small-Cap Growth]

“According to the Morningstar Small Value Index, small-cap value stocks returned 9.2% on an annualized basis over the past 10 years,” Michael Rawson, Morningstar analyst, said in a research note. “While that is better than the 2.9% annualized return on the S&P 500, at 21%, it experienced greater volatility than the 16% standard deviation of the S&P 500.”

Other small-cap value ETFs include:

  • iShares Russell 2000 Value Index (NYSEArca: IWN)
  • iShares Morningstar Small Value Index Fund (NYSEArca: JKL)
  • Powershares Dynamic Small Cap Value Portfolio Fund (NYSEArca: PWY)
  • Rydex S&P Small Cap 600 Pure Value ETF (NYSEArca: RZV)
  • SPDR S&P 600 Small Cap Value ETF (NYSEArca: SLYV)
  • Vanguard Small-Cap Value ETF (NYSEArca: VBR)
  • Vanguard Russell 2000 Value ETF (NYSEArca: VTWV)
  • Vanguard S&P Small-Cap 600 Value ETF (NYSEArca: VIOV)

iShares S&P Small Cap 600 Value Index Fund

For more information on small-cap stocks, visit our small-cap category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.