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.

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