Factor-based investing is a prominent theme and small-cap exchange traded funds are no exception. For example, the iShares Russell 2000 Growth ETF (NYSEArca: IWO) has nearly $7.5 billion in assets under management while the Vanguard Small-Cap Value ETF (NYSEArca: VBR) is a $5.2 billion ETF.
The growth stocks provide access to the faster growing and more expensive half of the U.S. small-cap market. The value stocks, on the other hand, provide exposure to cheaper and potentially higher-returning half of the small-caps market.
One of the kings among small-cap value ETFs is the Guggenheim S&P Smallcap 600 Pure Value ETF (NYSEArca: RZV), one of the top-performing ETFs since the start of the current bull market in March 2009. RZV was one of the top-performing broad market equity ETFs in 2012 and 2013. A $10,000 investment in RZV in March 2009 has grown to over $67,000 today. [Celebrating the Bull Market With ETFs]
Although RZV is a value spin on small-caps, it is not heavily allocated to low-beta sectors. Technology, energy and consumer discretionary names combine for 42% of the ETF’s weight. RZV’s largest sector allocation is 22.5% to industrials.
RZV’s heavier emphasis on value stocks has been a winning strategy over the past year as the ETF has outperformed the Russell 2000 by nearly 300 basis points. RZV has another advantage over the Russell 2000: A more attractive valuation. The Guggenheim offering has a P/E ratio of almost 16.2 and a price-to-book ratio of 1.08. For the iShares Russell 2000 ETF (NYSEArca: IWM), those numbers are 21.26 and 2.26.
With its value tilt, RZC offers investors some leverage to theme of rising small-cap dividends.
“From the end of 2013 there has been a 10.2% increase in the number of issues paying a dividend in the S&P SmallCap 600,” according to S&P Dow Jones Indices.
Although small-cap indexes remain at the low end of the dividend yield totem pole, more than half of IJR’s holdings are dividend payers and there is room for steady payout growth as “182 payers have a dividend rate less than 50% of their 12 month net GAAP income, with 235 being less than 75%,” according to S&P Dow Jones Indices. [Small-Cap ETFs Offering Dividend Growth]
“Starting with recent growth in SmallCap payers, and the history of payers to continue to pay and increase, SmallCaps issues appear to be trending up, and if the trend continues, eventually, the index level characterizes will change,” said S&P Dow Jones Indices senior index analyst Howard Silverblatt in a note.
Guggenheim S&P Smallcap 600 Pure Value ETF
