A Cost-Effective Idea for Small-Cap Value Exposure | ETF Trends

While value stocks continue moving in fits in starts, investors may want to consider adding the size factor to the equation via the Vanguard Small-Cap Value Index Fund ETF Shares (NYSEArca: VBR).

VBR, which is one of the least expensive funds in its respective category, seeks to track the performance of a benchmark index that measures the investment return of small-capitalization value stocks. The fund employs an indexing investment approach designed to track the performance of the CRSP US Small Cap Value Index, a broadly diversified index of value stocks of small U.S. companies.

VBR is also cheap on valuation.

“Small-value stocks are especially cheap relative to their growth counterparts. At the end of July 2020, VBR was trading at its largest discount to Vanguard Small-Cap Growth ETF (VBK) since that data was first available in February 2004, and it’s still close to that level,” said Morningstar analyst Alex Bryan in a recent note.

Historically speaking, small-cap value is a potent factor combination, though it’s languished in recent years as growth stocks topped value rivals. Amid signs that smaller stocks are starting to perk up, investors may want to revisit the small-cap value marriage with some added bonuses with VBR.

VBR Near-Term Potential

VBR is worth a look as the economy rebounds from the ill effects of the COVID-19 pandemic. While investors may flock to the relative safety of large-cap equities during a recession to lessen the blow of market volatility and to provide a cushion during a market downturn, small cap performance is worth watching as the economy exits a recession. As such, investors may want to give small cap equity funds a look now and make a value-oriented play relative to their potential gains.

“Valuations matter over the long term. The larger the price/fair value gap between these value and growth funds has been, the better VBR has tended to do over the next five years relative to VBK,” adds Bryan. “Now, this isn’t a tidy relationship. There are many other things that influence how these two funds perform relative to each other and relative to the broader U.S. market. But attractive valuations are certainly a plus.”

VBR’s clean, cost-effective approach makes it a solid idea for long-term investors.

“VBR is one of the better options for exposure to small-value stocks. It targets stocks representing the cheaper half of the U.S. small-cap market and weights them by market cap. This approach is simple but effective. It mitigates turnover, diversifies risk, and harnesses the market’s collective wisdom to size its positions,” according to Bryan.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. 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.