An Idea for Value With Small Stocks

The value factor as it is applied to small-cap stocks has proven potent over long holding periods, but investors should not be forced to pay up for that advantage. The Vanguard Small-Cap Value ETF (NYSEArca: VBR) ensures that is not an issue.

VBR charge just 0.08% per year, the equivalent of $8 on a $10,000 investment. That makes VBR one of the least expensive small-cap value funds on the market today.

The outperformance may be attributed to the small-cap, value-oriented ETFs’ tilt toward favorable sectors in the current market environment. Specifically, financials and industry, two outperforming sectors in recent weeks, make up a large portion of the funds’ underlying holdings.

In the case of VBR, the Vanguard ETF allocates over half its weight to financial services and industrial stocks. Financial stocks are often one of the largest sector allocations in value ETFs, regardless of what market capitalization the fund emphasizes.

VBR’s “approach promotes low turnover, effectively diversifies risk, and accurately represents the opportunity set available to active managers. The resulting portfolio includes just over 800 holdings such as JetBlue, Rite Aid, and Barnes & Noble. Most of these firms do not enjoy sustainable competitive advantages,” said Morningstar in a recent note. “They also tend to have poor growth prospects and, in many cases, limited profitability, so they are not necessarily bargains. But they could become undervalued if investors extrapolate lackluster past growth too far into the future.”