The Vanguard Small-Cap Value ETF (NYSEArca: VBR) is an inexpensive, liquid idea for investors looking to tap the value factor as it applies to small-cap stocks.
VBR charge just 0.07% per year, the equivalent of $7 on a $10,000 investment. That makes VBR one of the least expensive small-cap value funds on the market today.
Value stocks usually trade at lower prices relative to fundamental measures of value, like earnings and the book value of assets. On the other hand, growth-oriented stocks tend to run at higher valuations since investors expect the rapid growth in those company measures, but more are growing wary of high valuations, especially as the U.S. equities market moves toward the ninth year of an extended bull run.
VBR “is significantly less expensive than both small caps and large caps, in general. The tradeoff, obviously, is that you’re buying a relatively low growth portfolio that may be undervalued for a reason. In this specific instance, I like how the fund is positioned to grow over the next year or so,” reports ETF Daily News.
VBR’s large financial services weight could prove advantageous moving forward. Dodd-Frank has forced many banks to increase more conservative capital holdings to obviate another potential financial crisis event. While these more secure capital restrictions help limit exposure to risky or distressed assets, banks are finding it harder to make loans and do business. The regulations have also been particularly hard on smaller banks. The ETF allocates 30.4% of its weight to financials, by far its largest sector weight.
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The industrial sector is VBR’s second-largest sector weight at 20.3%, followed by consumer services at 10.6%. VBR holds 850 stocks with a median market value of $3.7 billion, implying this is actually a smaller mid-cap fund.
“Small cap value hasn’t been much to look at over the past several years, but it’s looking increasingly attractive in an overvalued market. We’ve seen equity indices rise for 9 straight years (assuming, of course, 2017 remains positive), and, at some point, investors are going to have to prepare for a down market. Small cap value has some built-in downside protection in case there’s a correction or a full-blown bear market,” according to ETF Daily News.
Value stocks have historically outperformed growth stocks, or companies with high earnings expectations, in almost every market over the long-haul. For instance, the MSCI USA Value Index has outperformed the MSCI USA Growth Index by an annualized 81 basis points since 1974 through September 2015.
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