If you have been considering adding a U.S. Small Cap Value ETF to your portfolio, you have a lot to choose from. There are at least 17 ETFs to pick from in this category. In this article, I will show you how I came up with what I believe is the best ETF in this category for a well-balanced portfolio.
Before I go through that analysis, let’s first look at the long-term performance of the U.S. Small Cap Value asset class. This asset class has long been touted as a volatile yet lucrative place to build wealth over long periods of time. According to portfoliovisualizer.com, this asset class has returned 14.39% since 1972 vs the U.S. Large Cap Blend asset class which has returned 10.17%. Both are respectable returns but look at the effects of compounding on this chart below.
1972 to 2017 is 45 years. That’s a very long time to hold an investment. So, let’s take a look at how this asset class has performed just since August 2000. On July 24, 2000, iShares started issuing shares in the iShares S&P Small-Cap 600 Value ETF – IJS. This is a much shorter time-frame for comparison, but the results are no less dramatic. The IJS ETF returned 10.32% vs the S&P 500 index with a 5.01% return during that 17 year period.
Now that we know, based on past history, that the Small Cap Value asset has a good strong track record, this should be a good place to put a portion of our portfolios. Since I believe it is a good place to invest, I compared all the ETFs in this category that are 10 years or older head-to-head. Here are the 10 ETFs I compared: IJS, IWN, SLYV, VBR, JKL, PXSV, PZI, FDM, RZV and DES.
I did not use following table to make the comparison. I used portfoliovisualizer.com to perform this task. I can only compare 3 ETFs at a time on their website, so I will show just the 3 that outperformed all the others. Those 3 are SLYV, VBR & JKL.
As you can see in the chart above, all 3 funds are in a statistical dead-heat. With such close returns, they are probably all 3 tracking the same exact stocks. In fact, any ETF that tracks the S&P 600 index will probably march in lockstep with each other and outperform other similar indexes. For example, IJS only trailed VBR by 0.06% over the last 13 years. Of the 3 ETFs that outperformed, I prefer the Vanguard Small-Cap Value ETF – VBR for these reasons:
- VBR has a lower expense ratio (0.07%), SLYV (0.15%), JKL (0.30%)
- VBR has less turnover (18%), SLYV (48%), JKL (51%)
- VBR has a lower dividend (1.82%) than JKL (2.38%). SLYV has a dividend of  (1.51%)
- VBR has much higher average trading volume (163k), SLYV (11k), JKL (10k)
As with any investment decision, you should do your own due diligence. As for full disclosure, I own some shares of VBR, and I intend to accumulate more in the future. I think investors will do well in this asset class no matter which ETF they choose, although the ETFs that track the S&P 600 value index seem to do better than those that track the Russell 2000 value index.
Thank you for reading.
The Deep Value ETF Accumulator, aka Micah McDonald
Thanks for the research Micah. I have been using IJS the last few years and I am totally happy having a good % of my portfolio in value. Keep up the good work.
I like IJS. It is a most excellent fund. Thanks for commenting on the Blog Mark. Micah
Thanks for the read. I too have owned VBR for about 3.5 years. Haven’t enjoyed the compounding though, as I moved profits to cash along the way to slowly decrease exposure as I approach 65. That said, midcap value and small cap value are currently the leaders (with withdrawals) in a diversified mutual fund portfolio, although this is a recent change in no small part due to the surge in financials over the last six months or so; growth had led until then. Financials low P/E and P/B cause them to be pretty heavily weighted in index value funds.
Hi Gary.
I’m still in the accumulation phase of investing.
I have a similar approach to selling.
I have a diverse, but NOT balanced portfolio.
My portfolio becomes very heavily tilted towards out-of-favor sector occasionally.
So, if one of those out-of-favor sectors turns around and becomes profitable, I begin to sell bits of it off to fund another sector.
With all that said, I plan to pursue the same approach as yours’ during retirement.
I went and looked at VBR on Vanguard and see it is heavy in financials.
I can see the reasoning behind this.
I still like the fund and plan to invest more into it in the future.
I don’t own or plan to own any financial sector ETFs, so VBR will give me that exposure.
I like DON in the mid-cap value category too.
Thanks your comments.
Micah