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There is good reason to believe that small stocks and value stocks will, in
the long run and on average, tend to have higher risk-adjusted returns than
large and growth stocks, respectively. In order to seek exposure to both
the small and value risk factors at the same time, it seems natural to invest in
a small-cap value fund.
There are several similar-seeming investment options
available. Which is best?
All of the options discussed here will likely have somewhat similar performance
and any of them will probably get the job done quite well. You can't go far wrong choosing any
of the options listed here. However, there is a dramatic difference
between how funds investing in the absolute tiniest and most valuey stocks
perform versus
those investing in merely "small" and merely "value" stocks. The funds are listed in rough overall
order of preference.
Preferences are listed separately for use in
retirement accounts and for taxable accounts.
For a listing of our preferences in other asset classes, see
here.
Retirement Accounts (i.e., tax-deferred or tax-exempt accounts)
 | Rydex S&P SmallCap 600 Pure Value ETF (RZV). E/R: 0.35%.
This ETF tracks the S&P SmallCap 600/Citigroup Pure Value Index. It is
both extremely small (as measured by weighted average market capitalization)
and extremely valuey (as measured by weighted average book to market value).
As of 2/28/09, this fund's weighted average book to market ratio was 82% more
valuey and it's weighted average market capitalization was 72% smaller than DFSVX
below. Unlike
virtually all other passively managed funds, this fund isn't weighted by
market cap, but rather by "value-ness." For more information on ETFs, see here.
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| DFA US Small Cap Value Portfolio (DFSVX). E/R: 0.54%. This
fund is both extremely small (as measured by weighted average market
capitalization) and extremely valuey (as measured by weighted average book to
market value). It basically has a strategy of
emulating the returns of the
25% most valuey of the 8% of US publicly traded companies with the lowest
market capitalization. As of 2/28/09, this fund's weighted average
market capitalization was 30% smaller and its weighted average book to
market ratio was 46% more valuey than VISVX/VBR below. Unfortunately,
this fund is now closed to new investors.
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| DFA US Targeted Value Portfolio (DFFVX). E/R: 0.41%. This
fund is similar to the above fund, only with somewhat less of a small-cap
orientation. Specifically, it excludes the largest 72% or so of
companies. It basically has a strategy of
emulating the returns of the
25% most valuey of the US publicly traded companies with a market
capitalization within the smallest 18% of all such companies.
We don't like this fund as much as DFSVX because the stocks it invests in
aren't as small in market capitalization or as valuey.
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| Vanguard Small Cap Value ETF (VBR). E/R: 0.15%. This ETF is a
share class of the Vanguard Small Cap Value Index Fund (VISVX). As such, it
should benefit from greater internal efficiency that incoming cash flows
bring, as compared with other ETFs. For more information on ETFs, see here.
We don't like this fund as much as DFSVX because the stocks it invests in
aren't as small in market capitalization and they aren't as valuey. We
also don't like that this fund has quite a bit of REITs in it.
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| Vanguard Small Cap Value Index Fund (VISVX). E/R: 0.28%.
This fund tracks the MSCI US Small Cap Value Index. While its expense
ratio is lower than DFSVX and DFFVX above, the stocks it invests in are
nowhere near as valuey as either of the above, and nowhere near as small or as
well diversified as those in DFSVX. We also don't like that this fund
has quite a bit of REITs in it.
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| iShares S&P Small Cap 600 Value Fund (IJS). E/R: 0.25%.
This ETF tracks the S&P SmallCap 600/Citigroup Value index. For more information on ETFs,
see here.
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| iShares Russell 2000 Value Fund (IWN). E/R: 0.25%. This ETF
tracks the Russell 2000 Value index. For more information on ETFs, see
here.
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| SSgA streetTRACKS U.S. Small Cap Value Index Fund (DSV). E/R: 0.27%. This ETF
tracks the Dow Jones Small Cap Value Index. For more information on ETFs, see
here.
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| iShares Morningstar Small Value Fund (JKL). E/R: 0.30%. This ETF
tracks all stocks which Morningstar considers to be "Small Value." For more information on ETFs, see
here. |
| Rydex S&P SmallCap 600 Pure Value ETF (RZV). E/R: 0.35%.
This ETF tracks the S&P SmallCap 600/Citigroup Pure Value Index. It is
both extremely small (as measured by weighted average market capitalization)
and extremely valuey (as measured by weighted average book to market value).
As of 2/28/09, this fund's weighted average book to market ratio was 82% more
valuey and it's weighted average market capitalization was 83% smaller than DTMVX
below. Unlike
virtually all other passively managed funds, this fund isn't weighted by
market cap, but rather by "value-ness." As an ETF, we expect
this fund to be perfectly capital gains tax efficient (which is good).
However, it has a dividend yield that is three times as high as DTMVX below.
While this contributes to making this fund more "valuey", it also makes it
somewhat less tax efficient. For more information on ETFs, see here.
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| DFA Tax-Managed U.S. Targeted Value Portfolio (DTMVX) (formerly the DFA
Tax-Managed U.S. Small Cap Value Portfolio). E/R: 0.47%. This
fund is both extremely small (as measured by weighted average market
capitalization) and extremely valuey (as measured by weighted average book to
market value). It basically has a strategy of
emulating the returns of the
25% most valuey of the 18% of US publicly traded companies with the lowest
market capitalization (i.e., those smaller than the 500th largest). It also endeavors to maximize tax-efficiency by
minimizing both capital gains and dividend distributions. This tax
management causes its pre-tax performance to be expected to diverge fairly markedly (in a random
fashion) from the similar (non-tax-managed) DFSVX (its higher market
capitalization causes its pre-tax performance to further diverge from DFSVX). Note that none of the
options below can be expected to be anywhere near as tax-efficient as this
option. As of 2/28/09, this fund's weighted average
market capitalization was about the same and its weighted average book to
market ratio was 46% more valuey than VISVX/VBR above. Our preference for
DTMVX over VBR is not a strong one.
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| Vanguard Small Cap Value ETF (VBR). E/R: 0.15%. This ETF is a
share class of the Vanguard Small Cap Value Index Fund (VISVX). As such, it
should benefit from greater internal efficiency that incoming cash flows
bring, as compared with other ETFs. While ETFs by their very nature tend
to be more (capital gains) tax-efficient than non-ETFs, Vanguard ETFs are an
exception — they will be exactly as tax-efficient as their parent fund. For more information on ETFs, see here.
We don't like this fund as much as DTMVX because this fund
has quite a bit of REITs in it.
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| Vanguard Small Cap Value Index Fund (VISVX). E/R: 0.28%.
This fund tracks the MSCI US Small Cap Value Index. While its expense
ratio is lower than DTMVX above, the stocks it invests in are less
valuey, less small, and less diversified than those
in DTMVX. Further, VISVX is not tax-managed. We don't like that
this fund has quite a bit of REITs in it.
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| iShares S&P Small Cap 600 Value Fund (IJS). E/R: 0.25%.
This ETF tracks the S&P SmallCap 600/Citigroup Value index. For more information on ETFs,
see here.
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| iShares Russell 2000 Value Fund (IWN). E/R: 0.25%. This ETF
tracks the Russell 2000 Value index. For more information on ETFs, see
here.
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| SSgA streetTRACKS U.S. Small Cap Value Index Fund (DSV). E/R: 0.27%. This ETF
tracks the Dow Jones Small Cap Value Index. For more information on ETFs, see
here.
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| iShares Morningstar Small Value Fund (JKL). E/R: 0.30%. This ETF
tracks all stocks which Morningstar considers to be "Small Value." For more information on ETFs, see
here. |
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