3 Great Small-Cap Value ETFs [iShares Russell 2000 Value Index (ETF), Vanguard Small-Cap Value ETF]

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June 1, 2015 5:34pm NYSE:EES NYSE:IWN

ETFsLawrence Meyers: Continuing my series on interesting exchange-traded funds for every asset class, we move into my favorite arena: small-cap value. I am a value investor, meaning I look for stocks that the market hasn’t discovered yet or that are out of favor for some reason.


small-cap-value-etfs

Smaller companies have further to run than large ones. That’s why you are more likely to see outperformance in the small-cap sector. There are a few choices for ETFs in the small-cap value arena, so I’m going to make suggestions for the average Joe investor, the aggressive investor and the conservative investor.

A straight-ahead small-cap value ETF choice for the average Joe investor is the iShares Russell 2000 Value ETF (NYSEARCA:IWN). This $6.21 billion market cap ETF was launched in 2000, so we have plenty of evidence to evaluate. It is extremely well-diversified with 1,371 holdings.

The ETF basically takes the Russell 2000 index and pulls out companies that have value characteristics in the broadest possible sense.

The average price-earnings ratio is a bit higher than I’d like when it comes to small-cap value, residing at 17.69. There’s also a higher weighting that I’d like in terms of sector allocation, with financials accounting for 41% of the ETF. Industrials comes in at 13%, consumer discretionary at 12%, information technology at 10%, utilities at 7%, materials at 4%, energy at 4% and the rest taken up with a smattering of other holdings.

Its five-year return is 72%, including dividends.

For the aggressive investor, consider the WisdomTree SmallCap Earnings ETF (NYSEArca: EES). It may sound ridiculous, but this ETF only invests in profitable companies. You’d think that an aggressive investor would also want unprofitable companies that might still be generating big revenue. That’s not the case here.

This ETF is a fundamentally weighted index fund, taking the smallest 25% of companies in the universe of profitable small-cap companies, after removing the 500 largest companies. The weighting is earnings-based, so the companies with the largest profits get weighted the most heavily. As for “earnings,” the ETF refers to “core earnings,”as defined by Standard & Poor’s to include expenses, income and activities that reflect the actual profitability of the company.

It’s nicely diversified with 973 holdings, 90% of which are under $2 billion in market cap. It has a 13% weighting in banks, 11% in capital goods, 10% in energy, 5% in consumer durables, 5% in health care, 5% in commercial services and, well, 5% in just about every other sector, giving you nearly equal weighting in all sectors.

The EES fund has doubled over the past five years.

For the conservative investor, there’s a very persuasive argument to go with the famous Vanguard family, specifically its Vanguard Small-Cap Value ETF (NYSEArca: VBR). Vanguard’s approach toward value securities is to evaluate them based on price-to-book, forward earnings-to-price, historical earnings-to-price, dividend-to-price and sales-to-price ratios.

That allows Vanguard to select 825 stocks, of which the top 10 only account for 4.8% of the total asset base. So you are getting true diversification. The sectors are nicely represented as well, with financials at 30%, industrials at 21%, consumer services at 13%, tech at 8%, consumer goods at 7%, and both health care and energy at 5% each.

This article is brought to you courtesy of Lawrence Meyers from Wyatt Investment Research.


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