Eric Dutram: Value Investing is an investment strategy that involves the selection of stocks that trade below their intrinsic value. Value Investors seek for shares of companies that do not represent their true intrinsic value or have been undervalued by the market. (Try Value Investing With These Large Cap ETFs)
Value investors are of the view that the market often reacts in an exaggerated way to both positive and negative news of certain stocks. This leads to movement in stock prices that do not reflect the company’s long-term fundamentals. The strategy is to invest in the stock when it appears to be somewhat inexpensive so as to take advantage of the correction when the stock finally reflects its true market price.
Companies with small market capitalization are looked upon as those which offer opportunity to exploit market inefficiency. So, a combination of the two, the small cap stocks and value stocks, together can form the best performing market segment. In order to play in the market with these two kinds of stocks at the same time, small-cap value fund is the best available option to an investor. Value small cap funds tend to exhibit higher risk adjusted returns than large and growth stocks. (Guide to Small Cap Emerging Market ETFs)
Value small cap funds also deliver higher returns. The additional return that the investor gets in these funds is the risk premium, as both the value stock and small cap stock are deemed to be risky investments.
Small cap stocks have less international exposure than their large cap counterparts. So small cap stocks rely more on the domestic economy for performance. If the international economy performs better than the domestic economy, then small cap stocks can underperform. (3 Stocks With Magic PEG Ratios).
Small Cap Value ETFs
For investors who are willing to take up high risk levels in hopes of achieving higher growth rates in a section of their portfolio, any of the five small cap value ETFs we have highlighted below could be an excellent choice:
Russell 2000 Value Index Fund (NYSEARCA:IWN)
Russell 2000 Value Index Fund is the oldest ETF which provides exposure to the small capitalization value sector of the U.S. equity market. The ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of small cap value stocks, as measured by the Russell 2000 Value Index. The product appears to be liquid as approximately 1.5 million shares change hands on a daily basis. The fund invests its $3867.5 million of net assets in 1360 stocks. The fund invests just 4.6% of its asset in the top ten holdings which suggest that the fund is hardly concentrated. BioMed Realty Trust Inc. (NYSE:BMR) and National Retail Properties, Inc. (NYSE:NNN) occupy the top two positions in the fund.
Among the sectors, Financials, Producer Discretionary and Consumer Discretionary hold the lion’s share making up 65.3% of the total investment. (Play A Consumer Recovery With These Discretionary ETFs) For the investment made in the ETF, the investor pays an expense ratio of 40 basis points. Due to heavy weighting towards Financials, the fund delivered a negative return of 1.2% over a period of one year.
S&P Small Cap 600 Value Index Fund (NYSEARCA:IJS)
S&P Small Cap 600 Value ETF, introduced in July 2000, seeks to provide exposure to U.S. small-cap value stocks and tracks the S&P SmallCap 600 Value Index. The fund holds a total of 455 small cap stocks. The fund has a total asset base of $2,125.5 million of which 8.2% is invested in the top 10 holdings. So like IWN, the fund appears to be diversified with assets not just concentrated in the top 10 holdings but also spread among other companies beyond the list of top 10. Among the different sectors Financials and Industrials occupy the top two positions with 46.2% of investment made in these two categories. The fund charges a premium of 25 basis points for the investment. Despite a tilt towards the financial sector, the fund could deliver a return of 4.51% over a period of one year.
Vanguard Small-Cap Value ETF (NYSEARCA:VBR)
Vanguard Small-Cap Value ETF seeks investment results that generally correspond to the performance of the MSCI US Small Cap Value Index. The MSCI US Small Cap Value Index represents the value companies of the MSCI US Small Cap 1750 Index. The fund has a total asset base of $7.2 billion of which 4.5% is invested in the top 10 holdings. A low concentration level in the top 10 holdings suggests that the fund is spread among other companies. Among sectors, a maximum of 37.3% is invested in Financials, while the fund is light on Telecommunication Services with just 0.3% of investment made in that sector. The fund could deliver a return of 0.20% over a period of one year and charges a premium of 21 basis points from investors.
WisdomTree SmallCap Dividend Fund (NYSEARCA:DES)
Another fund tapping the small cap value companies, WisdomTree SmallCap Dividend Fund, was introduced in June 2006. WisdomTree SmallCap Dividend Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the WisdomTree SmallCap Dividend Fund.
The WisdomTree SmallCap Dividend Index is a fundamentally weighted index measuring the performance of the small-capitalization segment of the US dividend-paying market. The Index comprises of companies that make up the bottom 25% of the market capitalization of the WisdomTree Dividend Index after the 300 largest companies have been removed. The index is dividend weighted annually to reflect the proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year, based on the most recently declared dividend per share number.
The fund holds a total of 624 stocks with 11.1% of the total asset base of $304.1 million invested in the top 10 holdings. Among sectors, the fund is heavily invested in Financials with 53.87% asset invested in the sector. The fund charges an expense ration of 38 basis points and delivered a one-year return of 4.78%,
Morningstar Small Value Index Fund (NYSEARCA:JKL)
Morningstar Small Value ETF, launched by iShares, seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Morningstar Small Value Index. The fund with a total asset base of $159.2 million holds a total stock of 235. The fund invests 8.83% of its assets in the top ten. Among sectors, Financials occupies the top position while the fund is light on Energy. The fund charges a total premium of 30 basis points and has delivered a negative return of 2.47% over a period of one year.
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