Skip to Content
ETF Specialist

Small Value's Best Bargain

This ETF offers the cheapest way to take advantage of the small-value premium.

Mentioned: , , , , , , ,

Small-cap value historically has been the best-performing segment of the United States equity market, and  Vanguard Small Cap Value ETF (VBR) offers investors a low-cost way to take advantage of this value premium. It invests in the cheaper and potentially higher-returning half of the U.S. small-cap market. However, VBR is not for the faint of heart. Most small-cap stocks lack sustainable competitive advantages and are typically more volatile than the broad market. Within this segment, value stocks tend to carry slightly greater risk than their growth counterparts. Consequently, VBR is a suitable small core holding for long-term investors with a relatively high tolerance for risk.

Value stocks tend to carry relatively high business risk, poor prospects for growth, and may remain out of favor for years. Yet, investors tend to penalize these companies too much by extrapolating recent performance too far into the future. This myopic focus can push prices below their fair values. Consequently, value stocks have generated better risk-adjusted returns than the market over the long run. Their depressed valuations can provide a margin of safety and offer attractive upside if they exceed expectations, which are low to begin with.

Alex Bryan has a position in the following securities mentioned above: VBR. Find out about Morningstar’s editorial policies.