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ETF Specialist

A Small-Value ETF With an Eye on Profitability

This exchange-traded fund filters out some distressed stocks, but there are cheaper alternatives.

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 IShares S&P Small-Cap 600 Value (IJS) offers well-diversified, market-cap-weighted exposure to small-cap value stocks and screens out some unprofitable names. It also has a considerable cost advantage against its actively managed peers. However, there are cheaper index alternatives, including a couple that track this fund's index, which limits its Morningstar Analyst Rating to Bronze.

The fund targets stocks representing the cheaper and slower-growing half of the S&P SmallCap 600 Index. This sweeps in more than 400 stocks such as Express (EXPR), Finish Line (FINL), and restaurant operator Bob Evans Farms (BOBE). Most of these firms have limited analyst coverage and do not enjoy sustainable competitive advantages. They also tend to have less attractive business prospects than their growth counterparts, so they are not necessarily bargains. But they could become undervalued if investors extrapolate lackluster past growth too far into the future. The fund's holdings are clearly riskier than their larger counterparts, but they should have greater return potential over the long term.

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