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3 Great ETFs to Play a Rebound in Small-Value Stocks

Small-value stocks present an opportunity in an increasingly large-growth world.

3 Great ETFs to Play a Rebound in Small Value Stocks
Securities In This Article
Vanguard S&P Small-Cap 600 Value ETF
Dimensional US Small Cap Value ETF
Avantis US Small Cap Value ETF

Bryan Armour: A mix of earnings growth and widening valuations pulled US stocks out of a rut in 2023. But success wasn’t shared equally across the market. The Morningstar US Large Growth Index returned 47%, while its small-value counterpart earned just 15%.

This leaves large-growth stocks as the most overvalued corner of the style box while small value is the most undervalued, according to Morningstar’s fair value estimates. Investors looking for contrarian opportunities should consider these three small-value ETFs.

3 Great ETFs to Play a Rebound in Small-Value Stocks

  1. Vanguard S&P Small-Cap 600 Value ETF VIOV
  2. Dimensional US Small Cap Value ETF DFSV
  3. Avantis US Small Cap Value ETF AVUV

Vanguard S&P Small-Cap 600 Value ETF, ticker VIOV, receives a Silver Medalist Rating for its diversified portfolio of profitable, small-value stocks. The S&P requires all new entrants to be profitable to join its index, a worthy filter when dealing in some of the smallest and riskiest companies on the market.

S&P’s indexes tend to reach further down the market-cap ladder than other index providers. That means this ETF holds smaller stocks than many category peers. The ETF’s price/fair value ratio is even lower than competitors, giving contrarian investors extra bang for their buck.

VIOV holds roughly 460 companies and charges a low fee, making it a well-diversified and cost-effective option in the small-value category. Despite hitting a rough patch lately, VIOV’s 10-year track record fell in the category’s second-best quintile.

The second ETF on my list is Dimensional US Small Cap Value ETF, ticker DFSV. This Silver-rated ETF leverages its academic foundation and topnotch talent to eke out every advantage it can find.

Dimensional’s portfolio managers start with the smallest 10% of US stocks, then pull in the cheapest 35% of those by price/book ratio. They further avoid holding stocks with relatively low profitability and aggressive asset growth, as these traits tend to lead to poorer returns. This helps the ETF avoid the riskiest stocks in the small-value segment of the market.

This portfolio holds over 900 stocks, effectively diversifying stock-specific risks. It tends to emphasize companies trading at lower valuations than category peers, and its focus on profitability shines through. While DFSV’s short track record is impressive, its sister mutual fund carries a long history of success. It ranks in the category’s top quintile over the past five, 10, and 15 years.

The third ETF on my list is Avantis US Small Cap Value ETF, ticker AVUV. This Silver-rated ETF takes a similar tack as Dimensional’s strategy, which is no surprise given that Avantis was an offshoot from Dimensional.

Avantis ratchets up the small size and value factors a bit more than Dimensional by pulling from the smallest 8% of the US market, then picking stocks with the best combination of value and cash-based profitability and tilting their weights toward those with the strongest traits.

This portfolio isn’t concentrated, though. It holds over 750 stocks, effectively diversifying stock-specific risks in a category rife with them. AVUV’s strong factor exposures and cheap, diversified portfolio have mixed well and are why I own this ETF myself. Over the past three years, AVUV beat its average category peer by over 5 percentage points annually, making it a fantastic option for small-value investors.

Watch Covered-Call and Buffer ETFs: Do the Pros Outweigh the Cons? for more from Bryan Armour.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Bryan Armour

Director of Passive Strategies Research, North America
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Bryan Armour is director of passive strategies research for North America at Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He also serves as editor of Morningstar ETFInvestor newsletter.

Before joining Morningstar in 2021, Armour spent seven years working for the Financial Industry Regulatory Authority, conducting regulatory trade surveillance and investigations, specializing in exchange-traded funds. Prior to Finra, he worked for a proprietary trading firm as an options trader at the Chicago Mercantile Exchange.

Armour holds a bachelor's degree in economics from the University of Illinois at Urbana-Champaign. He also holds the Chartered Financial Analyst® designation.

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