It’s not that the returns have been bad, but like their large-cap counterparts, small-cap value stocks have lagged broader smaller stock gauges. Over the past three years, the Russell 2000 and S&P SmallCap 600 value indexes returned an average of 37. 5% while the average return for the two parent gauge over the same span was about 42%.
To be sure, not all small-cap value ETFs have been duds. Some, including actively managed products, outpaced the percentages mentioned above, thoroughly outpaced broader and small-cap value benchmarks. However, those were exceptions, not rules, confirming it’s been a rough go for previously potent, long beloved factor combination.
“Small-value portfolios invest in small US companies with valuations and growth rates below those of other small-cap peers,” notes Morningstar’s Tori Brovet. “Stocks in the bottom 10% of the capitalization of the US equity market are defined as small caps. Value is defined based on low valuations (low price ratios and high dividend yields) and slow growth (low growth rates for earnings, sales, book value, and cash flow). ”
Fortunately, there are ways for advisors and investors to beat the small-cap value blues. Let’s examine one ETF with that potential.
USVM: A Nifty Spin on Small-Cap Value
Alright, perhaps some liberties were taken with the headline that frames the VictoryShares US Small Mid Cap Value Momentum ETF (NASDAQ: USVM) as a “hidden gem. ” This is a $1. 23 billion ETF that turned eight years old last October so it’s neither small nor young. Importantly, it’s a Morningstar medalist in the small-cap value category.
“Morningstar expects the highly rated small-value funds on this list to outperform their peers over a full market cycle. But even though all the funds on our list fall into the same category, they may practice different strategies and therefore behave differently from each other,” adds Brovet. “Investors need to do some homework to understand exactly what a particular fund invests in before buying. ”
As its name implies, USVM marries the value and momentum factors, dispelling the notion that the latter is confined to growth stocks. Advisors and experienced investors know momentum is style-agnostic and its applications are pertinent across market capitalization spectrums.
Some of the ETF’s advantages may be attributable to its mid-cap leanings. Its 287 holdings have a weighted average market value of $5. 35 billion – mid-cap territory to be sure. That’s alright because mid-caps are less volatile than small-caps and a prime territory for value hunters. The ETF’s value bias is confirmed by an approximately 48% allocation to financial services, healthcare and industrial stocks – quintessential value sectors.
Understanding USVM Advantages
The VictoryShares ETF Nasdaq Victory US Small Mid Cap Value Momentum Index, which it transitioned to in November 2022 and that benchmark is the source of some of the ETF’s perks.
“The Index is designed to deliver exposure to equity securities of small and mid capitalization issuers that have higher exposure to value and momentum factors while also maintaining moderate turnover and lower realized volatility than traditional capitalization weighted indexes,” according to the issuer.
USVM’s annual fee is 0. 25%, or $25 on a $10,000 investment, which is far lower than what advisors are likely to find on competing actively managed mutual funds.
