Market Overview

Big Value In A Small-Cap Package

Big Value In A Small-Cap Package

The value factor made its presence felt last year, prompting investors to put billions of dollars of new capital to work with large-cap value exchange-traded funds, but investors do not need to limit their affinity for value stocks to large-cap names.

Historical data suggest longer-term investors should embrace small-cap value funds. Since the start of the current bull market, small-cap value ETFs have been among the best-performing non-leveraged ETFs.

One small-cap ETF to consider is the iShares S&P SmallCap 600 Value Idx (ETF) (NYSE: IJS). The $4.86 billion IJS tracks the S&P SmallCap 600 Value Index, the value offshoot of the widely followed S&P SmallCap 600 Index.

Many of nearly 440 stocks held by IJS “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,” said Morningstar in a recent note.

Value And Volatility

Value should not imply lower volatility. IJS has a three-year standard deviation of 15.6 percent compared to just under 15.1 percent for the iShares S&P SmallCap 600 Index (ETF) (NYSE: IJR). Likewise, IJS does not offer a significant dividend yield advantage relative to IJR as both ETFs sport trailing 12-month yields around 1.2 percent.

“Unlike value index funds derived from the Russell 2000 Index and CRSP U.S. Small Cap Index, S&P requires new constituents in the fund's parent benchmark to have positive net income over the previous four quarters. This requirement reduces the fund's exposure to firms in severe financial distress. S&P may also consider other measures of financial viability, such as leverage,” noted Morningstar.

Why Consider IJS

Unlike large-cap value ETFs, IJS does not feature a large weight to energy stocks, but like its large-cap peers, IJS does have a hefty financial services weight. That sector is the largest in IJS at almost 19.1 percent of the ETF's weight. Industrial and consumer discretionary stocks combine for over 36 percent of the ETF's weight while technology and healthcare names combine for over 20 percent.

Again, IJS is a solid idea for those investing for the long haul.

“Small-cap value stocks have a good long-term record. From its inception in December 1978 through December 2016, the Russell 2000 Value Index (which offers similar exposure to this fund) outpaced the Russell 2000 Growth Index by about 3.7 percentage points annually. This outperformance has not been consistent. Over the past 10 years, the Russell 2000 Value Index lagged its growth counterpart by 1.5 percentage points annualized. While they won't always come out ahead, value stocks will likely offer a modest return edge over the long term,” according to Morningstar.


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