Value Investing Small Cap Stocks: A Guide to Getting Started

Value investing small cap stocks can be a great way to grow your wealth over time. This strategy involves identifying undervalued companies with strong potential for growth.

To get started, you'll want to focus on small cap stocks, which are companies with a market capitalization of $300 million to $2 billion. These stocks often have a higher growth potential than larger companies.

Small cap stocks are also more volatile, which can make them riskier investments. However, if you're willing to take on that risk, you can potentially earn higher returns.

Start by researching and identifying small cap stocks that meet your criteria for value investing. Look for companies with a low price-to-earnings ratio, low debt, and strong financials.

The SVAL ETF, also from Blackrock, is a relatively new kid on the block with a very short track record. It has just 232 holdings, which is by design, as it tracks the Russell 2000 Focused Value Select Index that has few holdings.

This ETF is supposed to be an improvement on the other indexes, being slightly smaller and significantly more value-y. However, its one-year return of 1.82% is significantly lower than that of any other ETFs in this analysis, making it a bit of a disaster.

Interestingly, SVAL is already twice as liquid as two of the three Vanguard ETFs, which is a plus. However, its very short track record and the fact that it trusts Russell to make a decent index make me a little skeptical. I'd probably hold off on this choice for a few years.

Here's a comparison of the SVAL ETF's holdings with the other small value ETFs:

As you can see, SVAL has significantly fewer holdings than the other ETFs, which might be a concern for some investors.

When choosing an index for value investing small cap stocks, the decision is crucial because it directly affects the fund's investments.

The methodology of deciding what a small company is, for example, can significantly impact performance.

This is particularly relevant for styles or factors, where the definition of small and value matters a lot more than with total market index funds.

The decision on which index to choose is really looking at the fund's investments.

If you're looking for small cap ETF options, there are several choices available.

Vanguard's VBR is a popular option, with an expense ratio of 0.07%. It's a well-diversified fund that has been a reliable choice for many investors.

One of the benefits of ETFs is that they can be purchased at any brokerage for minimal cost, making them a great option for investors with money spread across multiple brokerages.

The S&P SmallCap 600 Value Tracking ETF offers a solid option at a reasonable cost, with minimal tracking error making it a good choice for those who prioritize this metric.

VIOV is an obvious tax-loss harvesting partner for people with a primary holding of VBR, and is a good option for those who want to minimize tracking error.

If you're looking for an actively managed ETF, the DFA and Avantis options are worth considering, with DFA winning the one-year performance battle and Avantis winning the three-year performance.

Here are some key characteristics of the small cap ETF options:

Keep in mind that the IRS may argue that these ETFs are substantially identical, but the CUSIP is different, so nobody really cares.

Small-cap stock indexes are offered by many brokerages, allowing you to invest in the U.S. small-cap market through mutual funds or ETFs.

The Vanguard Small-Cap Index Fund (VSMX) and the Fidelity Small Cap Index Fund (FSSNX) are two examples of such funds.

There are two main small-cap indexes used as benchmarks for the small-cap equities market.

These indexes are used to track the performance of small-cap stocks and provide a basis for comparison between different investment options.

The methodology of deciding what a small company is and what a value company is affects performance, making this decision critical when choosing a fund that tracks a small-cap index.

Some small-cap value ETFs have shown surprisingly strong performance over the last decade, particularly those tracking the S&P SmallCap 600 Value Index.

The S&P SmallCap 600 Value Index tracking ETFs have actually outperformed the CRSP Small Value Index tracking ETF, VBR, despite being smaller and more value-y.

These ETFs can be broken down into six groups based on the index they track, including the CRSP Small Value Index, S&P SmallCap 600 Value, S&P SmallCap 600 Pure Value, Russell 2000 Value, Russell 2000 Focused Value Select Index, and no index.

Here's a rough breakdown of the ETFs within each group:

Keep in mind that some companies, like Vanguard and Fidelity, pass back a higher percentage of the income from securities lending to shareholders, which can impact performance.

Tracking performance is a crucial aspect of evaluating funds and ETFs. Tracking error, which is the difference between the fund's returns and the index it tracks, matters, but it's not the only factor.

Some companies, like Vanguard and Fidelity, are better at tracking indexes than others. These companies pass back a significant portion of the income from securities lending to shareholders, which can make up for a portion of the fund's expense.

The price of the fund is also a consideration, but it should be built into the tracking error. I've seen some funds with high prices, but they still manage to track their indexes closely.

The article breaks down the 10 ETFs into six groups based on the index they track. Here's a list of the groups:

The Russell 2000 tracking ETFs have almost identical 10-year returns, which is expected.

Small caps have been one of this year's "Trump Trades", along with the US dollar, cryptocurrencies, and rising bond yields.

History doesn't repeat, but it does often rhyme, as attributed to Mark Twain, and this postelection small-cap rally is the third straight one.

The current postelection small-cap rally may fizzle just like its predecessors did, but there are reasons to consider this unloved asset class beyond politics.

Policy will have an impact on markets, but so will lots of other factors, and fundamentals like earnings, cash flows, and valuations will drive markets over the long term.

Starting valuations play a larger role in returns than the party in the White House, according to Morningstar Investment Management's analysis of presidential cycles since 1881.

Small-cap stocks score well in terms of valuation, and Morningstar Investment Management's positioning in US Small Cap is "Overweight."

Large-cap and small-cap value investing may have been thought to be vastly different, but research has shown that they can earn similar returns. This challenges the long-held assumption that small-cap stocks are the way to go for growth.

The academic approach to investing has led some to believe that small-cap stocks are the key to beating institutional investors. However, this isn't always the case. In fact, a study found that large-cap and small-cap value portfolios earned similar returns over a 10-year period.

One reason for this similarity is that large-cap stocks offer stability and dividends, which can provide a steady stream of income for investors. This can be especially appealing to those who are nearing retirement or have a conservative investment strategy.

A study published in 2020 found that there was no difference in average returns between large-cap and small-cap portfolios over a 57-year period. This challenges the conventional wisdom that small-cap stocks are the better choice for growth.

Here's a breakdown of the returns:

It's worth noting that this study controlled for other factors, such as beta, to ensure that the results were accurate. This means that the similarity in returns between large-cap and small-cap portfolios is not just a coincidence.

Overall, the research suggests that large-cap and small-cap value investing can be a viable option for investors. While small-cap stocks may still offer more room for growth, large-cap stocks can provide stability and dividends, making them a more attractive option for some investors.

Small-cap stocks can offer a strong financial return if you invest in a stock with good fundamentals and hold it for the long term.

A key factor in the success of small-cap stocks is their potential for long-term growth, as they can grow significantly over time if the company performs well.

To give you a better idea, here are some key characteristics of small-cap stocks that can help you make an informed investment decision:

Penny stocks, on the other hand, are considered high-risk investments due to their low price, lack of liquidity, and wide bid-ask spread.

Mid-cap stocks are a safer bet than small-cap stocks, with less volatility and risk involved. This makes them a more stable investment option for those who want to play it safer.

Mid-cap stocks tend to have a more established track record than small-cap stocks, which can provide a sense of security for investors. However, this also means they may not offer the same level of growth potential as small-cap stocks.

In general, mid-cap stocks are a good choice for investors who want a balance between stability and potential returns.

Small-cap stocks are generally companies with a market capitalization between $250 million and $2 billion. This range can vary among brokers, but it's a good starting point for understanding small-cap stocks.

These companies are attractive investment opportunities because they have the potential for significant growth. In fact, small-cap stocks have historically outperformed large-cap stocks, although they are also more volatile and riskier.

To calculate a company's market capitalization, you multiply its current share price by the number of outstanding shares. This gives you a sense of the company's current value in the market.

Many small-cap stocks are well-established businesses with strong track records and great financials. They're not just startups or brand new companies, but rather companies that are smaller in size.

Here are some key characteristics of small-cap stocks:

Overall, small-cap stocks offer the potential for significant growth, but also come with more risk. Investors should carefully evaluate companies with a smaller market cap to determine if there is growth potential before making any investment decision.

If you're interested in investing in small-cap stocks, there are several options to consider. You can invest in individual companies, but this requires researching their earnings and revenue growth, price-to-earnings ratio, and price-to-sales ratio.

Researching individual stocks can be time-consuming and seems too risky for some investors. In this case, you can buy small-cap mutual funds or exchange-traded funds (ETFs). These might track broad small-cap indexes, specific industries within the small-cap market, or investment goals like value or growth.

One popular option is Vanguard's Small Value Index Fund (VSIAX for the traditional mutual fund; VBR for the ETF version). It has a low expense ratio of 0.07% and is well-diversified.

Another option is DFA's small value fund, which is smaller and more value-y. However, it's a mutual fund and requires an investment advisor to access. Avantis also offers an actively managed ETF that follows the DFA methodology, with a slightly lower expense ratio.

Here are some key characteristics of these investment options:

Ultimately, the best option for you will depend on your individual financial goals and risk tolerance. It's essential to do your research and consider factors like expense ratio, diversification, and manager risk before making a decision.

Investing in small cap ETFs can be a great way to gain exposure to this asset class. You can choose from a variety of options, including the Vanguard Small Value Index Fund (VBR) or the DFA Small Value fund.

One of the advantages of ETFs is that they can be purchased at any brokerage for minimal cost, making them a great choice for investors with money spread across multiple brokerages. The explosion of ETFs has created numerous additional options for small value investors, so it's worth taking a closer look at your choices.

If you're looking for a small value ETF with a low expense ratio, VBR is a good option, with an expense ratio of 0.07%. You can also consider the actively managed ETFs, such as DFA or Avantis, which may offer more value and smaller size than VBR, but come with higher expenses and manager risk.

Here are some small value ETF options to consider:

The small-value rally after the last two elections is a fascinating topic. In November and December 2016, small-value stocks rallied due to the "Trump Bump" which lifted stocks perceived as beneficiaries of candidate Trump's platform.

US Steel X was one of the stocks that soared during this time. Investors were uneasy about technology stocks under Trump, however, as they were perceived as negatives for Silicon Valley.

The Morningstar US Technology Index lagged the broad market in November and December 2016. The tech sector, led by the FANG acronym, was popularized in 2013 but was seen as a negative under Trump.

By 2017, the small-value rally had died, as expectations for the Trump presidency reset and parts of his agenda failed to advance. The Morningstar US Small Value Index was the worst performing of the nine style box benchmarks in 2017.

Earnings, profits, and investor sentiment favored the tech sector, which returned to dominance in 2017. This shows that the impact of politics on markets is typically overestimated.

To invest in small-cap ETFs, you can start by researching individual small-cap stocks, but be aware that this can be time-consuming and risky. Earnings and revenue growth are crucial factors to consider, as even a company without a profit should show growth and increasing revenue.

Investing in individual small-cap stocks requires a significant amount of time and knowledge, so it's essential to evaluate a company's price-to-earnings ratio, which compares the current share price to the earnings per share. This helps you measure the value of the company's shares.

If researching individual stocks seems too daunting, you can opt for small-cap mutual funds or ETFs that track broad small-cap indexes. These funds can provide diversification and reduce risk.

To get started, consider the following factors when selecting a small-cap ETF: earnings and revenue growth, price-to-earnings ratio, and price-to-sales ratio. These metrics will help you make an informed decision about which ETF to invest in.

When researching individual small-cap stocks, it's essential to examine their earnings and revenue growth. This will give you an idea of whether the company is on the right track.

A company's price-to-earnings ratio (P/E ratio) is another crucial factor to consider. This ratio compares the current share price to the earnings per share, providing insight into the value of the company's shares.

You'll also want to look at the price-to-sales ratio, especially if the company doesn't yet have any earnings per share. This will help you compare the company's performance to other small-cap stocks.

Before investing in a small-cap stock, make sure to research its earnings and revenue growth, price-to-earnings ratio, and price-to-sales ratio.

Here are some key metrics to consider when evaluating small-cap stocks:

By considering these factors, you'll be well on your way to making informed investment decisions in the world of small-cap stocks.

The iShares S&P Small-Cap 600 Value ETF, IJS, is another option to consider, formed in 2000.

This ETF tracks the same index as VIOV, but charges a little more and seems to have more trouble tracking its index.

IJS has a similar performance to VIOV, but its difficulty tracking its index and slightly lower performance make it less appealing.

The major benefit of IJS over VIOV is liquidity, but whether that's worth the trade-off is debatable.

Small-cap stocks offer a unique set of advantages that can make them an attractive investment option. They have more potential for growth relative to large-cap companies.

One of the biggest advantages of small-cap stocks is their lower share price, making it easier to get started with investing. This also means that share prices can't be artificially pushed up by mutual funds or hedge funds.

Small-cap companies can be found in all industries, providing a variety of options for investing. This is not limited to start-ups, as many small-cap companies have been in business for a while.

Because small-cap companies are less well-known, they are often priced below their value and can provide a solid return on investment.

Here are some key advantages of small-cap stocks:

However, small-cap stocks also come with some significant disadvantages. They can be volatile, with prices fluctuating widely due to market changes.

Investing in small-cap stocks is a riskier proposition than investing in large-cap stocks. The companies have less access to investment capital and are more sensitive to market changes.

You'll need to do your own research and have a solid understanding of company valuation before investing in small-cap stocks. This can be time-consuming and challenging.

Here are some key disadvantages of small-cap stocks: