By Dr. James M. Dahle, WCI Founder

Many stock mutual fund investors are “factor investors.” That means they “tilt” their portfolio toward stocks with certain factors in hopes of achieving higher risk-adjusted returns going forward. The idea is to diversify between different factors or risks rather than just between sectors and different stocks. I have discussed this many times and encouraged those who choose to tilt their portfolios to stay the course even when it seems their tilt is out of favor.

med school scholarship sponsor

Most recently, I published a post in May 2020 (written earlier) encouraging people to stay the course with their small value tilt, the most common factor tilt, even though it appeared to “not be working” at the time. From the bottom of the market in March 2020 through the rest of 2020, small value outperformed the overall market 85% to 70%. Small value beat the overall market 28.09% to 25.71% in 2021 and even in 2022's cratering market thus far, small value funds with Fidelity and Vanguard have managed to do a little less bad (down 10% vs 18% as of 5/25/22) than the rest of the overall market.

The purpose of today's post is not to debate whether you should tilt your portfolio to small and value. If you want to read more about that, try these posts:

Instead, we're going to talk about what vehicle you should use if you choose to tilt your portfolio to small and value.


What Small Value ETF Funds I Have Used

My records show that the first time I bought a share of a small value fund was in July 2007. I've been a big fan of Vanguard since I became financially literate more than 15 years ago, so I've always used the Vanguard Small Value Index Fund (VSIAX for the traditional mutual fund, VBR for the ETF version) for this tilt. I've always been aware it was neither the smallest nor the most valuey of small value funds. But the cost was very low, and it was well-diversified. It served my purposes. If I wanted more tilt to the portfolio, I could just add more of it. The big debate back then was whether it was worth paying an investment advisor to get access to the Dimensional Fund Advisors' (DFA) small value fund, which was smaller and more value-y. I wrote about that back in 2013 and, in fact, actually use both of them in my childrens' 529s:

Now, more and more investors are using ETFs rather than mutual funds. Aside from the unique Vanguard Fund/ETF structure, ETFs are a little more tax-efficient than traditional funds, and they can be purchased at any brokerage for minimal cost. Since we have money spread across Schwab, Fidelity, and Vanguard brokerages (not necessarily by choice), using ETFs allows us to use the same fund in each place. The explosion of ETFs has created numerous additional options for small value investors, so I thought it was time for me to take a look at my fund choice again. As a reminder, our overall portfolio asset allocation looks like this:

Stocks/Bonds/Real Estate: 60/20/20

  • US Total Stock Market: 25%
  • US Small Value: 15%
  • Total International Stock Market: 15%
  • International Small: 5%
  • TIPS: 10%
  • Nominal Bonds: 10%
  • US REITs: 5%
  • Equity Real Estate: 10%
  • Debt Real Estate: 5%

Since small value makes up as much of the portfolio as all of my private real estate holdings, it seems worthwhile to spend some time on this decision. Plus, as our taxable to tax-protected account ratio rapidly grows, we're now having to move small value stocks into our taxable account (along with TSM, TISM, IS, nominal bonds, and real estate). So, we now need tax-loss harvesting partners, i.e. ETFs that we're just as comfortable holding long-term as our original choice. Is VBR really still the best choice for us?


Small Cap Value ETF Options

Let's go through each of the reasonable options one by one and discuss their various merits. We'll start with this overview chart comparing small value ETFs (you can click on the image below to make it larger). Note that I am only looking at ETFs, not traditional mutual funds. If you are willing to look at funds too, be sure to look at the DFA and Fidelity options in addition to these eight ETFs.

small cap value ETFs chart


#1 VBR

Unlike the other options in this list, the Vanguard Small Value Index Fund is available as a traditional mutual fund (VSIAX, started in 1998) or as an ETF (VBR, started in 2004). It boasts a very low expense ratio at just seven basis points. That's not quite free, but it is very close. As you can see, it is not a 100% small value fund. None of these ETFs are, but this one is less so than any of the others. There is a fair amount of both mid-caps and “blend” stocks. In fact, this is what draws most of its criticism—it isn't small or value-y enough for some people's taste. Personally, I appreciate its low costs and liquidity and Vanguard's demonstrated ability to closely track an index over long periods of time.



Unlike its mutual fund lineup, the Vanguard ETF lineup includes three small value index funds. The Vanguard S&P Small Cap 600 Value ETF (VIOV), founded in 2010, is not as old as VBR (2004), but it has become a worthy alternative. It is significantly smaller than VBR and slightly more value-y. It only has half as many stocks, so it is less diversified. It is also dramatically less liquid. Even Vanguard tries to steer you away from this ETF and in to VBR:

VIOV is what we use in our taxable account as a tax loss harvesting partner for VBR.



The third small value ETF in the Vanguard lineup was started at the same time as VIOV (2010), but it follows a different index—the Russell 2000 Value Index. This fund offers more diversification than either of the above funds with 1,434 stocks, but that's about the last good thing I can say about it. It is about as small as VIOV but slightly less value-y. It has about the same liquidity, it costs about the same, and it has just as much trouble tracking its index closely. However, despite a very similar make-up, its performance over the last 10 years is dramatically worse, about 1.5% worse than VIOV and VBR. I don't know what it is about Russell indexes, but the performance of index funds that track them never seems to be very impressive to me.


#4 IJS

Moving from Vanguard over to Blackrock's iShares, we come to the iShares S&P Small Cap 600 Value ETF. This tracks the same index as VIOV above, but it charges a little more and seems to have more trouble tracking its index. Still, it is the best performing option in this asset class over the last 10 years.

This ETF was formed in 2000 and, thus, is one of the granddaddies among small value ETFs. The major benefit of IJS over VIOV is simply liquidity, but I'm not sure I'd give that up in exchange for such difficulty tracking its index, at least up until the last five years. This indexing stuff doesn't seem to be that hard, but this particular ETF sure seems to struggle with it (though the last year has seen the 10-year tracking error drop from 0.65% to 0.19%).


#5 IWN

This second offering from iShares follows the Russell 2000 Value Index, similar to VTWV. It has great liquidity (it is the most liquid of these eight ETFs), and it does a better job tracking its index than IJS does. Maybe the problem is its index. Like IJS, this ETF was formed in 2000. Despite its massive liquidity, it is still significantly more expensive than its Vanguard counterparts with an expense ratio of 0.24%. In fact, given the higher ER, it is impressive that its long-term tracking error is so similar.

small cap value index ETFs



This is a brand-new ETF without a significant track record. It is one of the least diverse of the small value ETFs with just 285 holdings. That is by design, as it tracks an index that has just 250 holdings. The Russell 2000 Focused Value Select Index is supposed to be an improvement on all of the above indexes. It is slightly smaller and significantly more value-y. Its one-year return is 2.79%, and its one-year tracking error is 0.22%.

It's a little bit DFA-like, passive but with rules that are supposed to beat traditional indexing techniques. I'm a little skeptical. Given its very short track record and the fact that it trusts Russell to make a decent index, I think I'll hold off on this choice for a few years. Interestingly, it's already twice as liquid as two of the three Vanguard ETFs.



This is SPDR's answer to VIOV and IJS. Actually, it's been around just as long as IJS and a decade longer than VIOV. It is cheaper and almost as liquid as IJS, but it shares the same trouble tracking its index (although more recently, it seems to be doing better with this).


#8 RZV

Here is a fairly unique ETF, designed for those who think that even the S&P Small Cap 600 Value and the Russell 2000 Value indexes aren't value-y enough for their taste. The Invesco S&P 600 Small Cap 600 Pure Value ETF follows its namesake index, the S&P Small Cap 600 Pure Value index, and as you can see, it is even more value-y.

If you want small value, this is small value. But look what you have to give up to get it. You have to give up diversification (only 172 stocks compared to 285-1,400 in the other ETFs), you have to give up additional expenses (0.35% vs. 0.07-0.20%), you have to give up liquidity (it's the least liquid of the ETFs), and you still have significant tracking errors. Some years that tracking error is pretty small, but in other years, it is as high as 0.79%.


How to Choose an ETF

When choosing an index fund to represent an asset class in your portfolio, there are really only two questions that you need to answer.


#1 Which Index?

This decision is really looking at what does the fund invest in. When it comes to styles or factors, this matters a lot more than with total market index funds. The methodology of deciding what a small company is and what a value company is affects performance.


#2 How Well Does the Fund (or ETF) Track It? 

It turns out there is some skill required to track an index, and some people and companies are better at it than others. The price definitely matters but should be built in to the tracking error. Most funds lend securities to short sellers, and this has the potential to make up for a significant portion of a fund's expense. But only some companies (like Vanguard and Fidelity) pass all of the income from those activities back to the shareholders. iShares only passes back 75%-82% of that income to shareholders. Invesco passes back 90%.

When looking at these eight ETFs, they can really be broken down into five groups based on the index they track.

  • CRSP Small Value Index (VBR)
  • S&P Small Cap 600 Value (VIOV, IJS, SLYV)
  • S&P Small Cap 600 Pure Value (RZV)
  • Russell 2000 Value (VTWV, IWN)
  • Russell 2000 Focused Value Select index (SVAL)

As you would expect, the Russell 2000 tracking ETFs have almost the exact same 10-year returns. Which makes what has happened with the S&P Small Cap 600 Value tracking ETFs 5-15 years ago all that much more bizarre. Take a look at this chart that was put together just before the market began to crater at the beginning of 2022:



I mean, what in the world? The only good news there is that it seems they're all getting better at doing this indexing thing in the last five years.

I find the S&P 600 Index to be intriguing and attractive. Given how large growth has outperformed small value over the last decade, I would have expected these ETFs to have underperformed VBR over that time period, like the Russell 2000 Value tracking ETFs and, most impressively, RZV. But they didn't, despite being smaller and more value-y.

I am also curious to see how SVAL does over the next few years, but its track record is just too short for me to be willing to bet on it.


Best Small Cap Value ETF

Your good options here are three-fold:


#1 The Case for VBR

I still think VBR is the best choice for me. It is liquid, diverse, very low cost, and it tracks its index well. The only beef anyone has with it is that it isn't as small and value-y as the other ETFs. An easy solution is to simply hold more of it. If you wanted 10% of your portfolio in something like RZV or VIOV, then just put 12% or 15% into VBR and call it good.


#2 An S&P Small Cap 600 Value Tracking ETF

If VBR isn't good enough for you, these three ETFs offer a solid option at a reasonable cost. If minimal tracking error matters most to you, then go with VIOV. If liquidity matters more, then go with IJS or SLYV. Either way, any of these three ETFs make for excellent tax loss-harvesting partners for VBR. Are they substantially different from each other to use as tax-loss harvesting partners? Well, the IRS has a strong argument that they're substantially identical since they all follow the same index. But let's be honest, the CUSIP is different, so nobody really cares. I still have yet to meet someone who was audited on this particular point. VIOV is the obvious tax-loss harvesting partner for me given my primary holding of VBR.


#3 RZV 

This one is for the purists out there. If getting the smallest and most value-y ETF is what you want, this is for you. It has serious liquidity and diversification issues, however. I'm just not willing to put 15% of my portfolio into just 172 of the riskiest companies in the market.

What do you think? Do you use a small value ETF? Which one and why? If you had to tax-loss harvest, which one would you go to? Comment below!