10 Best Small Cap Value ETFs by Performance

As investors look beyond highly priced large cap growth stocks, small cap value ETFs are gaining investor attention as reasonable valuations and greater upside potential look increasingly attractive by comparison. 

Learn more about investing in small cap value stocks, including the associated benefits and risks, and see a list of top-performing small cap value ETFs. 

What Is a Small Cap Value ETF?  

A small cap value ETF is an exchange-traded fund that invests in small cap companies with a value investing approach. Small cap companies have market capitalizations typically ranging from approximately $300 million to $2 billion. Value investing is a strategy that seeks undervalued stocks with the belief that the market has not fully recognized their true intrinsic value. 

More specifically, a small cap value ETF typically includes stocks of companies that meet certain fundamental metrics such as price-to-earnings ratio, price-to-book ratio and other valuation measures. Most small cap value ETFs are passively managed, meaning they aim to replicate the performance of a specific small cap value index. 

The largest small cap value ETF, as measured by assets under management as of July 20, 2023, is the Vanguard Small-Cap Value ETF (VBR), with $26.11 billion in AUM. 

List of 10 Top Performing Small Cap Value ETFs

Here is a list of top-performing small cap value ETFs, as measured by one-year total returns, through July 20, 2023. We eliminated ETFs that did not prioritize holding small cap stocks over larger market capitalizations.

Pros & Cons of Investing in Small Cap Value ETFs

Investing in small cap value ETFs offers distinct advantages, such as potential for outperformance and a value investing approach, but they also have associated disadvantages, such as higher volatility and risk. 

Here are the key pros and cons of investing in small cap value ETFs: 

Pros

• Potential for higher returns: Small cap value stocks have the potential for significant long-term growth. By investing in a diversified portfolio of undervalued small cap companies, investors may capture higher returns compared to larger, more mature companies. 
• Diversification: Small cap value ETFs provide investors with exposure to a broad range of small cap stocks across different industries. This diversification can reduce the risk associated with investing in individual small cap companies. 
• Value investing approach: The value investing strategy employed by small cap value ETFs seeks to identify undervalued stocks with potential for price appreciation. This approach is grounded in fundamental analysis and the belief that the market may eventually recognize the true value of these companies. 
• Passive management: Most small cap value ETFs are passively managed, aiming to replicate the performance of a specific small cap value index. Passive management typically results in lower expense ratios compared to actively managed funds. 
• Lower expense ratios: ETFs, in general, have lower expense ratios compared to actively managed mutual funds. This cost-effectiveness can improve overall returns for investors. 

Cons 

• Higher volatility and risk: Small cap value investing can be riskier and more volatile compared to investing in larger, more established companies. 
• Market sensitivity: Small cap value stocks may be more influenced by economic cycles, interest rate changes and market sentiment. Economic downturns can impact smaller companies more significantly. 
• Liquidity concerns and style drift: Some small cap stocks may have lower trading volumes and liquidity, making it harder to execute large trades at desired prices. For this reason, some small cap value ETFs extend their objectives to hold some midcap stocks, which may cause style drift. 
• Market overlooked: Value stocks, including small cap value stocks, may remain undervalued for longer periods, and the market may not recognize their true value as quickly as anticipated. 
• Higher company-specific risks: Smaller companies may face higher company-specific risks, such as management inefficiencies, limited access to capital and competitive challenges. 
• Potential for underperformance: While small cap value stocks have the potential for higher returns, they may also underperform during certain market conditions or economic cycles. 

Bottom Line on Investing in Small Cap Value ETFs 

Investing in small cap value ETFs can be suitable for investors seeking higher growth potential and exposure to undervalued companies, especially in environments where overpriced large cap growth stocks are expected to underperform. However, it's essential to recognize the higher risks associated with small cap stocks, particularly during economic downturns.  

Investors should carefully consider their risk tolerance, investment objectives and time horizon before allocating a portion of their portfolio to small cap value ETFs or any investment product.