Preferred Asset for Small Cap Value: VIOV

September 2022 Update: new information and new perspectives have caused me to re-think my recommendation of VIOv. It is still a good fund, but I think investors may also do better with Avantis's Small-Cap Value ETF (AVUV). See my write-up here:

Preferred Asset for Small-Cap Value: VIOV no more?
I wrote in June about my preferred way to invest in small-cap value equities: VIOV. Have learned some things since then, especially how to figure out just how small-cap and value a given ETF actually is. So, I decided to open up the search again. What might take its place?!

Below, though, is what I originally published on small-cap value and VIOV:

"The Vanguard S&P Small-Cap 600 Value ETF seeks to track the investment performance of the Standard & Poor’s Small-Cap 600 Value Index, an unmanaged benchmark representing U.S. small-capitalization value stocks."

Fund Home Page:

Barchart Page:

VIOV - S&P Smallcap 600 Value Vanguard ETF Price -
S&P Smallcap 600 Value Vanguard etfs funds price quote with latest real-time prices, charts, financials, latest news, technical analysis and opinions.

The Basics:

When thinking about an investor’s allocation to equities, the easiest and most straight-forward approach would be to invest in a Total Market fund such as Vanguard’s Total World fund (VT), which just invests in (pretty much) every stock in the world. Alternatively, if you one were focused on just American stocks (which make up about 60% of the world’s equities, anyway), one could invest in a total US stock fund like VTI.

But, if one wanted to stretch for slightly higher expected returns and was alright with a little added complexity, a quick way would be to allocate part of the stock portion to a small-cap value fund, meaning stocks that have small market capitalizations (number of shares times price per share, so a way to describe the total worth of a company) and that are being offered at a relatively low price (as defined by their Price/Earnings ratio, which is a way of thinking about how much one needs to pay to secure one dollar of earnings per share).

To understand why increasing your allocation to smaller companies and to companies that are seen as better values can lead to higher returns, it helps to know a bit about factor investing. Briefly, a distinguished list of academics and practitioners have found that, all things being equal, there are certain factors inherent to different types of stocks that contain particular risks and can expect to deliver higher rewards in the long-term. Here is a great video explaining it, from the inimitable Ben Felix.

The landmark paper was by Eugene Fama and Kenneth French who created a “Three Factor Model” that explained three factors to explain returns. There was already one factor identified, that of “excess market return”, to which they added:

  • Small companies have tended to do better than bigger companies (the size factor)
  • Value companies tended to do better than “growth” companies (the value factor).

Since then, Fama and French have added two more factors (profitability and investment), making this now a five factor model. Other researchers have added dozens, nay, hundreds more, though these are less widely accepted.

Utilizing these findings, some investors have been more intentional about their allocations to small companies whose prices are on the affordable side, or small-cap value. When you purchase an index fund targeting small-cap value, you get a lot of tiny companies you’ve probably never heard of: Helmerich & Payne, South Jersey Industries, and First Hawaiian Bank. They are also typically in industries away from the limelight: energy logistics, HVAC technology, home loan servicing, etc.

If you are going to invest in small-cap Value funds beyond just their presence in total stock indexes like VT or VTI - they are in those funds, just in fairly small amounts - then my preferred way is through Vanguard’s S&P Small-cap 600 Value fund (VIOV). This is one of two Vanguard funds for this sub-asset class (more below on the other), and it is my choice for its low expense ratio (.15%) and its focus on the smallest and the “value-ist” companies available.

The main reason to allocate extra to a fund like VIOV is the hope that such factors like size and value will continue to outperform as they have in the past. Over the past 50 years, a portfolio of all small-cap value stocks would have returned 3% more on an annualized basis compared to the US stock market as a whole, resulting in an additional $5.1 million based on an initial $10,000 investment.

The possible downside is as you can expect: past results are no guarantee of future returns. Some have said that the extra premium investors got for holding small, unpopular companies is now “dead,” and there are indeed many years where large companies have outperformed small, and growth has dominated value. Part of the resolution to this dilemma may be acknowledging that a long-term perspective is especially necessary with factor investing: if small-cap value is like the tortoise, and large-cap growth is like the hare, then you’d need to wait a long time to see the tortoise take the lead.

Correlation with Other Assets:

For Risk Parity investors, another feature of small-cap value as an asset class is that it has slightly different correlation numbers than the stock market as a whole when compared to fixed income, gold, and commodities. This shouldn’t be exaggerated, though: these are still equities and so the recommendation is to invest in these as part of your equity allocation, not to invest in these as a separate asset class.

Small-cap value has also tended to do a little bit better than the general stock market in times of market distress. From the mid 1970s to mid 1980s, for example, when inflation was fairly high, stocks on the smaller side and value side outperformed, making this sub-asset class a little more attractive in times of market turmoil. Whether this will be the case in the 2020s, again with higher inflation than usual, remains to be seen.

Here is the correlation matrix, with data from 2010 until the present: (link here)

Breaking it down, you can see slightly lower correlations between VIOV and other major asset classes. For example, the correlation between VT and BND is .11, while between VIOV and BND it is -.08. Again, not much of a difference, but it is something. You can also see somewhat lower returns for VIOV compared to VTI over the past twelve years, and this is an example of a time period where the hare seems to be outpacing the tortoise.

Other Options:

  • VIOV is one of two Vanguard ETFs tracking small-cap value funds, along with VBR, and truth be told, the differences between the two aren’t worth stressing over. Their essential difference is that they track two different indices - this one the S7P 600 while VBR is based on the CRSP Small Cap Value Index. I prefer VIOV since it is a bit more small-cap value-y: the average stock in VIOV has a market cap of $1.8 billion compared to $6B in VBR, and then the P/Book value for VIOV is 1.5, compared to VBR’s 1.8. It should be noted that VBR does have a lower expense ratio, though (.07%) and that its P/E is a bit lower.
  • For funds from other companies that are still similar to VIOV, there is IJS from iShares and SLYV from Schwab/State Street. They both track the S&P 600 small-cap value index as well, for either the same expense ratio (SLYV) or for slightly higher (IJS is at .18%).
  • If you are looking to invest in small-cap value in the form of a mutual fund, then Vanguard’s VSIAX is one that tracks the same index as VBR, as there is no VIOV equivalent. Fidelity’s FCPVX is an option, as well.
  • The Avantis US Small-Cap Value ETF (AVUV) is an intriguing option. It is somewhat indexed to the Russell 2000 Value Index, but can go “off script” a bit when its valuation metrics indicate deviation from the index. Its expense ratio is slightly higher (.25%) and there may be some additional returns available if you are comfortable departing from pure indexing (which itself is not exactly “pure”, but that's another kettle of fish).
  • The focus here has been on US equities, but the same logic supports small-cap value works internationally, as well. Avantis offers AVDV, their International Small-Cap Value ETF, which is likely the best for this. Other fund families do offer international small-cap funds (such as VSS or SCZ), though not necessarily small-cap value.

Meanwhile, if you're keen, here is a link for my search of “small-cap value " funds using the ETF Finder on Barchart:

ETF Finder -
Screen for ETFs based on Asset Classes: Commodity Sectors, Financial Sectors, Industry Sectors, Geographic Sectors, ETF Orientation.
Search for small-cap value ETFs

Disclaimer: In real life, I own shares of VIOV, as well as VBR. Keep in mind that this site is intended for financial education, and this write-up is to explain how you might want to think about this particular asset class and why I use it in my portfolio. It's not a recommendation that you do the same.