DFSV - DFSV Vs. VBR: New Small-Cap Value Beating Vanguard's

Summary

• The Dimensional US Small Cap Value ETF is closing in on its first anniversary. It has done better than many other Small-Cap Value ETFs.
• The Vanguard Small-Cap Value ETF, a very popular SCV ETF, is reviewed as a comparison choice.
• With history just approaching one year, investors picking DFSV have to decide if its first year of success compared to VBR or other SCV ETFs will continue.
• I include a list of other Small-Cap Value ETFs under Portfolio strategy. Of these, DFSV was the second best performer since it launched last February.

(This article was co-produced with Hoya Capital Real Estate )

Introduction

This is another article in my "better mousetrap" ideas, where I try to find an ETF that is treating investors better than a bigger, older, and more well known ETF investing in the same sector. It might still might not be the "best", but it does have some "better" results. This time, I will review and compare the Dimensional US Small Cap Value ETF ( DFSV ) against one of the biggest in the sector, the Vanguard Small-Cap Value ETF ( VBR ).

Dimensional US Small Cap Value ETF review

Many readers might not be aware of the ETF’s manager. They describe their firm as:

Dimensional is a leading global investment firm that has been translating academic research into practical investment solutions since 1981. Guided by a strong belief in markets, Dimensional offers strategies that focus on the drivers of expected returns. The firm applies a dynamic implementation process that integrates advanced research, methodical portfolio design, and careful execution, while balancing risks, costs, and other tradeoffs that may impact performance. This approach is applied across a full suite of investment strategies to help meet the needs of investors worldwide.

Source: dimensional.com Managers

Seeking Alpha describes this ETF as:

The investment seeks to achieve long-term capital appreciation. The portfolio, using a market capitalization weighted approach, is designed to purchase a broad and diverse group of the readily marketable securities of U.S. small cap companies that the Advisor determines to be value stocks. Under a market capitalization weighted approach, companies with higher market capitalizations generally represent a larger proportion of the portfolio than companies with relatively lower market capitalizations. DFSV start on 2/23/22.

Source: seekingalpha.com DFSV

Dimensional provides two insights into their ETF:

DFSV has already collected $1.2b in AUM. The managers charge 31bps in fees; reasonable for an actively managed ETF. Based on the last payout, a yield of 1.6% should be possible.

While DFSV is actively managed, they benchmark themselves against the Russell 2000 Value Index, which excludes the largest stocks but includes some Mid-Cap stocks. Some Value measures used by the managers include:

• low relative price in relation to its book value.
• Price to cash flow or price to earnings ratios.
• An equity issuer is considered to have high profitability because it has high earnings or profits from operations in relation to its book value or assets.

Like many ETFs, DFSV may lend its portfolio securities to generate additional income.

DFSV holdings review

I will compare this allocation to VBR later. DFSV hold almost 970 stocks, with the top 20 being about 12% of the portfolio.

The bottom half of the portfolio, by weight, account for just 3.6% of the total.

DFSV distribution review

With only one year of life, other than each payment went up, not enough history to determine where that growth will peak out at. The Forward yield is about 30bps below what VBR might generate. Being a new ETF, Seeking Alpha has yet to grade its distribution policy.

Vanguard Small-Cap Value ETF review

No need to discuss who Vanguard is. Seeking Alpha describes this ETF as:

VBR invests in value stocks of small-cap companies. It seeks to track the performance of the CRSP US Small Cap Value Index. VBR started in 1998.

Source: seekingalpha.com VBR

VBR has just over 20X the AUM that DFSV has: $25b. VBR has the usual low Vanguard fee: 7bps. The TTM yield is 1.9%.

Index review

One major difference between DFSV and VBR is the investing style: Active versus Indexed. CRSP defines their index as:

Small-Cap, based on market-size, falls between the 85-98% percentile.

CONSTRUCTING THE CRSP US VALUE AND GROWTH INDEXES The construction of the CRSP Value and Growth Indexes is tied to the construction of the market capitalization-based indexes. Value and growth style determination involves completing the following three additional steps for each market-cap segment at each quarterly ranking:

1. Calculate the value and growth style factors for each company within a market-cap segment.

2. Combine multiple style factors into a single composite factor (the score that is used to place the company), separately for value and growth. This will be the score used to assign a security to either a value or a growth index.

3. Rank scores and assign companies to their appropriate value and growth indexes.

DEFINING VALUE AND GROWTH INDEXES: When classifying companies to their appropriate value or growth indexes, CRSP employs a multi-factor model that uses five value and six growth factors. CRSP is the first index provider to use the Current Investment-to-Assets Ratio ((INV)) and the Return on Assets Ratio ((ROA)) as style model inputs/factors.

VALUE FACTORS USED IN THE MULTI-FACTOR MODEL

1. Book-to-Price Ratio

2. Future Earnings-to-Price Ratio

3. Historical Earnings-to-Price Ratio

4. Dividend-to-Price Ratio

5. Sales-to-Price Ratio

Source: crsp.org/files/crsp-market-indexes-methodology-guide.pdf

VBR holdings review

As we will see later, the top three sectors all line up. Here, with 860 stocks, the Top 20 positions are 10.3% of the portfolio; with the bottom half accounting for 18% of the portfolio; meaning they play a heavier role in VBR than the bottom half does in DFSV.

VBR distribution review

VBR has grown their payout by almost 9% over the past decade, earning the ETF an "A" rating from Seeking Alpha.

Comparing ETFs

I will start with some basic Value/Growth data. I marked in Green which is the better data point: all the Value and most of the Growth data favors DFSV.

Using the ETFRC.com Fund Overlap feature, we see this comparison data.

The above shows the benefit of an active strategy versus an index-based one. DFSV has over-weighted sectors that benefited in 2022 and under-weighted one of the worst sectors, Real Estate. Key is their ability to rotate at the right times. The two funds own 375 of the same stocks, or about 40% of the total owned. The next chart shows what the largest over/under weights are.

No stock appears in the Top 20 of both ETFs. What really counts is what investors earn and at what risk. For that, I turn to PortfolioVisualizer.com.

The actively-managed DFSV, with only slightly more StdDev, outperformed the index-based VBR ETF since inception. While eleven months of data is short, DFSV is off to a great start compared to VBR, which you will see next is highly rated by SeekingAlpha. They rate ETFs on various factors and also provide rankings at various asset-class levels, but DFSV is still too new for that analysis. Here is what VBR shows though.

Portfolio strategy

The three types of market-cap stocks, Large, Mid, and Small show a history of responding to economic conditions differently. History shows that new bull markets tend to present great opportunities to buy small-cap stocks. The questions then is, "Are we at the start of a Bull market?". History also shows us that Small?Cap stocks tend to outperform their larger counterparts during periods of heightened inflation and rising interest rates. That is definitely true right now. Small-Caps also peak and then trough before Large-Caps in the stock market cycle. Since this article focused on Value stocks, this is how the Value part of each market-cap segment has done over the past fifty years.

Since 1972, Small-Cap Value is the top performer. Even with the added risk, that market-cap segment still had the best Sharpe and Sortino ratios. The next questions night be Value or Growth for Small-Cap funds? It seems Value is the better investment.

For investors wanting to expand their Small-Cap exposure, Owning the DFSV is worth accepting its short history for entering the Value stocks it offers. As with any investment, always keep an eye out to see if it is still holdings its own compared to competitor funds. Here is results with the expand list.

Of these, only the Invesco S&P SmallCap 600 Pure Value ETF ( RZV ) did better, but with a higher StdDev.

Final thoughts

Deciding to invest in Small-Cap stocks is only the first of an investor due diligence steps; picking the one to invest in is next. The ETF.com site lists 144 ETFs that are invested in Small-Cap stocks. There are also Closed-End-Funds too so those investors who are okay with leveraged funds. This article covered two Value-focused ones; there are others that are Growth oriented or use other factors like dividends or momentum as an investment strategy.

Here I provide links to some of my other Small-Cap fund reviews.

• SCHA Vs. IJR: Schwab's Small-Cap ETF Underperforming The Big Dog
• VB Vs. VIOO: Comparing 2 Vanguard Small-Cap ETFs
• IJS Vs. VBR: Comparing Small-Cap Value ETFs That Use Different Indices
• Avantis U.S. Small Cap Value Fund Provides Non-Indexed Exposure To This Market Segment

For further details see: