2023-03-10 09:30:00 ET
Summary
- The Invesco S&P SmallCap 600 Pure Value ETF invests based on the S&P SmallCap 600® Pure Value Index.
- The Avantis U.S. Small Cap Value ETF provides investors with an actively managed SCV ETF, versus RZV and other index-based choices.
- Both ETFs are reviewed and than compared. While AVUV has recorded the best return since starting in 2019, neither ETF has had back-to-back best results.
(This article was co-produced with Hoya Capital Real Estate )
Introduction
Small-Cap US stocks is where I am overweight compared to their weight in the overall US stock market. I even hold two funds that invest even smaller: micro-cap stocks!
Since the mid-70s, Small-Cap Value was the top performer, with Small-Cap Growth stocks matching the Large-Cap universe of stocks. While the past decade has favored the larger stocks, driven by the Technology sector stocks, more recent history is again favoring the smaller cap stocks.
Out of over 100 possible funds in the Small-Cap space, I picked two I am considering using in place of two index-based ETFs that were not performing well that I recently sold. Those ETFs reviewed are:
Invesco S&P SmallCap 600 Pure Value ETF review
Seeking Alpha describes this ETF as:
The investment seeks to track the investment results (before fees and expenses) of the S&P SmallCap 600® Pure Value Index . The underlying index is composed of a subset of securities from the S&P SmallCap 600® Index that exhibit strong value characteristics. RZV started in 2006.
Source: seekingalpha.com RZV
RZV has $371m in AUM and provides investors with a 1.34% yield. The managers charge 35bps in fees.
Index review
S&P Dow Jones describe their index as:
We measure value stocks using three factors: the ratios of book value, earnings, and sales to price. S&P Pure Value Indices include only those components of the parent index that exhibit strong value characteristics, and weights them by value score. Constituents are drawn from the S&P SmallCap 600®.
Source: spglobal.com Index
They provided some basic index characteristics too.
The Methodology PDF went into more detail on the index construction, of which I thought these points to be important.
- The S&P U.S. Style Indices measure the performance of U.S. equities fully or partially categorized as either growth or value stocks, as determined by Style Scores for each security. The Style index series is weighted by float-adjusted market capitalization ('FMC'), and the Pure Style index series is weighted by Style Score subject to the rules described in Index Construction.
- The Pure Style index series identifies a portion of the parent index's market capitalization as Pure Growth and a portion as Pure Value. There are no overlapping stocks, and stocks are weighted in proportion to their relative style propensity.
- The index constituents are then sorted in ascending order of the ratio Growth Rank/Value Rank. The companies at the bottom of the list, comprising 33% of the total index market capitalization, are designated as the Value basket.
- Index constituents are weighted by their Style Scores.
RZV holdings review
The review starts with the sector allocations. Later, these will be compared to how AVUV allocates.
invesco.com RZV sectors
The top three sectors, which comprise about 57% of the portfolio, are sensitive to how well the economy is doing. With concerns that the FOMC could push the US into a recession, that needs to be taken into one's due diligence.
Top 20 stocks
invesco.com; compiled by Author
These stocks account for 27% of the portfolio. In total, RZV holds 150 stocks, with the smallest 50 holdings comprising 16% of the portfolio weight, making for a well balanced weighting structure.
RZV distributions review
With a low yield, investors should be less concerned about the high variability of the payouts RZV has provided. Seeking Alpha gives this pattern a "B" rating.
seekingalpha.com RZV scorecard
Avantis U.S. Small Cap Value ETF review
Seeking Alpha describes this ETF as:
The investment seeks long-term capital appreciation. The fund invests in stocks of companies operating across diversified sectors. It invests in value stocks of small-cap companies. AVUV started in 2019 and is actively managed.
Source: seekingalpha.com AVUV
AVUV has $5.8b in AUM and has a current yield of 1.57%. The ETF comes with 25bps in fees, very attractive for an actively-managed ETF. AVUV measures itself against, but is not restrict to investing in, the Russell 2000 Value Index .
Avantis explains their ETF as such:
americancentury.com AVUV
AVUV holdings review
Again, starting with sectors.
avantisinvestors.com AVUV sectors
The holdings list did not include tickers or sectors, which is a disappointment.
avantisinvestors.com; compiled by Author
With over 700 stocks, the Top 20 comprise under 15% of the portfolio; the bottom third, 3.4%, meaning there is little influence on the results of the ETF.
AVUV distributions review
Payouts appear somewhat more stable than the other ETF but the assigned grade from Seeking Alpha is lower; only a "C+".
seekingalpha.com AVUV scorecard
Comparing ETFs
Before comparing risk and returns, sectors are a good starting point in comparing ETFs, as sectors perform differently as the stage of the US economy changes. The next chart shows that the two ETFs are not investing the same.
There are only 80 stocks in common; 11% in overlapping market value. Investor thoughts on Energy, Financials, and Consumer Discretionary sectors will be critical in deciding between these ETFs as the weight variations in those three sectors are large. The next chart shows the stocks with the biggest weighting differences.
Since 2019, when AVUV started, we see the following for risk and returns.
AVUV has the better results in all but "Best Year". The next chart explains the title of this article.
Neither ETF was the top performer two consecutive calendar years. When looking at monthly returns, AVUV has a slight advantage; no ETF had the better return more than 4 consecutive months.
Portfolio strategy
If the manager can show their active strategy works, my preference with Small-Cap and Micro-Cap stocks is having at least some allocation in that style of funds. With AVUV and RZV being close, for traders/market-timers, I would own the ETF where the sector allocations match their expectations. AVUV's worth will come in showing they successfully reallocated as the economy shifts.
Even after deciding small is the way to go, one popular ETF site lists 87 Small-Cap ETFs, and another 51 Micro-Cap ETFs. Besides Value, Growth, and Blended choices, like shown here, there are a few actively-managed ETFs in this space. Also, there are a few factor-based ones too, selecting based on dividends or other common equity factors investors favor.
Even when comparing two ETFs, the overall selection process needs to include other variations on the Value theme. Above, we see that adding a momentum factor provides the best results over the time period used. That ETF, the Invesco S&P SmallCap Value with Momentum ETF ( XSVM ), is one I am using and recently reviewed: I Replaced IJS ETF With XSVM ETF: Good Timing?.
One ETF not in the above list because it started in early 2022 is worth considering based on its first year, the Dimensional US Small Cap Value ETF ( DFSV ), which I recently reviewed ( article link ).
Final thoughts
One possible problem arises when there are so many funds in the same market sector, it's known as the Paradox of Choice . Here, that would mean not picking any fund because there are too many to pick from. Remembering you can always sell later should help get investors past this potential road block.
This article updates my March 2021 Bullish review of the AVUV ETF: Avantis U.S. Small Cap Value Fund Provides Non-Indexed Exposure To This Market Segment.
For further details see:
RZV Vs. AVUV: No Consistent Winner In The Small-Cap Value Space