The Divergence Of Small Value

When most investors think about different style boxes, whether it’s large cap growth stocks or small cap value stocks, they probably just take the label at face value. However, if you dig a little deeper, you’ll notice that just because funds share the same name, does not mean they are the same thing.

In the graph below, you’ll see three different versions of small cap value stocks. The red line is Vanguard, green is Dimensional Funds and blue is iShares. You’ll notice that these three funds have performed very differently since the earliest common inception date.

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In Morningstar’s style boxes below, we can see that Vanguard’s small cap value ETF, which tracks the CRSP US Small Cap Value index, tends to have more mid cap stocks than either Dimensional Funds or iShares. The average market cap of the stocks inside Vanguard’s ETF is $2.58 billion, while the average market cap of iShares and Dimensional Funds is $1.25 billion and $1.36 billion, respectively. We shouldn’t be surprised to learn that mid cap stocks have returned 158% since the earliest common inception, which might help to explain Vanguard’s outperformance (to be fair, I’m not 100% sure that the heavier weighting to mid caps is new or has been in place since the beginning) .



Lastly, the composition of the funds are very different. iShares has significantly more exposure to financials and significantly less exposure to industrials, compared with both Vanguard and Dimensional funds.

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Knowing what’s inside these products won’t necessarily help you determine which one will have the strongest returns over the next six months or three years. But understanding that there are dramatic differences can help to prevent you from hopping from one small cap value fund to the next.