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How to Invest in Small Cap Value Stocks

  • (1:00) - The Strongest Asset Class: Investing In Small Cap Value Stocks

  • (5:40) - Good Small Cap ETFs To Help You Gain Exposure: Tracey’s Top Picks

  • (32:30) - Episode Roundup: IWM, IWN, SLY, SLYV, VTWV, QABA, CBSH, OZK

  • Podcast@Zacks.com

 

Welcome to Episode #308 of the Value Investor Podcast.

Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio, shares some of her top value investing tips and stock picks.

Growth has been so dominant, for so long, that it’s easy to forget that, historically, the best performing equity asset class is small cap value.

Over the years, Tracey has done podcasts on small cap value ETFs as a way to buy a basket of small cap stocks. They still aren’t in favor with investors, despite the cooling off in the growth stocks.

But that doesn’t mean they will stay down on their luck forever. Now is the time to start accumulating a position in small cap value stocks.

Small Cap Value Means Banks

One of the reasons small cap value ETFs have lagged in the last decade is that these ETFs are filled with small cap financial companies, specifically small cap banks.

In nearly every small cap ETF, financials are the largest sector. In the small cap value ETFs, financials are even a bigger position, usually over 20% of the total.

Should You Just Buy the Community Bank ETF?

If you really want the small bank exposure, there is an ETF devoted only to those banks. It’s the First Trust NASDAQ ABA Community Bank Index Fund QABA.

QABA has 172 holdings and an expense ratio of 0.6%. However, just because QABA specializes in community banks, doesn’t necessarily mean they are all small caps.

The largest position in the fund is Commerce Bancshares CBSH with a market cap of $8.4 billion. Additionally, not all banks are “values” even though the sector is.

Commerce Bancshares trades with a forward P/E of 18.7 and has a P/B ratio of 3.79. That P/B ratio is really high for a bank. Shares of Commerce Bancshares are up 2.7% year-to-date.

Another big community bank in the QABA is Bank OZK OZK which specializes in real estate. Bank OZK has a market cap of $5.4 billion. It is the 7th largest position in QABA.

Bank OZK shares are down 1.6% year-to-date, but it’s cheap, with a forward P/E of 10.2 and a P/B of 1.38. A bank with a P/B ratio near 1.0 is usually considered a value.

Not all Small Cap Value ETFs are the Same

But if you want to own sectors in addition to the financials, then a broader small cap value ETF is the place to be. However, there are differences between the ETFs that track the Russell 2000 and those that track the S&P 600.

1.       SPDR S&P 600 Small Cap Value ETF SLYV

The SPDR S&P 600 Small Cap Value ETF is a way to get exposure to small caps without owning thousands of stocks.

This ETF is holding just 462 stocks. The SPDR S&P 600 Small Cap Value ETF has a P/E of 11.2 and a P/B ratio of 1.4.

Financials are the largest category, at 21.6% followed by Industrials at 17.8%.

The SPDR S&P 600 Small Cap Value ETF is down 6.0% year-to-date.

Is the SLYV the way to get small cap value into your portfolio?

2.       iShares Russell 2000 Value ETF IWN

Because it is based on the Russell 2000 value index, which has 2000 stocks, there are a lot more stocks in the iShares Russell 2000 Value ETF than in the SPDR S&P 600 Small Cap Value ETF.

The IWN has 1390 holdings. It has a P/E of 10.2 and a P/B of 1.25.

Financials, however, are a much bigger percentage in this ETF at 29.3%. Industrials are just 12.9%.

Shares are down 10.2% year-to-date, which is underperforming the SLYV.

If you want to own cheap financials, is the iShares Russell 2000 Value ETF the way to go?

What Else Should You Know About Small Cap Value Stocks?   

Tune into this week’s podcast to find out.

[In full disclosure, Tracey owns shares of OZK and SLYV in her own personal portfolio.]

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Commerce Bancshares, Inc. (CBSH) : Free Stock Analysis Report

iShares Russell 2000 Value ETF (IWN): ETF Research Reports

First Trust NASDAQ ABA Community Bank ETF (QABA): ETF Research Reports

SPDR S&P 600 Small Cap Value ETF (SLYV): ETF Research Reports

Bank OZK (OZK) : Free Stock Analysis Report

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Zacks Investment Research