Small Cap and Value Stocks 

Wow! A Financial Planner that is not just looking to line his pockets! I subscribed.

As a senior economics and finance student, I cannot tell you how helpful and informative your videos are. Keep up the great work and thank you!

First 2 seconds of video: "I owe all of you an apology." Quintessentially Canadian lol

It may be true that stocks mid-way between value and growth are indeed "bland", however I think that that middle column in the style box is supposed to be labeled "blend". 😜

Ben, this is the best video you've made, and I've watched a lot of your videos and have recommended them to many people. Please keep making nuanced, technical videos like this. I have a background in portfolio theory and I feel like I've hit the jackpot upon finding your channel. Why are you spending so much time making these videos and responding to the comments? Your opportunity cost is so high as you're so smart and talented so the cost of your time is extremely high. I can't imagine that your ROI from making these videos is offsetting your opportunity cost. I’m absolutely loving your videos but am bewildered why such a smart guy like you so devoting so much time to this and am genuinely curious as to why you’re doing this. I’m a huge fan and will continue to recommend your channel to people.

When Ben says "it's time to go deep" I put on my thinking cap. It's actually not hard to understand: if the research shows that value stocks and small cap stocks have consistently higher returns than their opposites it makes sense to invest in those equities. Preferably through index funds or ETF's. See I did learn something from you Ben ;-). Seriously: big thanks for your substantial efforts in popularizing complex research that directly pertains to investing and explaining it in such a way it's understandable for laypeople. You're making all of us better investors. This video should be watched in conjunction with a related one titled 'The problem with small cap stocks'. The essence of that video is that it only pays to invest in small cap value stocks not general smal cap ETF's or index funds as they contain a lot of growth stocks that drag down the returns.

love how in-depth this is!

Congratulations on your promotion. Absolutely love your videos, please don't stop making them! They're going to be more useful moving forward as consumers seek expert advice as we move towards an inevitable recession. Cheers :)

Great script. Clear, concise, direct, efficient. No wasted verbiage, just high density information with a clean flow. Great post.

This is one of the most clear and concise ways I've ever heard the Fama-French Model described. Great work!

I owe you all another apology: at 0:48 I should have said RBC makes up *6.67%* of the S&P/TSX composite index.

Wow, every video is better than the other. Very insightful channel, the best one I came across on RU-vid so far. Greetings from France

I think we need an update video!

Love your videos, always informative and backed up with statistical evidence. Furthermore your interaction in comments is very admirable. Wish you every success and commend your desire to help others.

Ben - your videos are amazingly helpful and lucid explanations of complex topics. Thank you so much!

I think you made a lot of very valid points. The factors are probably here to stay and we have found 95% of what actually works. A lot of the new factors that are introduced every year are probably just the result of data mining and won‘t work out of sample. I think that it‘s still possible to improve on the criteria that are used to determine what‘s a „value“ or „quality“ stock. For example there is a lot of debate whether price-to-book is an accurate representation of the value characteristic or if we should also (or exclusively) look at metrics like EBITDA, EBIT, Gross Margin, etc. I am glad that you mentioned that there also seem to be some interdependencies between the factor. Small is good. Growth tends to e bad but the combination of the two (Small-Growth) tends to be even worse and is known as „the black hole if investing“. The reason is probably that these stocks feel like lottery tickets to many people and people are known to overpay for lottery-like games. Another interesting quadrant is Large Cap-Value. There is some evidence that the value premium has disappeared among large caps. Maybe it‘s worth looking for Value-Factor ETFs that exclude Large Caps. I have no idea if any exist.

Thanks so much for the video. I'm 18 and all of what you said has started to click in my head. I'll check out your paper too. Thinking about something like 45 VTI, 25 AVUV, 15 VTV, and 15 QQQ. There's still a lot to learn but I can't thank you enough for the clear and concise overview of factor-weighted portfolios.

Put a decent % into small cap 6 months back as a result of this video, reaping the rewards atm!! Thanks Ben!!

Love this clip, it's my favourite of all of your mini-lessons.

Felix - just found your channel. Subbed. Fantastic content, this should be mandatory viewing for Canadians.

Extremely informative video and great for diving into deeper concepts within the world of financial markets! Subscribed.

Wow. What a video. Have to watch this one a few times!

It seems like VIOV might also be a good choice, interchangeable with IJS. It also tracks the S&P 600 -- giving exposure to the profitability factor -- but its expense ratio is 10bp lower. Subjectively, I'm also just more comfortable with Vanguard funds. I trust them more than other firms, because of their history of promoting sensible investments, and their client-owned business model.

came back after EP 129 of the RR and I've spent the last few days transiting my portfolio from VGRO to the NEW 5 factor, thanks ben!

As a quantitative-value investor, I really enjoyed watching this video. I really like your way of explaining things, it makes it much easier to understand the whole topic! Could you maybe cover the momentum factor in a future video?

Finally found Ben's "Going Deep into Factors" video!

Ben, I love your videos so much, please make a video say something about momentum factor, thank you!

If we put things into context, it makes perfect sense that value stocks aren’t as profitable as they used to be. In the older days, investors didn’t have access to the internet and a plethora of ways to automate investing. This means that trying to beat the market is much more difficult, as virtually any metric that can be used to evaluate a stock has already been priced in. While small caps still manage to escape this to a certain degree(as they tend to be less of a focus for institutional investors and bots), I just don’t see this changing over time at all. If anything, it will just get worse.

Thank you for the transparency. This was something I'd been wondering about, but I never felt like you were purposefully skirting the issue, rather that it just wasn't really the topic of the discussion. Side note: I checked further with my finance guy, and they _do_ use index funds (tons of different types). He started spouting the same stuff as you. It was pretty cool to understand that stuff, for once. Woot!!

I enjoyed and appreciated the info in this video. Thanks!

This guy is probably too smart for me. I know the very basics of investing and want to become more sophisticated and knowledgeable. Not sure if I will get to this level of sophistication but it inspires me to learn more.

Ben is really one of the few RU-vidrs that are willing to share a bit deeper knowledge. This is amazing!

Probably the most important video I’ve watched on RU-vid of all time 😃

Do you recommend allocating long term investments entirely in Small Cap Value as a result of this model? What are your thoughts on investing in something like VWO in addition to VBR? Thanks!

Hi Ben. Thanks for the amazing content you give out to us for free.

Great content as usual. I do wonder if there’s any more guidance on how to decide between different similarly tilted ETFs, like VBR (MER of 0.07%) versus IJS (MER of 0.25%) for example. As you pointed out in one of the podcasts, the intuition that “cheaper is usually better” may not necessarily hold here, since the more expensive fund could have a higher exposure to the relevant factors, and hence higher expected future returns as well. That begs the question: is there any way to find out the amount of factor exposure of these different funds, so I can figure out whether IJS would be worth the 0.18% additional annual cost?

Hello Ben, I have just found your channel and want to thank you - you make the subject much more accessible for a lay investor like me. One question; I am familiar with factor analysis from my background in Psychology. In Psychology we commonly talk about the explanatory power of the factors. In this way we know that Extraversion has greater explanatory power of individual differences than Conscientiousness (for example). From watching your videos I take it that B, Value and Cap Size are the three factors with the greatest explanatory power and wonder what the research suggests about their weighting relative to each other? Miles (UK)

That's a great video! Thanks a lot!

You just showed me a rabbit hole. Thanks! I will google this topic deeper

Great explanation, I have 25% small cap I'm my fidelity portfolio

I am retrieving now ALL Ben's videos since 1st one. Of course they are magnificent, all of them. Anyways it seems that in March 2019, our beloved Ben had a promotion from Associate to Portfolio Manager 🤩🤩🤩. much more than well deserved

Just came back here to drop a note....The 2020 performance of the 3 US stock etfs recommended by Ben reflects that he was spot on...

Close you eyes. Obama is talking to you about investing

THANKS FOR DETAILED ANALYSIS

Sometimes you need to come back and watch this video just to remember why you're SCV tilt is absolutely the best approach.

Great episode. Thanks!

Hi Ben, Great video once again!! For diversification and increasing the asset exposure, I agree to include small-cap and value stocks. But, I am not sure how much percentage of these should a portfolio consist for long term. Would you please suggest the ratio of value and growth ETFs/stocks in 60:40 and 80:20 portfolios? or Any relevant literature that can provide insights? Thanks!!

Excellent thank you so much!

Great video and analysis! Another approach is to have a part of the portfolio in weighted index funds plus another part in small and mid size companies selected through value investing process, investing more in them when they get 10-20% down until reach an adequate level of the overall portfolio (5-7%) and not re-balancing unless the stocks get overvalued vs their DCF analysis. What do you think?

Hi Ben, love your videos and your podcast. I looked at the MSCI US Small Cap Value index and noticed the largest holding in it is... Gamestop. Which brings me to my question: what do you think of the risk of ending up in such an index fund with highly shorted stocks which do not necessarily indicate they are good long term investment. Of course, the weight of Gamestop is very small in the index (0.5% at Jan. 29 2021), but I would assume that there are other similar cases that make it relatively high in the holdings list. Thoughts? Thanks!

Hey Ben - great video! Thank you for all the informative information. If I read your paper correctly, gaining exposure to these other 2 factors can improve return about 0.44%? This is probably not worth it for Canadians that could just invest in XGRO/VGRO (like you metioned), if one isn't willing to put in the effort of re-balancing, etc, eh?

Great video! Could you make another video adressing the factors Profability and Momentum? Or aren't there any good ETFs around to even do it in the real world? Which ETFs would you use if you couldn't access US and canadian ETFs? Is it possible to overweight value and size with Irland domiciled ETFs?

Revisiting this yearly

Hi Ben - I'm wondering if you can do a video talking a bit more about the some of the other main factors that people talk about besides value and size (momentum, quality, volatility). Are these real factors distinct from value & size and should a DIY investor try to get exposure to these through US ETFs? Thank you for your videos! They are awesome.

Hi Ben, Thank you for great videos you make! I have a question, need your help - for me, as for an european, does it make sense to invest in US market? I mean that there is currency exchange rate and nobody knows what will be over 20 years. Should I find some ETF of European stocks market or even Asia or Global? Personally I would prefer simplicity and just invest in two-three US ETFs which you suggested in this video. Thanks.

I wish you could share some of the etfs you've invested in. I'm looking for some long term growth etfs but there are too many options!

Are all 5 of the funds suggested available for canadian investors through canadian investment accounts? Are they hedged/non-hedged? How does the currency work with the two additions to the portfolio (the value and small cap US ETFs)

You're my hero

I love the typo in "blend" ("bland").

It was great. Thank you

personally I like a blended small cap etf better because it captures growth in addition to value but if your goal is long term growth, you really can't go wrong with small cap value What's more important is the index it tracks, a russell 2000 etf will perform differently from an S&P 600 index fund because both of the indexes themselves have different criteria for a stock to be qualified for inclusion (like profitability, trade volume, etc)

Ben, your content is so persuasive and well grounded. Plus your voice and inflections remind me a lot of Barack Obama. I thoroughly appreciate your work...

Hi Ben, greetings from Kazakhstan! I'm a big fan of your informative RU-vid sessions, and I've been learning a lot from you. I have a quick question: In my region, there are no small-cap and value ETFs available. Do you think it's a good idea to manually track the top 10 companies from each category (small and value) from a reliable index and buy them individually to gain exposure to small and value factor stocks? Alternatively, should I stick with large-cap growth stocks, which are readily available here? Thanks for your insights!

Hi Ben. Amazing explanation! Is there any region (say, emerging markets) that could be considered like a factor, increasing expected returns?

Subbed. Great info

Yes, in fact mine is a combination of small cap and emerging markets: SMIN

Ben, have you ever considered being a professor after you're ready to be done working as a portfolio manager? I just graduated with my degree in Finance and I think you would've been an awesome professor to have. Teaching seems natural to you. Just my thoughts. Great video!

PZW seems to be the best product available in Canada for global equity (incl. US) weighted towards small value stock. It's not perfect obviously, but the ETF's PE ratio is 17.28, and the Morningstar style box is Small Blend (but tilting more towards value than any ETF I've found).

Ben, Great video and info. I do have a few questions: 1) Now that we know about key factors that contribute to equity risk premia, why restrict to two factors only (size, value) vs the four factors (size, value, momentum and quality). Example IJS vs SMLF to make the point. 2) Does more potent value exposure via value-weighted index funds provide better equity risk premia compared to market-cap weighted value index funds?. Example IJS vs VFVA (if you ignore that VFVA is a total cap). 3) I am yet to see a fund that is built around the thought of "small cap minus the junk" i.e. small cap with a quality tilt? Any thoughts? Thanks.

If you chose an index over another one you are stockpicking. A good company, but still a "stock" you have to chose. If you take many indexes, it's like chosing many stocks. It is less risky, I agree, but not necessarily a better option. Correct me if I am wrong, please

In case someone is wondering, you can buy "IJS" ETF to get exposure to the Small Cap Value factor.

How can you best capture the value premium as an European investor using iShares products? MSCI USA and MSCI Europe Enhanced Value Indexes are a reasonable solution for retail investors? What about Emerging Markets equities? Really appreciate your feedback.

fantastic video

Great video. You're fantastic and your speech cadence is very similar to Barrack Obama. Who is a hell of a communicator so I think that's a win.

Wow we have so much time together,its like a real relationship!

Great video

For US investors, you do not need Dimensional Funds(DFA) to get the value exposure. You can use ETFs such as Vanguard. They may not be as deep value as DFA but you can get the amount of value you desire by adjusting the amount of your exposure to the value ETFs. The Vanguard Value ETFs would be cap weighted value stocks. DFA uses additional factors in addition to cap weighting, such as the magnitude of value of the stocks.

Ben, what is your consensus as to why small-cap value hasn't performed as well in the past decade?

Ben, awesome video and article! Now I understand better what you meant by cost per unit of risk premium in relation to your earlier video about small caps. Am I seeing things or should the bottom table titles on page 8 be "global ex-US" instead of US MKT, etc. in your article? Finally, what would be the rationale for assuming a 50% reduction in the factor premia as a criterion whether an ETF is suitable? Wouldn't it be rational to expect factors to "persist" given the data?

Ben, can you elaborate on why small cap growth stocks with weak profitability drag down results of small caps as a whole? Also, in an efficient market, wouldn't investors discount their prices until that effect was erased?

Hi Ben, read your paper. Amazing content, and decided to follow the outlined portfolio immediately, only difference substituting in XIC for the Vanguard equivalent (cost worked out slightly more evenly). My question is, will there be any future discussion to include the profitability factor (RmW) and which ETFs best capture it currently?

Hi Felix, Thank you for all your videos! I have two questions: 1) How often do you recommend rebalancing your portfolio if you had these funds 2) Are there any low-cost market cap weighted index funds in Canada or the Global market that you'd recommend to help DIY investors increase their exposure in having a factor-tilted portfolio?

I'm thinking something like 60-70% VTSAX (total US market index fund), 10-20% VBR (small cap value ETF), and 20% VXUS (total international index fund) for my portfolio. I might even split that 20% VBR down to 10% VBR, and the other 10% into VBK (small cap growth ETF.) Still playing around with the percentage allotments. Great video.

It could be good to speak about the APT.

Please go into detail about ETNs such as MRRL, SMHB, USOI. I am thinking of holding for 5 years with distribution yields @ +20% , the speed of these would accelerate my dividend portfolio. I am investing just fun money on them, but on the other hand....I would like some grasp of knowledge on these tools. Could these be viable if I could handle the risk?

Legend

I want this guy to manage my money.

That’s a compelling argument for DFA. However, what one will want to know is what kind of premium DFA are expected to deliver, given that accessing them will likely cost in the neighbourhood of 100 basis points!

50th video. Wow. At 100, I may call you King Felix. I think Felix Hernandez is retired so you will get that nickname...at 100 videos. Thx for the video. Good information here. You dont miss a beat.

Hey Ben, really appreciate what you do. Do you know the long-term average return rate for small-cap value stocks?

Very informative video. Thanks, Ben. Could you give me an example of how the style box for a factor-tilted portfolio would look like? What are you thoughts on the quality factor and an ETF like ZGQ?

If one has the opportunity to purchase a small-cap value index fund vs. a comparable small-cap value ETF is it always a better choice to go with the fund? Since ETFs have the chance to incur additional costs and fees due to their ability to be traded more often like stocks, it would seem that an index fund, with its less frequent trading would be more tax advantageous in the long-run. Do you agree? Or disagree?

I need to watch this twice.

Hahaha prolly I new that coz you mentioned in one the comments lol! However, index ETFs is best suited for most investors tho!

Would dividing up the Equities portion as follows: 2/3 IUSV 1/3 IJS be to value tilted in your opinion? Looking to add small-cap and value tilt to my portfolio now, but there is a benefit of having 1 less ETF in the portfolio this way. Just wondering about the severity of tradeoffs, I am ok with taking some additional risk.

Ben, really liked your model portfolio. I recently implemented it with some small adjustments. Basically I used VEU instead of VEE and VIU to lower the cost of my international assets, accepting some small increase in canadian exposure by lowering my VCN allocation. Overall I get a 0.04 reduction in my portfolio expense ratio. What do you think? 12% XUU, 11% IJS, 33% (was 31%) VCN, 11% IUSV, 35% VEU (was 25% VIU, 8% VEE) Also, thank you for this series, it's a great resource for any level of investor. Keep up the good work.

@Ben Felix, IJS seems to have an expense ratio of 0.25%. Why not VIOV, with 0.15%? Is it possible to get away with VBR at 0.07%?

Have you found any correlation in small cap vs large cap REITs?

Great Channel totally love it !! Any chance you could cover tax declaration of capital gains calculations in a non-registered accounts in Canada. This ABC for ETFs deserve a video... or should I say I need a video to understand them ;-) Awesome Job keep up the good work.