Small Cap and Value Stocks 

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

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.

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!

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.

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

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!

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". 😜

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.

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 :)

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 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.

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!

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?

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

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

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

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?

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

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

Close you eyes. Obama is talking to you about investing

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.

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!!

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

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!

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?

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)

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

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.

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

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.

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.

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

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

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

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.

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

THANKS FOR DETAILED ANALYSIS

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?

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

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

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.

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!

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!

That's a great video! Thanks a lot!

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

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

Excellent thank you so much!

Revisiting this yearly

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?

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

Great episode. Thanks!

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!!

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...

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?

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.

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?

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)

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?

Ben, I have a "what would Ben do" type of question. In my 401k I invest in NMSAX which used to be the only option for small-cap. However, now they added DEVLX. This one is a small-cap value. Looks way better than NMSAX but expense ratio is more than double. Should I stop NMSAX and go DEVLX instead? Or is it better just to have core s&p500 in 401k and instead invest in VBR in my Roth IRA for small-stock value in addition to everything else? I do like DEVLX better than VBR except for the expense ratio. Thank you for your help!

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

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?

@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%?

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

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)

I think we need an update video!

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.

It was great. Thank you

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!

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!

I'm invested solely in VT. How should I incorporate small cap value into my portfolio? Should I include international small cap value?

Can someone please clarify which are the best european alternatives to the ones shown in Ben Felix's paper?

Hi Ben, In the Indian markets, I see that actively managed funds with longer history or index funds across market caps has given similar returns over longer term. Do you feel that there is a small cap risk premium across geographies. May be this premium varies across geographies. Any views on this.

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?

Re-viewing this episode, something occurred to me: If I understand the data correctly, when comparing small cap and large cap value, it seems the overall premium difference is modest. Considering the higher risk of small cap stocks, is it really necessary to be have a factor lean towards both rather than large cap value only? Doesn't large cap value produce similar returns with much less volatility?

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

Would small cap and value ETFs sell the stocks of value compsnies as they become more successful and become large/mid cap? Is there any ETF that hold these valued stocks for longer even though they become larger?

Hi Ben, I do have some small cap exposure following your REIT video.I have been rotating away from a mainly stock based portfolio into ETFs (mainly XAW and ZAG) but your REIT video saved me from buying REIT ETFs and I instead picked up VBR. Ended up going with VBR over IJS. But what are your thoughts on VSS for non-US small cap exposure? Would you recommend not pursuing international small cap exposure or would you recommend a different ETF?

Subbed. Great info

Is AVUV or IJS better for US small cap value allocation?

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.

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).

Hey Ben, Firstly thanks for everything you do for us DIY’ers. Your advise and insight is greatly appreciated. I have 2 questions regarding this latest video. 1: you mention that this strategy is not “for everyone” but I’m not sure what determines what situations would make this strategy for me. My assumption by this is people who want to not maintain their portfolio (rebalancing, picking ETF’s etf)!should not proceed with the factor investing strategy. Correct? 2: can you elaborate why you divy factors by equal weights of 1/3. Is there any disadvantage to putting more weight on market cap vs value/small cap since performance has not been as expected over the past 5-10 years?

Hey Ben, thank you for the great videos! I would like to increase the value exposure in my portfolio. However, for me as a Finnish investor, taxation is a major problem with dividend-paying funds (the ones you propose in this video). I found an ETF that tracks MSCI World Value Index (iShares Edge MSCI World Value Factor UCITS ETF USD (Acc): abbreviation, IWVL). This ETF seems like a reasonable choice for me. However, I haven't found any information regarding its capability to capture the factor premium. Have you examined this ETF thus far and what are your opinions on it?

Hi Ben, I was looking at the returns for the US vector vs. its benchmark (Russell 3000). It appears that the DFA fund trailed its benchmark in most years. The unhedged fund trailed its benchmark by about 2.5% annualized for the past 10 years. what's your thought on it? I do have almost all my money in DFA, but sometimes I question my judgement.

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.

Hello Ben, I read your paper "Factor Investing with ETFs". What's the easiest method to calculate the appropriate allocations of IJS and IUSV when combined with an all-in one ETF solution, such as VGRO?

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

Is there a meaningful advantage in investing in value stocks throughout market caps, or could one just invest in a small-cap value ETF and call it a day? In the example shown at 14:53, it splits them out, but I don't remember hearing anything about if larger-cap value stocks had better risk-adjusted performance than small-cap or not.

Hi Ben, Love your show, it's the clearest investing series I've seen that is backed up with solid sources. After watching your videos on factor investing I've been mulling over implementing a US value tilt to my portfolio. I've been doing my reading to understand the S&P 900 value index and from what I understand, the index is rebalanced annually in December. Would the recent market drop due to COVID 19 have an affect on the expected size of the value premium? I mean if the value premium is based on buying riskier companies, would the drop mean that those hypothetical risks have been realized and are no longer hypothetical, therefore reducing the expected premium? Theoretically if I were to buy the value ETF, should I buy it only right after the underlying index has been rebalanced? Thanks!

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...

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.

fantastic video

Why did you choose ITOT vs VTI in your portfolio example?