Enjoy Growth And Income With These Small-Cap Value ETFs

After a smooth ride last year, the U.S. stock market is experiencing a shaky 2015 due to successive issues that have been lashing the bourses and heightened volatility. In Q3, global growth concerns played foul, crushed all risky assets and even held the Fed back from ratifying a lift-off in its September meeting.

Things turned messier to start Q4. While on the one hand, a slowdown in the labor market over the last three months almost killed the possibility of hike at the December Fed meeting and guaranteed cheap money inflows throughout this year, on the other a weak job data roused  anxiety over U.S. economic health (read: ETFs that Gained & Lost Post Dismal Job Data).

Overall, as just the September job data came out, the stocks surged and bond yields slumped on the belief that this is bad news for the economy but good news for the market. The Fed funds rate for the longer run was also cut to 3.0-4.0% from 3.3-4.3% suggesting a slower rate hike trail.

Having said this, we would like to note that though the momentum has slowed, the U.S. economy is still the lone star in the developed market pack. The Euro zone is buckling under the pressure of deflationary concerns; China is busy in averting a hard landing, Japan is also seeing deceleration in its growth pace and the broader emerging markets are on the line.

This economic trend should hammer out a good deal for the U.S. small-cap value ETFs. Normally, smaller companies pick up faster than the larger ones in a growing economy. Since these pint-sized securities usually focus more on the domestic market, they are less ruffled by international worries than their globally exposed larger counterparts. This is especially true as a pile of woes hit a number of developing and emerging nations this year.

Moreover, due to lesser foreign focus, small-cap ETFs are not exposed to risks emanating from a still-stronger dollar. Having said this, we emphasize value picks in the small-cap spectrum given the flare-ups in economic uncertainty.

Small-caps have the potential to offer good returns in a trending market, but these are often blamed for increasing volatility. Thus, investors seeking equity appreciation with a lower level of risk should look for value in the small-cap space (read: No Imminent Lift Off? Time for These Dividend ETFs).

Value investing takes into account under-priced securities. These stocks normally have low P/E and P/B ratios plus high dividend yields. In short, small-cap value ETFs have the potential to offer investors both capital appreciation and decent current income which could be useful in the present low-rate environment. Below, we have highlighted some of the top performing small cap value ETFs that could be the ones to watch in the months ahead (see all small-cap ETFs here).
Vanguard Small-Cap Value ETF (VBR)
This fund provides exposure to the value segment of the U.S. small cap market by tracking the CRSP US Small Cap Value Index. It holds a large basket of 840 stocks, which is widely spread across individual securities as none of these has more than 0.5% of assets.In terms of sector exposure, financials dominates the portfolio at 30.3%, followed by industrials (20.4%) and consumer services (12.8%). The ETF is quite popular with AUM of more than $5.62 billion. It is one of the low cost choices in the small cap space, charging 9 bps in fees per year from investors.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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