Value and Quality Screens Drive Outperformance in Small-Cap ETFs

Value-oriented small-cap exchange-traded funds (ETFs) have significantly outperformed their broad-market peers over the past three years, with funds employing specific factor tilts leading the category. Data compiled by Investing.com reveals that strategies focusing on value and profitability have provided a performance edge over more widely-held passive index funds.

Value Factor Delivers Strong Returns

The trend of value outperformance is most evident in the U.S. small-cap space. The Avantis U.S. Small Cap Value ETF (AVUV) stands out as a top performer among its U.S.-focused peers.

• AVUV: Delivered a +61.0% total return over the last three years.
• IWN (iShares Russell 2000 Value ETF): Posted a +58.5% return over the same period.
• IWM (iShares Russell 2000 ETF): The popular benchmark returned +56.2%, trailing its value-focused counterparts.

This performance gap underscores the recent strength of the value factor, which targets stocks that appear to be trading for less than their intrinsic or fundamental worth.

Index Construction Proves Critical

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Beyond a simple value tilt, the choice of underlying index has also been a key driver of returns and cost efficiency. ETFs tracking the S&P 600 index, such as the SPDR Portfolio S&P 600 Small Cap ETF (SPSM) and the iShares Core S&P Small-Cap ETF (IJR), have a built-in quality screen.

The S&P 600 index requires constituent companies to have a history of positive earnings, a rule not present in the broader Russell 2000 index. This profitability filter has helped these funds deliver competitive returns while offering some of the lowest fees in the category. The SPSM, for example, has an expense ratio of just 0.05%, compared to 0.19% for the IWM.

International and Low-Cost Leaders

For investors seeking international diversification, the Avantis International Small Cap Value ETF (AVDV) has been a notable standout, generating a +88.7% return over the past three years, according to the data. The fund also features a high dividend yield of 5.41%.

On the domestic front, cost-conscious investors have several highly efficient options. Alongside SPSM's 0.05% fee, the Vanguard Small-Cap ETF (VB) also charges 0.05%. The Vanguard Small-Cap Value ETF (VBR) and iShares' IJR both offer access to the segment for an expense ratio of 0.07%.