Ready for a Return to Value? These Small-Cap Value ETFs Could Surprise This Year

The appetite for high-multiple growth stocks has really faded in recent weeks. And while the S&P 500 seems well on its way to staging a comeback after slipping into a correction, it remains unknown as to whether high-multiple names (think the Magnificent Seven) will pick up where they left off before the Trump-driven slump. With much of the enthusiasm surrounding AI having eroded in these past week months, it certainly feels like the less-obvious (think the small-cap stocks) plays may finally have a chance to lead.

In any case, investors seeking to fare well in what could be an “off” year for markets may have just a bit more incentive to look beyond the obvious mega-cap growth stars if outperformance is what they seek. Most notably, the small-cap value ETFs look like great places to reconsider as the Magnificent Seven, large-caps, and blue chips fade in favor of the lesser-known firms, some of which could be spared as this latest spill in markets carries on.

Of course, only time will tell if a rotation to small-caps and value will be in the cards once investors calm down after a vicious, volatile start to the year. Either way, I think it’s only prudent to show the smaller-cap stocks a bit more respect. Here are two small-cap ETFs that could make for great diversifiers for investors actively seeking to underweight their exposure to the mega-cap tech stars as they continue their descent.

Here are two fantastic small-cap value ETFs that may very well be ready to make up for lost time if a sustained rotation does come to be after the latest “wake-up call” of a correction for investors who may have been too heavy in mega-cap growth and too light in small-cap value. 

Vanguard Small Cap Value ETF

Vanguard Small Cap Value ETF (NYSEARCA:VBR) is one of my favorite ways to punch your ticket to small-cap value. The low-cost ETF, which boasts a low 0.07% expense ratio, has quietly gained more than 112% in the past five years. Sure, that’s still shy of the 123% gain of the S&P 500, but with a mere 16.4 times price-to-earnings (P/E) multiple and a higher 2% yield, the VBR stands out as a great way to position oneself for a value rotation.

The VBR has over 800 holdings, with no single name contributing more than 1% of the fund. Indeed, it’s a one-stop-shop way to “fix” any portfolio that’s lacking in the department of small-caps, value, or both.

Of late, the VBR has been under more pressure (still down 12% in this Trump correction) than the S&P 500 and could be at risk of exhibiting slightly more volatility than the broad market (1.11 beta, which entails slightly more volatility) in times of panic.

That’s largely attributed to the choppier nature of the small caps than anything to do with the “value” aspect of the ETF. Either way, the VBR could prove a great bargain while it’s fresh off its latest correction, especially with more rate cuts on the way. 

Invesco S&P SmallCap 600 Pure Value ETF

The Invesco S&P SmallCap 600 Pure Value ETF (NYSEARCA:RZV) is a different flavor of small-cap ETF, with a slightly smaller number of holdings (600 vs. over 800) and a slightly higher, though still competitive total expense ratio of 0.35%. Looking underneath the hood, it’s likely that you’ve never heard of any of the top 10 holdings of the fund. In any case, the index gauges value by a number of metrics, providing broad exposure to “cheap” names scattered across the small-cap universe.

Perhaps most striking is that the RZV has actually outperformed the S&P 500, gaining around 200% over the timespan. Indeed, much of the outperformance came in 2020 and 2021, when rates were brought down to historic depths. In the past four years, shares of the RZV have been in a consolidation channel of sorts.

The big question for investors is whether continued rate cuts could give the RZV and small-cap value ETFs like it another big leg higher. It certainly seems overdue for a pop. If President Trump gets his way, perhaps the Fed could get more aggressive on rate cuts over the coming 18 months. Let’s just say it wouldn’t be all too surprising!

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