Topic Guide
What Is Small cap value?
Small cap value is a subject covered in depth across 2 podcast episodes in our database. Below you'll find key concepts, expert insights, and the top episodes to listen to — all distilled from hours of conversation by leading experts.
Key Concepts in Small cap value
Small cap value (scv)
SCV refers to companies with small market capitalizations and 'value' characteristics, such as low price-to-earnings ratios. This episode highlights its importance based on Fama and French research, suggesting it historically offers diversification and enhanced long-term returns compared to other market segments.
Factor investing
An investment strategy that targets specific market characteristics, or 'factors,' believed to drive long-term returns. Fama and French identified size (small cap) and value as key factors, and this episode explains how funds like AVUV leverage these factors by focusing on small, undervalued companies.
Algorithmic funds (index funds)
These are funds that use computer programs to categorize, select, and weight stocks based on predefined index criteria, rather than human stock-picking. The episode clarifies that even funds like AVUV, which apply specific 'quality filters,' operate on algorithms, distinguishing them from traditional actively managed funds.
Profitability/quality filter
This is an additional screening mechanism used by some factor funds, notably AVUV, on top of basic small cap and value criteria. It aims to exclude unprofitable or low-quality companies from the index, which the guest argues contributes to better historical performance by 'getting rid of the worst ones.'
Four-fund strategy
A diversified equity portfolio proposed by Paul Merriman, consisting of 25% allocation each to large cap blend (S&P 500), large cap value, small cap blend, and small cap value. This strategy is presented as historically offering higher returns and lower volatility than a single S&P 500 investment due to broad market exposure and capturing various factor premiums [12:14].
Non-traditional index funds
These are ETFs or mutual funds from providers like Avantis and DFA that track specific market segments but employ more active, factor-based selection criteria than typical index funds. Instead of just replicating an index based on market capitalization, they filter for higher-quality companies within a given asset class (e.g., small cap value) based on factors like financial statements and book-to-value ratios, aiming for superior risk-adjusted returns [19:25, 20:27].
What Experts Say About Small cap value
- 1.Small cap value (SCV) investing is a strategy often recommended in the FIRE community for long-term performance and portfolio diversification, stemming from 1990s research by Eugene Fama and Ken French.
- 2.SCV funds target companies with small market capitalization and 'value' characteristics (e.g., low price-to-earnings ratios, stable industries like financials or industrials), as opposed to 'growth' companies (e.g., high-P/E tech companies).
- 3.Historically, small cap value companies have tended to outperform the overall market over long periods, though the extent of this outperformance is a subject of ongoing debate.
- 4.AVUV, a popular small cap value fund, differentiates itself by applying a proprietary 'profitability' or 'quality' filter to its index, aiming to exclude 'bad companies' and thus improve performance compared to basic SCV indexes like the Russell 2000 or S&P 600 SCV.
- 5.Funds like AVUV are best understood as 'algorithmic funds' rather than actively managed; they use computer programs based on specific index criteria to select and weight stocks, similar to VTSAX, but with different underlying rules.
- 6.Small cap value funds offer diversification benefits, as they often perform differently from large-cap growth funds (like the S&P 500 or VTSAX), especially during market downturns (e.g., 1970s, early 2000s, 2022).