Better Buy: Invesco S&P SmallCap 600 Pure Value ETF or Vanguard Small-Cap Value ETF?

A good portfolio needs diversification, especially in times when markets are extremely volatile. The great thing about exchange-traded funds (ETFs) is that they are literally built for diversification, as they track the performance of a basket of stocks, typically within an index or benchmark.

But just because your portfolio includes a bunch of ETFs doesn’t mean it is diversified. If they are all growth-oriented ETFs, or tech-focused, or large-caps, you are probably not getting the type of diversification you need in a market like this, when growth companies are struggling.

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It may be a good time to add a value-oriented ETF to your portfolio to provide some additional balance. Let’s take a look at two of the best small-cap value ETFs. Which is the better buy?

Invesco S&P SmallCap 600 Pure Value ETF

The Invesco S&P SmallCap 600 Pure Value ETF (NYSEMKT: RZV) takes a narrower view of the small-cap universe, investing in the S&P SmallCap 600 Pure Value Index. According to the prospectus, this ETF tracks the performance of value stocks in the S&P SmallCap 600 Index as determined by book-value-to-price ratio, earnings-to-price ratio, and sales-to-price ratio.

The “pure value” moniker is derived from the system of scoring both value and growth stocks, using specific criteria. Any stocks that exhibit characteristics of both are eliminated, making it pure value (or growth). Furthermore, the stocks with the highest value scores get higher weighting. The average market cap of stocks in the ETF is about $1.5 billion.

With such screens, it has fewer holdings than many other small-cap value ETFs. It currently holds about 174 stocks with 22% in consumer discretionary, 19% in financials, and 15% in industrials. The top three holdings are Kelly Services, Olympic Steel, and Realogy Holdings Corp.

The ETF is down less than 1% so far in 2022. Last year through Dec. 31, the ETF was up 46%, reflecting the strength of value stocks over this time period. It has a five-year annualized return of 6.9% and a 10-year annualized return of 11.4% as of Dec. 31. Since its inception in 2006, it has posted an annualized return of 7.2%. It has an expense ratio of 0.35%.

Vanguard Small-Cap Value ETF

The Vanguard Small-Cap Value ETF (NYSEMKT: VBR) is a broad market ETF, tracking the performance of the CRSP US Small-Cap Value Index. This index essentially tracks the entire universe of small-cap value stocks, with about 1,000 holdings. The average market cap of stocks in the ETF is $6 billion.

Financials make up the biggest chunk of the ETF, representing about 23%. Industrials make up 20%, and consumer discretionary stocks account for roughly 15%. The three largest holdings are Diamondback Energy, Signature Bank, and VICI Properties.

The ETF is down about 2% year to date as of March 1. Last year, it returned 28% through Dec. 31. It has a five-year annualized return of 10.3% and a 10-year annualized return of 13.3%. Since its inception in 2004, it has returned 9.5%. The expense ratio is a minuscule 0.07%.

Which is the better buy?

These two ETFs are a good study in the contrasts within the small-cap value space. The Vanguard ETF takes a much broader look and includes larger companies, with most skewing into mid-cap territory with some large-caps, as its $6 billion median market cap would suggest. The Invesco fund is predominantly made up of small- and micro-cap stocks, with only a small percentage that veer into mid-cap territory.

With its pure value screens, the Invesco ETF has clearly been the better performer over the past year as value has significantly outperformed growth. It will be the better choice during market downturns and when the bulls aren’t running. The Vanguard ETF has clearly outperformed over the long term, benefiting from the bull market of the past decade. Without the pure value screens, it has stocks that are larger and have more growth characteristics than the Invesco ETF.

So which ETF you consider the better buy depends on what you are looking for and what you think the market might do over the next decade. If you want a true value diversifier to buoy your portfolio during significant downturns, the Invesco fund is the better option. If you want a diversifier that performs better when the market is up, the Vanguard ETF is a good choice. It will likely have better long-term returns if historical patterns hold.

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Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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