The largest exchange-traded fund, or ETF, in the world, the Vanguard S&P 500 ETF (ticker: VOO), sits at about $1 trillion in assets under management. The ETF has delivered an impressive 15.5% annualized total return over the past decade, helped by its low 0.03% expense ratio and a market-cap-weighting methodology that naturally increased exposure to outperforming companies.
The downside of allowing winners to run is increasing concentration. According to Vanguard, VOO’s median market capitalization stood at $455 billion at the end of June, while the portfolio traded at a rich price-to-earnings (P/E) ratio of roughly 27.5.
Investors looking to move away from this mega-cap growth tilt may instead consider factor investing. This is an approach that goes beyond market-cap weighting to systematically target specific characteristics associated with higher expected returns, through either rules-based indexes or active management.
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Two of the best-known factors are size and value. Pioneered by Nobel laureate Eugene Fama and finance researcher Kenneth French, these factors helped explain stock returns beyond what the original Capital Asset Pricing Model could capture.
The size factor, commonly referred to as “small minus big,” measures the historical tendency for smaller companies to outperform larger ones over long periods. The value factor, known as “high minus low,” reflects the historical outperformance of companies trading at lower valuations.
“Investing in small-cap value stocks offers a sensible proposition for potentially outperforming equity benchmarks; all else being equal, paying a lower price for a stock’s future cash flows can lead to a higher expected return,” explains Wes Crill, senior client solutions director and vice president at Dimensional Fund Advisors.
Like all investment factors, size and value move through cycles of outperformance and underperformance. Both have generally lagged the broader market over much of the past decade as mega-cap growth companies dominated returns.
For contrarian investors, however, that relative weakness may present an opportunity if leadership broadens beyond the largest growth stocks. A small-cap value ETF can help investors capitalize on this with more reasonable fees and better tax efficiency compared to older mutual funds.
“Any small-cap strategy is expected to buy securities at a low price and to sell them when the price goes up, so from the capital gains point of view generates a lot of taxes,” says Eduardo Repetto, chief investment officer at Avantis Investors. “Using an ETF allows for efficient rebalancing of small-value strategies that is tax-friendly and is expected to minimize or eliminate capital gains distributions.”
Here are seven of the best small-cap value ETFs to buy in 2026:
| ETF | Expense Ratio |
| Vanguard Small-Cap Value ETF (VBR) | 0.05% |
| iShares Russell 2000 Value ETF (IWN) | 0.24% |
| State Street SPDR S&P 600 Small Cap Value ETF (SLYV) | 0.15% |
| Invesco S&P SmallCap 600 Pure Value ETF (RZV) | 0.35% |
| Avantis U.S. Small Cap Value ETF (AVUV) | 0.25% |
| Dimensional U.S. Small Cap Value ETF (DFSV) | 0.30% |
| Distillate Small/Mid Cash Flow ETF (DSMC) | 0.55% |
Vanguard Small-Cap Value ETF (VBR)
One concern with factor investing is that any expected return premium can be offset by higher management fees. To address that, low-cost providers such as Vanguard use indexing to deliver systematic factor exposure without significantly increasing costs. VBR, for example, charges just a 0.05% expense ratio to track 840 companies represented by the CRSP U.S. Small Cap Value Index.
However, VBR’s broad approach results in relatively modest size and value tilts, with a median market capitalization of about $10.5 billion placing much of the portfolio in the mid-cap range. Likewise, its price-to-earnings ratio of roughly 18 is below VOO’s, though some dedicated value investors may prefer deeper coverage. Even so, a 0.05% expense ratio for small-cap value exposure is hard to beat.
iShares Russell 2000 Value ETF (IWN)
The Russell 2000 is one of the most widely followed small-cap benchmarks thanks to its broad representation of U.S. smaller companies and the large number of index funds that track it. ETF sponsors also offer factor-based versions like IWN, which tracks the Russell 2000 Value Index. The fund holds nearly 1,400 stocks and trades at a modest P/E ratio of 15.1.
Investors should also recognize some of the challenges associated with the Russell 2000 universe. The parent index has long been criticized for containing a large number of unprofitable or “zombie” companies that struggle to generate sustainable earnings. Tilting toward value helps screen out some of these weaker businesses, but it does not fully eliminate the structural issues within the benchmark.
State Street SPDR S&P 600 Small Cap Value ETF (SLYV)
“The broader S&P 600 Small Cap Index screens out small-capitalization stocks that do not have four consecutive quarters of earnings per share,” explains Matthew Bartolini, managing director and global head of research strategists at State Street Investment Management. “Firms that are not consistently profitable are excluded from the broader index, providing both a size tilt as well as a quality tilt.”
By excluding consistently unprofitable companies, SLYV allows the size and value factors to express themselves with less interference from speculative businesses that may never generate sustainable earnings. “SLYV’s exposure has a lesser potential of owning small-cap value traps, a situation where a firm has below-market valuations stemming from weak cash flow and fundamentals,” Bartolini says.
Invesco S&P SmallCap 600 Pure Value ETF (RZV)
“RZV provides more concentrated and targeted exposure by weighting holdings based on their value characteristics rather than market capitalization, resulting in a purer expression of small-cap value,” explains Chris Dahlin, senior factor and core equity strategist at Invesco. This ETF screens for price-to-book value, price-to-earnings and price-to-sales ratios via the S&P SmallCap 600 Pure Value Index.
RZV’s stricter screening process produces a much more concentrated portfolio, holding just 159 stocks compared with 461 for SLYV. It also exhibits deeper factor exposure, reflected in a low forward P/E ratio of 15.6 and a smaller average market capitalization of $2.8 billion versus just over $4 billion for SLYV. That comes at a higher cost, however, with RZV charging a 0.35% expense ratio.
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Avantis U.S. Small Cap Value ETF (AVUV)
Index-based small-cap value strategies have limitations. Scheduled reconstitutions can be front run, while some value metrics are not equally useful across all industries, particularly capital-intensive businesses with high depreciation. Investors seeking a flexible approach may prefer AVUV, which charges a 0.25% expense ratio and has outperformed the Russell 2000 Value Index over the past five years.
“Avantis ETFs are active, which means that we are not tied to an index and their arbitrary rebalancing dates,” Repetto says. “We buy securities because they are expected to add value to the portfolio, and we are also not forced to continue holding securities if they have already enjoyed the expected price appreciation and their future expected prospects are no longer as attractive.”
Dimensional U.S. Small Cap Value ETF (DFSV)
“Dimensional has over 30 years’ experience managing small-cap value strategies that go beyond indexing with a daily systematic investment process,” Crill says. By systematic, Dimensional does not mean traditional active stock picking. Instead, the firm uses quantitative screens to target desired factor exposures while seeking to keep portfolio turnover low and costs reasonable.
DFSV charges a 0.3% net expense ratio and has annual portfolio turnover of just 9%. The ETF remains broadly diversified, with more than 1,000 holdings and a weighted average market capitalization of approximately $5.8 billion. Like many small-cap value strategies, the portfolio is concentrated in financial sector stocks, at 28%, followed by industrials, at 16%, and consumer discretionary, at 14%.
Distillate Small/Mid Cash Flow ETF (DSMC)
Traditional value metrics such as price-to-earnings and price-to-book ratios can be less reliable for modern businesses, where stock-based compensation, depreciation and other one-off accounting items may distort reported earnings. One alternative is to focus on companies generating strong free cash flow, which can be converted to a value-based yield metric by dividing free cash flow by enterprise value.
DSMC applies this approach to a universe of 1,000 profitable small- and mid-cap companies using active management. The ETF begins by excluding companies with elevated debt levels before selecting the 150 most attractively valued stocks using Distillate Capital’s proprietary free cash flow methodology. Holdings are weighted by free cash flow and rebalanced quarterly. The ETF charges a 0.55% expense ratio.
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7 Small-Cap Value ETFs to Buy in 2026 originally appeared on usnews.com
Update 07/21/26: This story was published at an earlier date and has been updated with new information.
