Small Value Lags For 15 Years

Using Fama-French research indexes, we see that small value stocks have far outperformed other equity asset classes over the long term. The following are the returns to U.S. equities from July 1926 through September 2018:

  • Small Value: 14.8%
  • Large Value: 12.0%
  • Total Market: 10.2%
  • Large Growth: 9.8%
  • Small Growth: 9.0%

Many investors forget the long-term evidence and, being subject to recency, ask: “What have you done for me lately?” And small value has not been the star performer over the last 15 years that it has over the full 92 years.

Fund Returns

Before considering recent returns, it’s important to note that the above data is based purely on returns to indexes. Thus, they do not include trading costs, which are greater in small stocks. In addition, expense ratios for small value stock funds tend to be higher as well. With that in mind, we can look at Vanguard’s index funds to look at live fund returns; the lowest-cost version available for the full 15-year period is used. We’ll also look at the returns of Dimensional Fund Advisors’ U.S. Small-Cap Value Fund (DFSVX). (Full disclosure: My firm, Buckingham Strategic Wealth, recommends Dimensional funds in constructing client portfolios.) Data is from Portfolio Visualizer and is for the 15-year period ending October 2018.

  • Vanguard Total Stock Market (VTSMX): 8.9%
  • Vanguard U.S. Growth (VWUAX): 9.0%
  • Vanguard Value (VIVAX): 8.2%
  • Vanguard Small-Cap Growth (VISGX): 9.7%
  • Vanguard Small-Cap Value (VISVX): 9.4%
  • Dimensional Small-Cap Value (DFSVX): 8.9%

Note that while small growth outperformed small value, Vanguard’s small value fund did outperform the total market over the 15-year period, though Dimensional’s only managed a tie (due to its higher costs). These outcomes, while not expected, should not be surprising either—at least to those who know their financial history. All risky asset classes go through extended periods of underperformance. If this were not the case, there would be no risk. In fact, using data from Paul Merriman’s website, we see that U.S. small value stocks have been the top-performing equity asset class (including international equities) in 56%, not 100%, of 15-year periods.

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