Will The Rebound For Small-Cap Value Stocks Endure?

It’s been a year of revival so far for the previously trailing small-cap value space in the US stock market. Deciding if the party can last may depend on how stocks overall fare in the months ahead and whether the consensus forecast for a strong economic recovery is accurate.

For now, small-cap value is the top-performing equity risk factor year to date, based on a set of exchange traded funds. The iShares S&P Small-Cap 600 Value ETF (IJS) is enjoying a strong 22.3% total return in 2021 through yesterday’s close (Apr. 20). The edge over second- and third-place factors is shrinking, but for now IJS holds the high ground. Meanwhile, measured against the broad market, there’s no comparison: IJS’s year-to-date run is more than double the 10.6% increase for SPDR S&P 500 (SPY) so far in 2021.

Small-cap value (SCV) is widely followed, in part because of influential research in the 1990s that first documented that this slice of equities’ capacity for outperforming the broad stock market through time. But as the SCV stumbled in recent years, investors wondered if the risk premium had faded and the original research was wrong. But as the risk factor’s prospects hit rock bottom, the tide began to turn, or so it seemed.

Last June, The Wall Street Journal wrote that “Small ‘Value’ Stocks Are Down but Not Out.” The article was a timely piece, arriving just ahead of a renaissance in SCV leadership. Since November, IJS has pulled far ahead of the broad market (SPY).

In fact, there’s been a strong run for most of the major US equity factors so far this year. More than half of the ETF-based equity factors in the table above are beating the broad market’s performance in 2021. Note, too, that every corner of this factor zoo is posting a gain, ranging from a relatively modest 6.0% rise for momentum (MTUM) up through small-cap value’s performance lead.

Yet the second-place high-beta version of the S&P 500 is nipping at small-cap value’s heels. Invesco S&P 500 High Beta (SPHB) is up 21.6% so far this year, just slightly behind IJS’s lead.

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Disclosures: None.

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