Among the equity factors that academic research has identified — size, value, momentum, quality, and others — small-cap value has the strongest historical record. Over the long run (decades), small-cap value stocks have outperformed the broader market by 2–4 percentage points per year. The mechanism is debated; the data is consistent across multiple countries and multiple decades.
The complication: the premium has been weaker over the last 15 years, especially in US markets, leading some investors to question whether it still exists. This page is about what the premium is, what the recent underperformance might mean, and how to actually access the factor if you want to.
Two factor exposures combined:
Smaller companies (by market capitalization) have historically outperformed larger companies. The effect is most pronounced at the smaller end (small-cap and micro-cap) and weakens for mid-caps.
Cheaper companies (by metrics like price-to-book, price-to-earnings, dividend yield) have historically outperformed more expensive companies. "Cheap" here is defined by traditional value metrics, not by judgment about the underlying business.
Stocks that are both small and cheap have produced even higher historical returns than either factor alone. The combination is more pronounced than the sum of the individual factors.
Over 1928–2020 in the US:
The 3.5 percentage point spread between large-cap broad and small-cap value compounded over a 40-year career produces roughly 3.5x more wealth — a substantial difference.
International data shows similar but somewhat weaker effects. The premium exists in most developed markets and most decades.
From roughly 2008–2023, US small-cap value underperformed US large-cap growth by a large margin. The reasons advanced include:
Whether this represents a temporary deviation or a permanent change in the premium is unsettled. Two views:
The argument: factor premiums get arbitraged away once they are widely known. Once enough investors tilt toward small-cap value, the premium evaporates because the prices of those stocks are bid up.
This argument has some merit but is undermined by the persistence of the premium across decades and the fact that it has weakened-then-recovered multiple times historically.
The argument: the premium is real but cyclical. Periods of underperformance are followed by periods of outperformance. The 2008–2023 underperformance is not unprecedented; similar stretches have happened before, and recoveries have followed.
This view is the more common among academic researchers who built the factor models. It implies the premium will return, though timing is uncertain.
The honest answer: nobody knows. Investors choosing to tilt toward small-cap value are making a judgment call that the long-run premium will continue.
The most straightforward approach. Specific funds:
The differences between these funds are real:
For investors specifically wanting factor exposure, AVUV is often considered the best option. For investors wanting modest tilt at low cost, VBR works.
If you want the factor outside US markets:
Some funds combine multiple factors (size, value, quality, momentum) in one product. AVUV is technically a multi-factor fund; explicit "factor stack" funds exist but tend to be expensive.
If you choose to tilt toward small-cap value, the question is how much.
Adds factor exposure without dramatically changing the portfolio's character. The most common approach. Low risk that the tilt dominates the experience if the factor underperforms.
For investors with strong factor convictions. Provides meaningful exposure but accepts substantial tracking error vs. broad market.
Rare; typically only for investors with very strong factor convictions and long horizons. Accepts the possibility of decade-plus periods of underperformance.
Factor investing requires patience. The premium materializes over decades, not years. An investor adding small-cap value at the wrong moment can experience 5–15 years of underperformance before the factor returns.
This is the single biggest behavioral challenge with factor investing: the conviction that the long-run return premium is real has to survive multi-year periods where the tilt is hurting performance.
If you would not hold a small-cap value fund through 10+ years of underperforming the broader market, you should not buy one. The factor premium is paid for by the willingness to hold through bad periods.
For investors who want exposure to the strongest equity factor:
For investors who want simplicity and acceptable returns without factor bets:
Both approaches are defensible. Heavy factor tilting requires conviction and patience; choosing not to tilt requires accepting that you might leave 1–3% of expected return on the table over the long run.