The Best Stock Asset Class To Own ?

This post is a little different than a typical stock trading post in that it is about long term investing because I thought I would share what I was recently looking into.

I recently spoke to a very smart financial adviser who constantly studies asset allocation and portfolio scenarios over time.

I asked him if he could only invest in one asset class, which one would he would invest in ?

The Answer : Smallcap Value

Now, I already knew that many “lazy portfolio” articles talk about having smallcap value as an asset but was curious what else was written about it.

Well-known financial advisor Paul Merriman has some excellent information studying the performance of Smallcap Value ETF’s.

Mr. Merriman helped popularize “Lazy Portfolio” ETF investing by studying returns over time having low-cost index funds allocated based on past performance.

Mr Merriman’s research found that:

“I have looked at asset-class returns for small-cap value stocks covering 67 separate 20-year periods going back to 1927. On average, those 20-year periods produced a compound rate of return of 16.1%.

In the best period, 1942-1961, the return was 22.7%. In the worst period, 1929-1948, the return was 6.2%. Those are the extremes. Perhaps more important (at least to me) is the fact that in 10 periods, these stocks returned more than 20%. The return was less than 10% in only five of those 67 periods.

By themselves, those numbers don’t mean much. But let’s look at how they compare with the S&P 500 Index. On average, the index’s compound return in all those 20-year periods was 11.3% (versus 16.1% for small-cap value). In the worst period, 1929-1948, the annual gain was 3.1%. In the best period, 1980-1999, the return was 17.9%.

On the other end of the scale, small-cap value stocks turned in 10 periods with returns over 20%. The S&P 500 Index had zero.

The academic community believes that over long periods of time, the combination of small and value should add three to five annual percentage points to the return of the S&P 500 Index.”


How to Invest in Smallcap Value ?

Ok, so now you know that Smallcap Value is good for long term performance but how to invest in it ?

Well, there are various indexes that try to model the “Value” component of the smallcap stock universe. Some seem to be more diversified vs. others and some have a heavier weighting to certain assets like REIT’s which can affect performance.

I did some searching around and it seems that the 2 popular ones are from Vanguard because of the low expense ratio. These are Vanguard Small Cap ETF (VBR) and Vanguard Russell 2000 Value ETF (VTWV).

VBR is usually the more popular one mentioned in articles about smallcap value but Mr Merriman actually advocates for VTWV. He has some great information in this article and in this podcast episode about why he likes VTWV.

Besides Vanguard, there are also some good smallcap value index funds that have no commission costs from Schwab and Fidelity.


Seriously consider owning Smallcap value as a LONG term investment. Just buy it and put it away.

As to which is the best way to invest in Smallcap Value, I think VTWV looks solid because of the reasons stated in the article I linked to above but VBR is also worth considering if you are just focused on expense ratio.

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