Strategy · Factor
SMALL-CAP VALUE TILT
BullishDefined riskIntermediate
Overview
Overweight small-cap value stocks via funds (IJS, AVUV) or individual names selected on low P/B and strong free-cash-flow yield. Captures the small-cap value premium documented since the 1930s.
Setup
- 1.Allocate 10-30% of equity allocation to a small-cap value sleeve.
- 2.Pick one fund (AVUV, IJS) or build a basket of 20-30 names.
- 3.Filter individual names: P/B <1.5, ROE >10%, debt/equity <0.5.
- 4.Rebalance annually; trim winners, add to laggards.
- 5.Hold 5+ years — the premium is realized over multi-year periods.
- 6.Tax-locate in IRAs to avoid frequent capital-gains friction.
Max profit
Historically 1-3% annualized excess return vs. broad market.
Max loss
Small caps can underperform for 5+ year stretches; full equity-market downside applies.
Breakeven
Equal performance with broad market over the holding period.
When to use
As a long-term factor tilt within a diversified equity portfolio.
When to avoid
If you cannot tolerate underperformance for years. As a market-timing tactic.