The Fed’s persistent hawkish tilt to control still-elevated inflation and the recent banking crisis could push the economy into a recession. Amid this, it could be wise to invest in top small-cap value ETFs Vanguard Small-Cap Value ETF (VBR), ProShares Russell 2000 Dividend Growers ETF (SMDV), and VictoryShares US Small Cap High Dividend Volatility Wtd ETF (CSB) for portfolio diversification and potential gains.

Since March 2022, the Federal Reserve has increased the benchmark federal funds rate to a 4.75%-5% range, the highest level since September 2007. The Fed’s hawkish stance is now yielding results, with inflation dropping for the ninth consecutive month in March. Consumer prices rose 0.1% for the month and 5% year-over-year, below respective estimates of 0.2% and 5%.

Although inflation has fallen significantly from the 40-year highs reached last year, it remains well above the Fed’s target of 2%. Still-elevated inflation instills fears among investors about the Fed’s next course of action. The CME FedWatch tool shows markets are pricing approximately 80% chance of a quarter-percentage-point interest rate hike in May.

Furthermore, according to the Fed minutes released last week, the fallout from the recent banking crisis could push the economy into a recession later this year. Also, projections following the meeting suggested that Fed officials expect gross domestic product (GDP) growth of merely 0.4% for 2023.

Based on its probability model, the Conference Board also predicts a 99% likelihood of a recession in the United States within the next 12 months. Moreover, it forecasts three-quarters of negative real GDP readings starting in the second quarter of 2023.

Against the backdrop, investors could add top-performing small-cap value ETFs to their portfolios to secure high returns and add diversification while minimizing risk. These ETFs invest in stocks of companies that have a small market capitalization size of under $2 billion and are trading well below their intrinsic values.

While high risk and volatility associated with small-cap stocks may discourage investors, the small-cap value approach also emphasizes other factors, including value, which helps to mitigate any potential losses to the small-cap names. Thus, this month, top small-cap value ETFs VBR, SMDV, and CSB could be ideal investments.

Let’s delve deeper into the fundamentals of these ETFs:

Vanguard Small-Cap Value ETF (VBR)

VBR seeks to provide exposure to small-cap firms that exhibit value characteristics in the equity market. The ETF offers extreme diversification as it holds close to 1,000 securities in total and does not allocate more than 0.5% of the total assets to any security.

VBR tracks the CRSP US Small Cap Value Index. DIA has assets under management (AUM) of $23.86 billion. The fund has a total of 847 holdings. Its top holdings include US Dollar with a 1.01% weighting, IDEX Corporation (IEX) at 0.68%, followed by Reliance Steel & Aluminum Co. (RS) and Atmos Energy Corporation (ATO) with 0.59% and 0.58% weightings, respectively.

The fund has an expense ratio of 0.07%, lower than the category average of 0.34%. Over the past three months, VBR’s fund inflows came in at $68.86 million, and $761.87 million over the past six months. Its P/E ratio of 10.80 compares with the category average of 9.16. Also, the ETF has a beta of 1.15.

VBR has paid dividends for 17 consecutive years. The ETF pays a $3.49 per share dividend annually, translating to a 2.21% yield on the current price. Its dividend payments have grown at a CAGR of 2.7% over the past three years and 8% over the past five years.

This ETF has gained 2.8% over the past month and 4.8% over the past six months to close the last trading session at $158.72. It has a NAV of $158.78 as of April 19, 2023.

VBR’s POWR Ratings reflect this promising outlook. The fund’s overall B rating equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

VBR has a B grade for Peer and Buy & Hold. Of the 21 ETFs in the Small Cap Value ETFs group, it is ranked first.

To access all VBR’s POWR Ratings, click here.

ProShares Russell 2000 Dividend Growers ETF (SMDV)

SMDV tracks the performance of the Russell 2000® Dividend Growth Index. This ETF comprises quality companies that pay solid dividends and have raised them for at least ten consecutive years. As a group, its holdings usually have stable earnings, sound fundamentals, and strong histories of profit and growth.

With $833.90 million in AUM, SMDV’s top holdings include Healthcare Services Group, Inc. (HCSG) with a 1.27% weighting, followed by Cogent Communications Holdings Inc (CCOI) at 1.23%, and WD-40 Company (WDFC) and Ensign Group, Inc. (ENSG), at 1.23% and 1.21%, respectively. It currently has 97 holdings in total. 

Over the past six months, SMDV’s fund inflows were $40.73 million. In addition, its 0.40% expense ratio compares favorably to the 0.54% category average. The ETF’s NAV was $60.33 as of April 19, 2023.

SMDV’s P/E ratio of 17.34 compares with the category average of 8.87. The fund pays a $1.55 annual dividend, yielding 2.60% at the current share price. Its dividend payouts have increased at a 5% CAGR over the past three years and an 8.9% CAGR over the past five years. SMDV has a record of paying dividends for seven consecutive years.

The fund has gained 2.1% over the past six months to close the last trading session at $60.27. It has a beta of 0.78.

SMDV’s fundamental strength is reflected in its POWR Ratings. The ETF has an overall rating of B, translating to a Buy in our proprietary rating system.

SMDV has a grade A for Peer and a B for Buy & Hold. It is ranked #2 out of 21 ETFs in the Small Cap Value ETFs group.

Click here to see all the SMDV ratings.

VictoryShares US Small Cap High Dividend Volatility Wtd ETF (CSB)

CSB offers exposure to small-cap, dividend-paying stocks without subjecting investors to the inherent limitations of traditional market-cap or yield weighting it. The ETF seeks to track the performance of the Nasdaq Victory US Small Cap High Dividend 100 Volatility Weighted Index.

CSB has an AUM of $392.90 million. The fund has a total of 101 holdings. Its top holdings include NewMarket Corporation (NEU) with a 1.73% weighting, MGE Energy, Inc. (MGEE) at 1.71%, MSC Industrial Direct Co., Inc. Class A (MSM) at 1.66%, and NorthWestern Corporation (NWE) at 1.65%.

CSB has an expense ratio of 0.35%, lower than the category average of 0.54%. Over the past six months. Its fund inflows were 56.16 million and $139.77 million over the past year. Also, it has a beta of 1.05. CSB’s P/E ratio of 15.93 compares with the category average of 8.87.

The ETF pays an annual dividend of $1.87, which yields 3.80% on the current price. Its dividend payouts have increased at an 8.5% CAGR over the past three years and a 5.3% CAGR over the past five years.

CSB has gained 2.1% over the past month and 5.5% over the past six months to close the last trading session at $52.00. The fund has a NAV of $51.76 as of April 18, 2023.

CSB’s POWR Ratings reflect this strong outlook. The ETF’s overall B rating translates to a Buy in our proprietary rating system.

CSB has a grade of B for Buy & Hold and Peer. Of the 21 ETFs in the same group, CSB is ranked #3.

To access all the POWR Ratings for CSB, click here.

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VBR shares were unchanged in premarket trading Thursday. Year-to-date, VBR has gained 0.54%, versus a 7.95% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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