The “Pioneer Small Cap Value” ETF tracks an index composed of about 855 small companies; there is a major disconnect between the US stock market, small cap stocks, and large cap stocks, and between growth and value, and the fundamentals of these small companies with value characteristics are solid and their valuations are low, so this ETF is probably one of the best options to beat the S&P 500 index.
Currently, the three major US stock indices are at or close to their all-time highs. Among them, the US stock market index, the S&P 500 index, has repeatedly reached record highs since 2024. Today, the S&P 500 index position seems “unattainable” for many investors. In addition to the fact that a high point in the S&P 500 index means a sharp correction risk that may occur at any time, it is important for investors to be aware of the serious situation of a “major disconnect” between small-cap and large-cap stocks in the US stock market, as well as between growth stocks and value stocks.
Most of the gains in the S&P 500 Index (S&P 500 Index) and the Nasdaq 100 Index, which covers the most popular technology stocks in the US, were fully driven by large growth stocks led by the “Seven Magnificent Seven US Tech Giants” (Magnificent Seven). This had the most obvious impact on the Nasdaq 100 Index. Therefore, it can be described as a “major disconnect” between small and large cap stocks in the US stock market, and between growth stocks and value stocks, whether in terms of overall valuation or scale of capital inflows.
If you are “afraid of going high” the S&P 500 index, you might as well consider a “Pioneer Small Cap Value ETF”
The massive influx of global capital into the “top seven US tech giants”, which account for the high weight of the S&P 500 index, spurred the index to continue to reach record highs in 2024, which means that when negative events driving sell-offs and the “profit settlement” wave hit, the pullback could be very drastic. At the same time, in the context of the “major disconnect” described above in the US stock market, when large growth stocks with high valuations face uncertainty or negative catalysis, many small-cap stocks and value stocks with low valuations and excellent fundamentals seem to have stronger investment appeal than the S&P 500 index, which is currently at its highest level in history.
Taking advantage of the “major disconnect” between small and large cap US stocks, and between growth and value, a good way is to invest money in the “Pioneer Small Cap Value ETF” (US stock code: VBR). As the name suggests, Pioneer small-cap value ETF is an exchange-traded fund (ETF) that invests in small-cap stocks with “value stock attributes”, and overall positions focus more on the “value” attribute. These small companies with valuable characteristics have solid fundamentals and are undervalued, so this ETF is probably one of the best options to beat the S&P 500 ETF.
Furthermore, looking at the US stock market as a whole, the fee rate for this ETF is extremely low, only 0.07%, which means that for every 1,000 US dollars invested in the ETF, the annual investment fee is only 0.70 US dollars.
According to some Wall Street analysts, in anticipation of a “soft landing” in the US economy, the “small capital+value” combination of the US stock market has a very obvious alpha (alpha) investment return advantage — that is, the advantage of excess earnings over the US stock market compared to S&P 500 ETFs that simply focus on beta (beta) earnings.
Wall Street bank Goldman Sachs (Goldman Sachs) recently released a research report saying that if the prospects for a “soft landing” in the US economy continue to be optimistic, investors may later invest large amounts of money into stocks that have not performed well recently, rather than continue to pour into the “Seven Magnificent Seven” (Seven Magnificent) US stocks, which occupy a high weight. Savita Subramanian, head of US equities and quantitative strategy from Bank of America (BofA), recently said that if the yield in the US money market starts to decline, “a large amount of capital” will flow into the US stock market, but not necessarily the “seven tech giants” that are currently the most popular; Subramanian stressed that the S&P 500 index is still expected to continue to rise for a long time to come without the “big seven tech giants” leading the way.
Dan Suzuki, Deputy Chief Investment Officer of Richard Bernstein Advisors, said that if the US economy accelerates and achieves a soft landing, the rise in US stocks will expand to companies other than the seven tech giants that can ensure profit growth. This may lead to a classic trend of rotating markets or profit recovery, and then to some stocks with cheaper stock prices and valuations.
Philip Orlando, chief stock strategist from Federated Hermes, said the agency favors lower-valued value stocks rather than technology stocks; value stocks are defined as relatively inexpensive compared to book value or high dividends, and are currently mainly concentrated in the financial, consumer, and healthcare industries. Cesar Perez Ruiz, chief investment officer of Pictet Wealth Management, said that as US economic data continues to rise, undervalued small and medium-sized enterprises will become favored targets for investors.
According to public information, VBR's ETF portfolio has very obvious “diversified” investment attributes. This ETF holds 855 stocks, with a median market capitalization of about US$6.4 billion. As the market generally expects value stock ETFs, the largest sector in this ETF's holdings portfolio is concentrated in the sector with the highest concentration of value stocks and small-cap stocks such as industry, finance, and non-essential consumer goods, while exposure to highly valued industries such as technology and biotechnology is relatively low.
The index that the fund tracks is a weighted index, but it has as many as 855 stocks and is highly diversified. In stark contrast to ETFs that track large-cap stock indices such as the S&P 500, the top 10 holdings of the “Pioneer Small Cap Value ETF” account for less than 6% of its total assets. Stocks that investors can find in the ETF's diversified portfolio include relatively popular stocks such as TOLL Brothers (TOL.US), Williams-Sonoma (WSM.US), Cleveland-Cliffs (CLF.US), and Ally Financial (ALLY.US).
Make good use of the “major disconnect” in the US stock market
Undoubtedly, this ETF with its “low cost” attributes is definitely a positive investment advantage. However, as mentioned at the beginning, due to the collective influx of global capital into the “Big Seven Tech Giants,” there is now a “major disconnect” between large and small cap US stocks, as well as between growth and value stocks. Once the S&P 500 index is adjusted, this disconnection trend is expected to turn into an advantage — that is, capital selects low-cost, low-priced and well-founded small-cap stocks and value stocks in anticipation of a “soft landing,” and this ETF allows portfolios to take advantage of this disconnect trend.
Statistics show that at the beginning of 2024, compared to large US stocks, the net market ratio of small-cap stocks can be described as the lowest level in 25 years. This valuation gap seems to be getting wider. Unlike the S&P 500 index and the Nasdaq 100 index, which have repeatedly reached new highs since this year, the benchmark index for small cap stocks in the US, the Russell 2000 Index, is still about 14% below its all-time high.
Furthermore, the performance of value stocks in the US stock market in recent years has clearly lagged behind growth stocks dominated by the “Big Seven Tech Giants.” In fact, since the beginning of 2023, the “Pioneer Growth ETF” (code VUG) has outperformed the “Pioneer Value ETF” (code: VTV) by an astonishing 47 percentage points.
If expectations of a “soft landing” in the US economy continue to be strong, this expectation may become a major catalyst for US small-cap stocks with low stock prices and good fundamentals. Compared with large mature companies, small businesses tend to rely more on strong consumer spending. As described in the Goldman Sachs Research Report, investors may later invest large amounts of capital into stocks with poor recent stock price performance rather than continuing to pour into the “Big Seven US Tech Giants”, which have high weight; therefore, when the prospects for soft landings are optimistic and large growth stocks with high valuations face adjustments, those inexpensive small-cap stocks and value stocks can often attract large amounts of capital during this period.
In any case, this ETF, which only lays out small-cap and value stocks, now seems very attractive to invest in. The average price-earnings ratio of the stocks in its portfolio was only 13.7x, and the earnings per share growth rate was as high as 12.5%. Therefore, this ETF may not necessarily be a “opportunistic” investment choice, but rather a long-term stable ETF with value.