Overview of BiggerPockets Money: Is Small Cap Value Worth It?
This episode breaks down factor investing with a focus on small-cap value, especially funds like AVUV and how they compare with offerings from Dimensional and Vanguard. Ben Felix explains the academic case for tilting away from pure market-cap weighting, why small-cap value exists as a distinct style, and why it may be especially relevant for people pursuing financial independence. The big takeaway: small-cap value can be a rational portfolio tilt, but it’s not a timing tool and there’s no single “correct” allocation.
What Factor Investing Is
Ben frames factor investing as an evolution of classic index investing.
From CAPM to Multi-Factor Models
- The original Capital Asset Pricing Model (CAPM) explained returns mainly through market risk.
- Researchers later found anomalies that CAPM couldn’t fully explain.
- Fama and French expanded the model to include:
- Size: small companies vs. large companies
- Value: cheap stocks vs. expensive stocks
- Later additions:
- Profitability
- Investment / asset growth
Why Investors Care
- If certain factors have a premium, investors may expect higher long-term returns for taking on different kinds of risk.
- Factor investing is used both to:
- improve expected returns, and
- benchmark whether active managers are actually adding value.
Small Cap vs. Value: What the Terms Mean
Ben clarifies that “small cap value” is not just one thing.
Small Cap
- Refers to the smallest companies in the market by market capitalization.
- Market cap = share price × shares outstanding
- “Small” depends on the index provider:
- S&P, MSCI, CRSP, etc. all define it differently.
Value
- Refers to stocks that are cheap relative to fundamentals.
- Common measures include:
- price-to-book
- price-to-earnings
- other accounting-based fundamentals
- “Value” means lower price relative to fundamentals; “growth” means more expensive.
Small Cap Value
- Combines both characteristics:
- small companies
- cheap relative to fundamentals
- Ben emphasizes that this generally implies higher expected returns, but also more tracking error and volatility.
Why AVUV and Similar Funds Are Popular
A major part of the discussion is why investors keep hearing about AVUV.
Avantis vs. Dimensional
- Dimensional Fund Advisors pioneered factor-based implementation for decades.
- Avantis was launched in 2019 by former Dimensional people.
- Avantis gained popularity because it launched ETFs available to DIY investors, while Dimensional products were historically more advisor-accessible.
Similarities and Differences
- Both firms:
- tilt toward smaller, cheaper, more profitable companies
- use academic research in portfolio construction
- keep fees and turnover low
- Differences are more about implementation details than broad philosophy:
- profitability definition
- IPO treatment
- how small they go
- whether they include more mid-cap exposure
Vanguard Small Cap Value
- Ben notes Vanguard’s small-cap value fund is not “bad,” but it may be:
- less small
- less cheap
- less factor-intense than Dimensional or Avantis options
How Ben Thinks About the Right Portfolio Tilt
The conversation repeatedly returns to the same theme: there is no universally correct amount of small-cap value.
No Single “Best” Allocation
- How much to tilt depends on:
- conviction
- tolerance for underperformance
- patience with tracking error
- overall portfolio goals
- Ben compares it to deciding how much stock vs. bonds to hold:
- there’s no objective answer
- it’s a risk preference decision
Why Not Go All In?
- 100% small-cap value can be hard to live with.
- Historically, it has experienced long stretches of poor performance.
- The biggest challenge is often behavioral, not mathematical:
- can you stay invested when your portfolio is far behind the market?
A Practical Reference Point
- Ben’s model portfolio for retail investors was roughly:
- 75% total market
- 25% small-cap value
- He says that was a practical compromise, not a “perfect” or universal formula.
Factor Investing and Financial Independence
The episode strongly connects factor investing to the FIRE community.
Why FIRE Investors Care
- Early retirees face long time horizons.
- A pure S&P 500 or total-market approach can go through long flat periods.
- Factor tilts may help diversify sources of expected return, even though they don’t add new asset classes.
Risk, Labor Income, and Theory
- Ben introduces the ICAPM idea:
- investors care not just about volatility, but when the risk shows up
- In theory, people without labor income risk—such as financially independent investors—may be especially suited to factor tilts.
Withdrawal Rate Implications
- Higher expected returns could support a higher safe withdrawal rate.
- But that only works if the investor can:
- handle volatility
- adjust spending when returns disappoint
- Ben stresses this is not a guarantee, just a theoretical implication.
CAPE Ratio: Useful Context, Not a Timing Signal
The hosts discuss the Shiller CAPE ratio and whether high valuations justify tilting away from the S&P 500.
Ben’s View
- CAPE is not reliable enough for tactical allocation decisions
- It can be useful in:
- setting expected returns
- planning how much to save or spend
- But it should not be used as a market-timing tool
Historical Examples
- Ben points to:
- the U.S. “lost decade” after the dot-com era
- Japan’s post-1989 crash
- In both cases, small-cap value held up better than the broad market over very long stretches.
Key Takeaways
- Small-cap value is a legitimate research-backed tilt, not a gimmick.
- AVUV became popular because it made factor investing accessible to DIY investors.
- Dimensional and Avantis are similar in philosophy, but differ in implementation details.
- There is no single best small-cap value fund or allocation—the right choice depends on your goals and tolerance for tracking error.
- Factor investing is more about expected return and behavioral fit than timing the market.
- For FIRE investors, factor tilts may help create a more robust portfolio, but only if you can stick with the strategy.
Host Follow-Up: Portfolio Experiment Update
At the end of the episode, the hosts revisited Scott’s small portfolio experiments.
Portfolios Mentioned
- 60/40 stocks/bonds
- S&P 500 (VOO)
- Risk parity / golden ratio-style portfolio
- A factor-tilted portfolio
- including funds like AVUV, AVDV, BND, and VNQ
General Result
- The factor-tilted portfolio was up over the short term.
- The hosts emphasized this is not meaningful proof of future success.
- Their point was mainly that even small experiments can help investors understand:
- volatility
- behavior under different market conditions
- whether they can tolerate a strategy before committing meaningful capital
Practical Advice for Listeners
- Don’t obsess over finding the “perfect” small-cap value fund.
- Decide on a reasonable strategy and stick with it.
- If you want to explore factor investing:
- start small
- understand the tracking error
- make sure the portfolio matches your temperament
- For many investors, a modest tilt may be easier to live with than a concentrated factor bet.