Combine Small and Value Factor Exposures?

Should a long-only equity investor seeking exposure to the size factor (stocks with small market capitalizations tend to outperform) and the value factor (stocks that are cheap with respect to fundamentals tend to outperform) choose two distinct funds or a combined small-value fund? In his March 2025 paper entitled “Small, Value, or Small/Value?”, Javier Estrada tests six annually rebalanced allocations for an investor seeking to enhance a 60% core exposure to the broad U.S. stock market with 40% total exposure to small and value factors:

• 60-40: 40% exposure to one combined small-value fund.
• 60-8-32: 8% exposure to a small fund and 32% exposure to a value fund.
• 60-16-24: 16% to small and 24% to value.
• 60-20-20: 20% to small and 20% to value.
• 60-24-16: 24% to small and 16% to value.
• 60-32-8: 32% to small and 8% to value.

He considers two samples of monthly returns: (1) Fama-French small-cap, value, small-value and market portfolios during July 1926 through December 2024; and, (2) to account for portfolio maintenance frictions and management fees, iShares small-cap (IJR), value (IUSV), small-value (IJS) and market (IVV) exchange-traded funds during August 2000 through December 2024. Using the specified allocations and samples, he finds that: (more…)