Navigating Volatility: Why Small-Cap Value ETFs Like SLYV May Not Justify the Risk in Today's Markets

The debate over whether small-cap value ETFs such as the SPDR S&P 600 Small Cap Value ETF (SLYV) offer sufficient rewards to justify their risks has intensified amid shifting market dynamics. While SLYV's concentrated exposure to small-cap value stocks has historically appealed to aggressive investors, its elevated volatility and limited factor diversification now face stiff competition from multifactor strategies like the Dimensional U.S. Targeted Value ETF (DFAT) and quality/momentum-focused ETFs. This analysis evaluates whether SLYV's risks are worth bearing in 2025's uncertain landscape.

Volatility: A Double-Edged Sword

SLYV's volatility metrics scream caution. With a 5.81% annualized volatility and a max drawdown of -61.32% since inception, it has routinely endured extreme price swings. Recent performance underscores this: its -12.92% current drawdown as of July 2025 lags behind the Dimensional U.S. Targeted Value ETF (DFAT), which has a max drawdown of just -26.12%. Even short-term metrics like daily standard deviation (24.71% for SLYV vs. 24.35% for DFAT) reveal similar risk levels, but DFAT's sharper risk-adjusted returns (Sharpe Ratio 0.08 vs. SLYV's 0.02) suggest better capital preservation.

Factor Concentration vs. Diversification

SLYV's risk stems not only from small-cap exposure but also its singular focus on value factors. Its top holdings—such as Regions Financial (23% sector weight in financials) and Pall Corporation—reflect a sector-heavy tilt that amplifies idiosyncratic risk. In contrast, multifactor ETFs like DFAT and MTUM spread risk across value, quality, momentum, and low volatility. For example, DFAT's active management avoids overexposure to any single sector, while MTUM's momentum tilt has delivered 15.63% YTD returns in 2025, far outpacing SLYV's -3.70%.

The factor performance landscape of 2025 further undermines SLYV's case. Value stocks, particularly in small caps, have underperformed as macroeconomic headwinds (e.g., trade tensions, soft consumer demand) hit earnings. Meanwhile, low-volatility and quality factors—key components of multifactor ETFs—have thrived during market turbulence. Berkshire Hathaway and Mastercard, for instance, outperformed broader indices during March 2025's tariff-driven selloff.

Performance Under Pressure: Risk-Adjusted Returns Matter

While SLYV's 2.37% dividend yield may attract income seekers, its poor risk-adjusted returns undercut its appeal. Over three years, it delivered a 6.31% annualized return versus DFAT's 12.34%, despite similar expense ratios (0.15% vs. DFAT's 0.34%). The gap widens when considering downside risk: SLYV's Ulcer Index of 11.60%—a measure of investor “pain”—exceeds DFAT's 10.20% and MTUM's 6.08%.

Current Market Conditions: A Multifactor Advantage

Today's market environment favors diversification. The high correlation (0.75) between SLYV and other small-cap ETFs like the iShares Russell 2000 Growth ETF (IWO) amplifies portfolio risk, while multifactor ETFs offer insulation. For example, the FTSE RAFI US 1000 ETF (PRF), which blends value and size factors, has outperformed SLYV in every down market since 2023.

Moreover, the factor cycle now favors quality and low volatility. As tech-driven momentum stocks (e.g., NVIDIA, Alphabet) face valuation corrections, multifactor ETFs insulated by these factors have maintained stability. SLYV's lack of exposure to such dynamics leaves it vulnerable to further underperformance.

Investment Recommendations

1. Avoid SLYV for core portfolios: Its extreme volatility and single-factor exposure make it unsuitable for most investors.
2. Opt for multifactor ETFs: DFAT (Sharpe Ratio 0.08) and MTUM (Sharpe Ratio 0.78) offer superior risk-adjusted returns and diversification.
3. Consider hybrid strategies: Pair DFAT with low-volatility ETFs like the iShares Edge MSCI Min Vol USA ETF (USMV) to balance value exposure with downside protection.

Conclusion

In 2025's volatile markets, small-cap value ETFs like SLYV demand a high-risk tolerance and a bet on a value factor rebound that may not materialize. Multifactor ETFs, with their diversified exposure and resilience during downturns, present a stronger case for investors seeking sustainable returns. Unless you're purely speculating on small-cap value's recovery, the risks of SLYV far outweigh its rewards.