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Let us assume that one believes the Fama French hypothesis and one wants to increase investment return. If so, a greater proportion of one's portfolio, then justified based on market capitalization, should be in small cap and value stocks. How can one do this in the Canadian stock market especially if you are a index fund investor? iShares has a small cap index ETF and a value index ETF. However, both ETFs are less than $40 million in size; I'm not sure how long they are going to be around. Any suggestions?
 

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"Value" is a subjective term, for which there seems to be no end of varying selection criteria. But IMHO, in the Canadian market, there is not much difference between the holdings of a "Value Fund" and a solid Dividend fund such as those owned by the big banks. So if you want an index that will emulate "value" stocks, try a CDN Dividend Index. There is another thread here somewhere discussing some recent entries to this field. (If you could buy a fund that used just the O'Shaugnessey CDN Value Strategy for selecting stocks, that would be a modestly priced alternative, but such a fund doesn't exist as far as I know.)


Small cap funds in the CDN market are problematic because our market is so small. O'Shaughnessey US Growth is a small-medium cap fund, and they have had to close it because of oversubscription. There just aren't that many good small cap companies to go around, and there can be lot of churn in portfolios as successful companies are bought up by larger companies, or by US companies. Some former CDN small cap companies have expanded their prospectuses in recent years to become North American small cap.
 

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The US market for small cap value stocks is much deeper than the Canadian market. Take a look at this link to a visual guide to US ETFs. Based upon the map, any of IWN, IJS, JKL, PWY, VBR, RZV or DSV could meet your investment objectives.

Also, in many cases, growth and value indices tend to exhibit a high degree of correlation. This is because all equities (in the same market) are affected by the same market risk premium, which is the most significant driver of returns (under the Fama & French model). If diversification is what you are looking for, there may be better ways to achieve it.
 
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