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The U.S. stock markets are in decent shape since the second quarter of the year with the S&P 500 hovering near the 2,000 mark for the first time. Two other benchmark indices including Dow Jones and Nasdaq also clocked solid gains during this phase.

The U.S. economy advanced 4.6 % in the second quarter indicating the best clip after the fourth quarter of 2011 thanks to improved activities both at corporate and household levels. Most of the economic indicators released recently, be it consumer confidence, manufacturing, inflation and job-less data, were relatively upbeat.

Investors should note that while faster growth is setting in the U.S. foreign markets were sluggish with the Euro zone buckling under the pressure of deflationary concerns, China still showing soft economic numbers and Japan seeing deceleration in growth pace.

Why Small-Cap Value ETFs?

This economic trend should stage a proper backdrop for small-cap U.S. stocks. Normally, smaller companies pick up faster than the larger ones in a growing economy. Since these pint-sized securities usually focus more on the domestic market, they are less ruffled by international worries than their globally exposed larger counterparts. This is especially true as a pile of woes hit a number of developing and emerging nations this year and next year.

Having said this, we emphasize value picks in the small-cap spectrum. Small-caps have the potential to offer good returns in a trending market, but these are often blamed for increasing volatility. Thus, investors seeking equity appreciation with a lower level of risk should look for value notion in the small-cap space (read: Endure Market Volatility with These ETFs ).

This is especially true given that the Fed will end its asset repurchase program this October and there is a strong chance that the short-term interest rates will be hiked mid next year. However, the Fed has not made it official till now and has instead reiterated that it will keep the rates low for a ‘considerable time’. But, all seem to be convinced that sooner or later, the U.S. economy will soon see the end of a prolonged low-rate environment.

Though the U.S. economy is on the right track, a sudden tightening in the Fed policy might cause some disruptions in the market activities. Also, as the markets are hovering around lofty levels, many perceive that the U.S. equities as slightly over-valued currently.

In such a backdrop, value investing will be an intriguing option as this investment pattern takes into account under-priced securities. These stocks normally have low P/E, P/B ratios and high dividend yields. In short, small-cap value ETFs have the potential to offer investors both capital appreciation and low volatility (read: 3 Ultra Cheap ETFs for Value Investors ).

Small caps are presently exhibiting a losing streak. However, losses were less acute in the value ETF pack. Below, we have highlighted some of the top performing small cap value ETFs that are outperforming in the small cap space and could be ones to watch in the months ahead.

Vanguard Small-Cap Value ETF ( VBR )

This fund provides exposure to the value segment of the U.S. small cap market by tracking the CRSP US Small Cap Value Index. It holds a large basket of 819 stocks, which is widely spread across individual securities as none of these has more than 0.5% of assets.

In terms of sector exposure, financials dominate the portfolio at 28.2%, followed by industrials (20.8%) and consumer services (13.1%). The ETF is quite popular with AUM of more than $4.53 billion and trades in good average daily volume of about 125,000 shares. It is one of the low cost choices in the small cap space, charging 9 bps in fees per year from investors.

The fund has added about 2.3% so far this year (as of October 3, 2014) versus 4.7% loss incurred by the biggest small-cap value ETF iShares Russell 2000 Value ETF (IWN ). VBR has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook. VBR has a dividend yield of 1.83% (read: 3 Small Cap Value ETFs Poised to Outperform ).

iShares Morningstar Small-Cap Value ETF ( JKL )

JKL is designed to track the performance of the Morningstar Small Value Index. The fund invests about $378 million of assets in its 130-securities portfolio. No single firm makes up more than 0.88% of the portfolio.

Only 7.45% focus on the top-10 holdings suggests extremely low concentration risk. As such, we have a ‘Medium’ risk outlook for JKL in the near term (see Create a Diversified Portfolio Using ETFs ).

The choice charges investors only 0.30% for this exposure which makes it a reasonable one in the space. In terms of sector exposure, financials (15%), industrials (9.5%) and consumer services (5.2%) rule the product.

The fund has returned about 0.9% so far this year. JKL has a yield of 1.99% per annum. This product also carries a Zacks ETF Rank #2 (Buy).

SmallCap Dividend Fund ( DES )

DES looks to track the performance of the WisdomTree SmallCap Dividend Index. The fund is one of the popular choices in the small-cap value space with about $988 million in AUM. It is a low cost (38 bps) option in the small-cap value ETF space.

Holding more than 600 stocks in its basket, the product puts more than 10% of its total assets in the top 10 holdings, suggesting low concentration risk. Sector wise, this ETF is heavy on financials (26.4%) followed by industrials (17.93%) and utilities (12.6%).

The fund has lost about 2.6% in the YTD time frame. DES has a yield of 2.81% per annum. The fund carries a Medium risk outlook along with a Zacks ETF Rank #3 (Hold).

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