Podcast Summary: BiggerPockets Money Podcast

Episode: AVUV vs VTSAX: Why Small Cap Value Could Outperform

Broadcast Date: February 20, 2026

Host(s): Mindy Jensen & Scott Trench

Guest: Frank Vasquez (Risk Parity Podcast)

Episode Overview

This episode takes a deep dive into the topic of small cap value investing, with a particular focus on the AVUV fund, in comparison to the total stock market fund VTSAX. Frank Vasquez returns as a guest to help clarify what small cap value means, why it has been a cornerstone in the FIRE community, and how to intelligently analyze and select funds within this segment. The discussion is rich in factor investing theory, fund mechanics, and practical advice for intermediate-to-advanced FIRE investors seeking long-term outperformance and diversification.

Key Discussion Points & Insights

1. Small Cap Value Defined (05:06 – 09:07)

• Foundation in Factor Investing:
  Frank outlines the history of factor investing, referencing Eugene Fama and Ken French’s research from the 1990s. The two key factors are:

  • Size: Companies are categorized as small, mid, or large cap based on market capitalization.
  • Value vs. Growth: Value companies (e.g., Procter & Gamble) are typically stable, have lower price-to-earnings (P/E) ratios, pay more dividends, and cluster in sectors like utilities and consumer staples. Growth companies (often in tech or biotech) have high P/E ratios and little earnings relative to price.

  Quote:

  "The most important thing to understand about the difference between growth and value is it is a way of distinguishing the types of companies we’re talking about." – Frank Vasquez (07:42)

  • Style Boxes: Investment funds and individual stocks are mapped on a 3x3 "style box" with value-to-growth and size axes—a framework used across the industry.

2. Why Small Cap Value? Diversification vs. Performance (09:07 – 13:28)

• Attraction of Small Cap Value:
  Historically, the "bottom left" style box (small cap value) has outperformed over long periods. However, its real appeal is that it often "zigs when the market zags," providing vital diversification against large cap growth holdings (like VTSAX/S&P500).

• Current Cycle:
  Frank notes that in the current half-year, small cap value has outperformed the S&P 500 by roughly 10%, but outperformance cycles between categories.

  Quote:

  "If you have two things that are basically performing the same way over long periods of time, but perform differently at different times, that is a fundamental principle of diversification." – Frank Vasquez (11:14)

• Mutual Outperformance:
  Over certain windows, small cap value can perform as well or better than the market, but its primary benefit is stability through diversification.

3. Factor Investing Goes Mainstream (13:28 – 15:36)

• Historical Exclusivity:
  Factor investing was pioneered by Dimensional Fund Advisors (DFA) and was once available only through financial advisors, often with steep fees.
• Modern Accessibility:
  Now, DFA and its offshoot Avantis (offers AVUV) provide ETFs based on these concepts, making sophisticated factor investing widely accessible at a low cost.
  • Liz Ann Saunders (Schwab) and Paul Merriman were cited as thought leaders who advanced factor-based portfolio design.

4. Index Funds and the “Cream in the Coffee” Analogy (15:36 – 23:04)

• Algorithmic Indexing:
  Frank demystifies index funds, stating they're simply algorithms that periodically select and weight stocks based on defined rules (not human stock picking).

  • S&P 500 and VTSAX (total market) are cap-weighted and heavily tilted toward large cap companies. Small cap "exposure" in VTSAX is negligible.

  Quote:

  "If you ask me for cream in your coffee and I gave you one eyedropper of cream, you would not consider that to be cream in your coffee. That is about how much cream or small cap that VTSAX has in it." – Frank Vasquez (19:18)

• Diversification Tip: If you want meaningful exposure to small caps, you must buy dedicated small cap funds.

5. What Makes AVUV Special? (23:25 – 29:04)

• Comparing Indices:
  Three main indices for small cap value funds:

  • Russell 2000 Value: Pure size/value screen, includes unprofitable companies, yields the weakest returns.
  • S&P 600 Small Cap Value: Adds profitability filter (divests loss-makers), resulting in consistently better performance.
  • CRSP Index (used by Vanguard): Tends to "creep" into mid cap, with profitability filters, offering slightly different risk/return.

• AVUV’s Edge:
  AVUV applies even stronger filters for profitability and "quality," actively avoiding the "worst" companies. Although its algorithm is proprietary, these enhancements have, in backtests and recent years, led to higher returns.

  Quote:

  "Since its index or algorithm does a better job in getting rid of these worst companies, it has a better performance or has had a better performance for the past 30 years." – Frank Vasquez (25:45)

6. Active vs. Passive: Clearing up Misconceptions (27:17 – 30:50)

• Algorithm vs. Human Management:
  AVUV, while technically dubbed "actively managed," operates on an algorithmic (computer-based) index, not human stock pickers. Expense ratios (<0.25%) are a fraction of what investors once paid for access to such strategies.
• Performance Context:
  Comparing AVUV to VTSAX is apples-to-oranges—compare it to other small cap value funds. AVUV has recently outperformed, but long-term cycles shift.

7. What’s Inside Small Cap Value Funds? (33:26 – 34:52)

• Sector Composition:
  Small cap value funds hold a wide array of “Main Street” businesses: community banks, insurance, manufacturing, home services, etc.—far more diversified (and less top-heavy) than VTSAX.

  Quote:

  "If you look at the top 25 companies in a small cap value fund, that’s not going to be 80% of the fundamentals. Whereas if you look at VTSAX right now… top 7 or 10 companies are like 40% of the fund." – Frank Vasquez (34:34)

8. Potential Traps of Cap-Weighted Indexing (35:59 – 39:51)

• Current Risks:
  Brandon and Frank discuss the dangers of top-heavy S&P 500 funds, especially with speculative bubbles (AI investments in 2026 compared to the Nifty 50 and dot-com eras).

  Quote:

  "In both cases, holding value stocks saved you… The lesson here is not to worry about trying to forecast this… I’d rather say I don’t know. But I won’t put all my eggs in that basket." – Frank Vasquez (39:05)

9. Portfolio Building for FIRE (39:51 – 41:56)

• Sequence of Returns Risk:
  The value of mixing small cap value and large cap growth appears clearer when transitioning from the accumulation to withdrawal phase.
• Practical Advice:
  • During accumulation: "Just buy low-cost index funds, stay 100% in equities."
  • In decumulation: Rebalance out of large cap concentration and into diversifiers like small cap value.

10. International and Beyond (42:03 – 44:23)

• Expanding Diversification:
  International small cap value funds are now available via Avantis and DFA, offering another axis for diversification as cheaply and easily as US options.

11. AVUV: The Last Mile of Due Diligence (44:23 – 47:10)

• Transparency and Proprietary Algorithms:
  The nitty-gritty rules behind AVUV’s index remain somewhat opaque, though Paul Merriman’s team and Portfolio Visualizer can help quantify factor exposures. Full transparency into the screening process isn’t available, but the fund’s general approach—to filter for the smallest, most value-and-profit focused companies—is described in its prospectus.

Notable Quotes & Memorable Moments

• On Small Cap Value’s Appeal:

  "Small cap value and large cap growth tend to do either as good or better than the overall market... If you have two things that are basically performing the same way, but perform differently at different times, that is a fundamental principle of diversification." — Frank Vasquez (10:16–11:14)

• On VTSAX’s Small Cap Exposure:

  "If you ask me for cream in your coffee and I gave you one eyedropper of cream, you would not consider that to be cream in your coffee." — Frank Vasquez (19:18)

• Algorithmic vs. Active:

  "There are no people sitting around a table picking these stocks. It’s... an algorithm run by a computer. It's the difference between somebody pushing a broom and a Roomba." — Frank Vasquez (28:11–29:01)

• On Historical Market Cycles:

  "In both cases, holding value stocks saved you... The lesson here is not to worry about trying to forecast this... But I won’t put all my eggs in that basket. I will put some of my eggs in this value basket." — Frank Vasquez (39:05–39:34)

• Coffee Metaphors Galore:
  The episode frequently uses coffee as a metaphor for portfolio construction, e.g.,

  "The coffee is the S&P 500, right? You gotta mix in the creamer, which is going to be your value... And if you’re not putting hazelnut in your coffee, you’re doing it wrong, metaphorically." — Brandon (42:03)

Important Timestamps

• 05:06 – Definition and history of small cap value investing
• 09:45 – Diversification vs. performance benefits of small cap value
• 15:36 – What index funds really are and the “cream in coffee” analogy
• 23:56 – How AVUV differs from Russell, S&P, and CRSP small cap indices
• 28:00 – Active vs. passive management clarified for AVUV
• 34:52 – How small cap value funds differ in diversification from VTSAX
• 39:51 – Lessons from 1970s, dot-com bubble: how value stocks protect portfolios
• 44:23 – Summary and next steps for analyzing AVUV’s process

Closing Thoughts & Takeaways

• Small cap value exposure provides true diversification, not present in market cap-weighted funds like VTSAX.
• Not all small cap value funds are created equal—filters for profitability and “quality” matter.
• AVUV’s outperformance may be attributed to proprietary, algorithmic screens that weed out weak companies, but ultimate transparency is limited.
• Mixing large cap growth with small cap value is a robust, research-backed approach, yet cycles of over- and underperformance are impossible to predict.
• Factor and international investing tools are more accessible and affordable than ever before.
• Do your due diligence: use resources like Portfolio Visualizer and Paul Merriman’s analysis to examine the underlying mechanics of small cap value funds.

Resources & Further Learning

• Risk Parity Radio Podcast: Hosted by Frank Vasquez for deeper dives and portfolio theory.
• Paul Merriman’s Fund Recommendations: For vetting best-in-class small cap value and international funds.
• Portfolio Visualizer: Free analyzer to explore fund exposures by factor.

Closing Quotes

• "I want to understand at the mechanical level everything that I'm putting my money into. And I still don't right now when it comes to AVUV..." — Brandon (50:28)
• "Past performance is not indicative of future gain, blah, blah, blah. But past performance is a good place to look. It's a good place to start." — Mindy Jensen (50:58)

This episode is essential listening for DIY investors deep into the FIRE journey, offering actionable insights and a fun, highly accessible breakdown of sometimes intimidating financial theory. Skip the coffee puns if you must—but don’t skip the homework if you plan to get “small cap value” right.