Which Is the Better Small-Cap ETF, Vanguard's VB or the iShares ISCB?

Investors seeking to diversify away from the dominance of the largest mega-cap stocks often turn to small-cap funds to capture the potential of the next generation of industry leaders. Small-cap stocks often provide greater growth potential than their large-cap counterparts, though they typically involve more significant price swings.

Both Vanguard Small-Cap ETF (NYSEMKT:VB) and iShares Morningstar Small-Cap ETF (NYSEMKT:ISCB) target this segment of the market, offering low-cost access to hundreds of smaller U.S. companies that are frequently overlooked by the major indices.

The Vanguard Small-Cap ETF offers massive liquidity and a lower expense ratio, while the iShares Morningstar Small-Cap ETF provides broader diversification with over 1,500 holdings and a marginally higher trailing dividend yield.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year monthly returns. The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

The Vanguard fund maintains a slight cost advantage with its 0.03% expense ratio compared to 0.04% for the iShares fund. While a single basis point difference might seem negligible, it could impact long-term compounding for investors with significant capital. Both yields are comparable, with ISCB providing a 1.30% distribution yield and VB offering 1.20% over the trailing 12 months.

Performance & risk comparison

What's inside

The iShares Morningstar Small-Cap ETF currently holds 1,544 stocks, following an index designed to mirror the market performance of smaller U.S. companies. This broad diversification limits the impact of any single company failure on the total portfolio.

Sector allocation for the iShares fund includes industrials at 18%, financial services at 16%, and technology at 15%. Its largest positions include Lumentum Holdings (NASDAQ:LITE) at 0.99%, Revolution Medicines (NASDAQ:RVMD) at 0.46%, and Ati (NYSE:ATI) at 0.42%. This fund, which was launched in 2004, paid $0.95 per share over the trailing 12 months.

In contrast, the Vanguard Small-Cap ETF holds 1,357 securities and is managed to replicate the CRSP U.S. Small Cap Index using a full-replication strategy. Its sector tilts are slightly different, with a higher concentration in industrials at 21% and technology at 17%, while financial services account for 13% of the portfolio. Top holdings in the portfolio include Flex Ltd (NASDAQ:FLEX) at 0.69%, Astera Labs (NASDAQ:ALAB) at 0.62%, and Ciena Corp (NYSE:CIEN) at 0.51%. Like its counterpart, the Vanguard fund was launched in 2004; it has a trailing-12-month dividend of $3.50 per share.

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What this means for investors

Adding small-cap stocks to your portfolio is a great means of gaining exposure to high-growth companies that are typically not household names, such as Astera Labs. An efficient way to invest in these businesses is through funds, such as the iShares Morningstar Small-Cap ETF (ISCB) and Vanguard Small-Cap ETF (VB). Deciding between the two comes down to a few key considerations.

ISCB offers a slightly higher dividend yield, which can appeal to income-focused investors, and it had a stronger one-year performance. Its more than 1,500 holdings offers broader exposure to the small-cap universe. However, since these smaller businesses can prove more volatile than their large-cap brethren, the increased size in holdings introduces higher risk, as demonstrated by ISCB’s max drawdown.

Perhaps the biggest advantage VB has over ISCB is its far greater AUM. This makes the ETF highly liquid, and helps the fund to deliver tighter bid-ask spreads, reducing costs on every transaction. Not only that, in April, Vanguard lowered VB’s expense ratio, making it extremely cost effective and cheaper even than the inexpensive ISCB. Consequently, VB is a good fund for investors who want to buy and hold for the long term.

Robert Izquierdo has positions in Astera Labs. The Motley Fool has positions in and recommends Ciena and Lumentum. The Motley Fool recommends Astera Labs, Ati, and Flex. The Motley Fool has a disclosure policy.