VBR vs. IWN: Which Small-Cap Value ETF Is the Better Buy?

The iShares Russell 2000 Value ETF (NYSEMKT:IWN) provides broader exposure to small-cap value stocks, while the Vanguard Morningstar Small-Cap Value ETF (NYSEMKT:VBR) offers a lower-cost alternative with a slightly higher dividend yield.

Small-cap value stocks often provide a blend of growth potential from smaller firms and a margin of safety from lower valuations. IWN and VBR both seek to capture this segment of the market, but they track different benchmarks, which results in distinct sector exposures and risk profiles for investors to consider.

Snapshot (cost & size)

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

VBR is the cheaper option, with a 0.05% expense ratio, significantly lower than IWN’s 0.24%. VBR also provides a higher dividend yield than IWN.

Performance & risk comparison

What's inside

Launched in 2000, IWN aims to replicate a benchmark of small U.S. companies identified by value characteristics, currently holding 1,389 stocks. Its sector weights lean most heavily into financial services at 28.6%, followed by industrials at 12.1% and real estate at 11.2%. Its largest positions include UMB Financial (NASDAQ:UMBF) at 0.6%, Viasat (NASDAQ:VSAT) at 0.6%, and CareTrust REIT (NYSE:CTRE) at 0.6%.

VBR endeavors to mirror the Morningstar US Small Cap Value Index and maintains a portfolio of 840 holdings. Its top sector allocations include financial services at 17.5%, industrials at 17.3%, and consumer cyclicals at 13.6%. Its largest positions include Jabil (NYSE:JBL) at 0.9%, NRG Energy (NYSE:NRG) at 0.7%, and Tapestry (NYSE:TPR) at 0.6%. VBR launched in 2004.

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Which looks like the better buy?

For investors, the choice between these two funds mostly comes down to two factors: breadth and cost.

IWN's 1,389 holdings give it meaningfully broader exposure to the small-cap value universe, and that wider net has helped boost the fund’s returns over the past year. IWN's heavier tilt toward financials has especially paid off lately, as the sector has benefitted from a resilient rate environment and steady bank earnings. Zooming out, however, VBR's more concentrated portfolio (relatively speaking) and rock-bottom 0.05% expense ratio -- less than a quarter of what IWN charges -- have paid off over longer stretches, helping VBR post stronger five-year returns than IWN.

The cost difference between these two funds matters more than most investors realize. Over a decade or two, a 0.19-percentage-point expense-ratio difference can meaningfully impact returns, especially in a segment like small-cap value where gains are sometimes modest and choppy.

Either of these funds is a sensible choice. Investors who want the widest possible small-cap value net, including more exposure to financials and real estate, may lean toward IWN. Those prioritizing low fees and a higher yield may prefer VBR. Either way, small-cap value remains a segment many savvy, long-term investors use to balance out growth-heavy, large-cap portfolios.

Andy Gould has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends NRG Energy. The Motley Fool recommends Tapestry. The Motley Fool has a disclosure policy.