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

Vanguard Small-Cap ETF (NYSEMKT:VB) and iShares Morningstar Small-Cap ETF (NYSEMKT:ISCB) both target diversified U.S. small-cap exposure, but differ in cost, trading scale, and portfolio construction.

Both funds aim to capture the U.S. small-cap equity segment; however, ISCB tracks a Morningstar index, while VB follows the CRSP U.S. Small Cap Index. Investors comparing these two may weigh ISCB’s broader roster of holdings and slightly lower expense against VB’s deep liquidity and long-standing track record in the small-cap space.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year weekly returns. The one-year return represents total return over the trailing 12 months.

ISCB is marginally more affordable, with a 0.04% expense ratio, compared to VB’s 0.05%, although the difference is negligible in dollar terms.

Performance & risk comparison

What's inside

ISCB holds approximately 1,540 stocks and is built on a Morningstar index, with allocations of 19% in industrials, 16% in technology, and a slightly higher allocation to financial services at 15%. Top positions include Ciena, Coherent, and Rocket Lab, each with a weighting of less than 0.6%. The fund has a long track record, having been launched over 21 years ago, and exhibits no notable quirks or non-standard features.

VB, in contrast, holds around 1,357 stocks and leans slightly more towards industrials and technology (20% and 18%, respectively), with a smaller tilt towards financials. Its largest holdings are Insmed, Comfort Systems USA, and SoFi Technologies, but none exceed 0.7% of assets. Both funds broadly diversify across sectors, but ISCB’s portfolio is slightly broader and more evenly distributed.

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What this means for investors

Despite holding a slight edge returns-wise this year, as the table above shows, ISCB has trailed the total returns provided by VB over the last 10 and 20 years. I was surprised by this, as ISCB's holdings are derived from a Morningstar index that utilizes a quantitative scoring system. In contrast, VB simply comprises a large grouping of all the smaller stocks within a specific range within Vanguard's investable universe.

Ultimately, other than this subtle difference, the two small-cap ETFs are very similar. Their dividend yields, expense ratios, betas, and average P/E ratios of their holdings are nearly identical. That said, VB is a $163 billion behemoth, while ISCB only has net assets of $250 million.

It is not an exciting take, but I would probably opt for VB thanks to this size discrepancy and the ETF's superior track record since 2004, compounding returns by 9.6% annually compared to ISCB's 8.5% mark. Both ETFs are excellent selections, however, and could be interesting options for investors who are wary of the Magnificent Seven (and the growing list of mega-cap tech stocks) that have driven much of the market's returns over the last decade.

Glossary

ETF: Exchange-traded fund; a fund that trades on stock exchanges and holds a basket of securities.
Expense ratio: The annual fee, as a percentage of assets, that a fund charges to cover operating costs.
Liquidity: How easily an asset or fund can be bought or sold without affecting its price.
Small-cap: Refers to companies with a relatively small total market value, typically between $300 million and $2 billion.
Index: A benchmark representing a group of securities, used to track the performance of a specific market segment.
Dividend yield: Annual dividends paid by a fund or stock, expressed as a percentage of its price.
Beta: A measure of a fund's volatility compared to the overall market, often the S&P 500.
AUM: Assets under management; the total market value of assets a fund manages on behalf of investors.
Max drawdown: The largest percentage drop from a fund's peak value to its lowest point over a given period.
Sector allocation: The distribution of a fund's investments across different industries or sectors.
Total return: The overall gain or loss of an investment, including price changes and any income from dividends.
Portfolio construction: The process of selecting and weighting assets within a fund to meet specific investment goals.

Josh Kohn-Lindquist has positions in Rocket Lab and SoFi Technologies. The Motley Fool has positions in and recommends Coherent, Comfort Systems USA, Rocket Lab, and Vanguard Index Funds - Vanguard Small-Cap ETF. The Motley Fool has a disclosure policy.