VBR vs. IWN: Does Vanguard's Low Fee Beat iShares' Broader Diversification?

The Vanguard Small-Cap Value ETF (NYSEMKT:VBR) stands out for its lower cost and higher yield, while the iShares Russell 2000 Value ETF (NYSEMKT:IWN) offers broader diversification and a stronger recent return, with each fund tilting toward different sectors.

Both VBR and IWN are popular choices for investors seeking exposure to U.S. small-cap value stocks, but they track different indexes and emphasize distinct sector mixes. This comparison looks at cost, yield, performance, portfolio makeup, and risk to help clarify which ETF may appeal more to different types of small-cap value investors.

Snapshot (cost & size)

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

VBR looks more affordable for long-term holders with a 0.07% expense ratio compared to IWN’s 0.24%, and it also pays a slightly higher dividend yield at 2.0% versus 1.6%.

Performance & risk comparison

What's inside

IWN tracks an index of small-cap U.S. stocks that display value characteristics and includes 1,423 holdings, making it broader than many peers. Financial Services dominate at 26%, followed by Industrials at 13%, and Health Care at 11%. The largest positions -- Echostar Corp Class A (NASDAQ:SATS), Hecla Mining (NYSE:HL), and UMB Financial (NASDAQ:UMBF)-- each account for less than 1.1% of assets, so no single stock heavily influences returns. The fund has a long track record, with over 25 years since inception.

VBR also aims for small-cap value exposure but takes a slightly different approach, with Industrials (22%), Financial Services (20%), and Consumer Discretionary (14%) as its top sectors. Its largest holdings -- NRG Energy (NYSE:NRG), Sandisk (NASDAQ:SNDK), and Emcor (NYSE:EME) -- each make up less than 1% of assets. VBR holds 840 stocks, so it is somewhat less diversified than IWN, but it still spreads risk broadly across the small value universe.

For more guidance on ETF investing, check out the full guide at this link.

What this means for investors

When it comes to these value ETFs, Vanguard charges roughly one-third the price of iShares for essentially the same investment strategy, giving it a clear advantage here. VBR dominates on cost and scale, charging just 0.07% annually compared to IWN's 0.24% expense ratio. VBR also commands nearly $60 billion in assets versus IWN's $12 billion, and offers a slightly higher dividend yield at 2.0% compared to IWN's 1.6%.

However, with 1,415 holdings, IWN offers significantly broader diversification than VBR's portfolio, spreading risk across more companies. IWN also tracks the widely-recognized Russell 2000 Value Index, which some investors prefer for its transparency and third-party methodology. Both funds have delivered similar long-term performance, with IWN showing a modest edge in recent one-year returns.

If you’re prioritizing rock-bottom costs and higher dividend income, VBR has an exceptional value proposition to offer. If you specifically want Russell 2000 Value exposure or value having exposure to more individual companies, you might prefer IWN, knowing that you’ll have to accept higher fees for that particular index tracking and broader diversification.

Glossary

Expense ratio: The annual fee, as a percentage of assets, that a fund charges to cover operating costs.
Dividend yield: The annual dividends paid by a fund, expressed as a percentage of its current price.
Beta: A measure of a fund's volatility compared to the overall market, typically the S&P 500.
Drawdown: The percentage decline from a fund’s peak value to its lowest point over a specific period.
AUM (Assets Under Management): The total market value of all assets managed by a fund.
Small-cap: Refers to companies with relatively small total market values, typically between $300 million and $2 billion.
Value stocks: Stocks considered undervalued relative to fundamentals like earnings or book value.
Index: A benchmark that tracks the performance of a group of securities, often used as a standard for funds.
Holdings: The individual securities or assets owned by a fund or portfolio.
Sector tilt: When a fund has a higher allocation to certain industries or sectors compared to others.
Total return: The investment's price change plus all dividends and distributions, assuming those payouts are reinvested.
Diversification: Spreading investments across various assets to reduce risk from any single holding.

Sara Appino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends EMCOR Group. The Motley Fool has a disclosure policy.