3 Key Differences Between the Vanguard and iShares Small-Cap ETFs

Small-cap stocks often provide a growth engine for diversified portfolios, capturing companies before they reach mid-cap status. Both the Vanguard Small-Cap ETF (NYSEMKT:VB) and the iShares Core S&P Small-Cap ETF (NYSEMKT:IJR) are heavyweights in this space, yet they use different indexing strategies to define smallness and select their constituents for long-term exposure. VB offers a lower expense ratio and broader diversification, while IJR provides more concentrated exposure to higher-quality small caps.

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.

VB is the more affordable option with an expense ratio of 0.03%, which is half the cost of IJR. The Vanguard fund also provides a slightly higher trailing-12-month dividend yield of 1.2% compared to 1.16% for its iShares counterpart.

Performance & risk comparison

What's inside

The Vanguard Small-Cap ETF tracks a diversified small-cap index and currently holds a little more than 1,300 positions. Its portfolio leans toward industrials (23.2%) and technology (13.8%), and its largest positions include EMCOR Group at 0.51%, Bloom Energy at 0.48%, and Ciena at 0.48%. This fund, which launched in 2004, has a trailing-12-month dividend of $3.50 per share.

In contrast, the iShares Core S&P Small-Cap ETF follows a more selective strategy with about 640 holdings. It launched in 2000 and has paid $1.60 per share over the trailing 12 months. Its sector weights favor financial services (17.3%) and industrials (16.9%). Top holdings include Semtech at 0.9%, Sanmina at 0.88%, and Viavi Solutions at 0.71%.

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What it means for investors

Small-cap stocks, typically those with market caps between $250 million and $2 billion, can be a good method to drive diversity and growth in a balanced portfolio. While individual small-cap companies can be risky due to their small size and, often, lack of revenue, holding a basket of small-cap stocks can allow you to benefit from the enormous upside that comes with holding tomorrow’s winners today.

The Vanguard fund’s slightly lower expense ratio and higher dividend yield may appeal more to income investors. Its broader portfolio of stocks mitigates concentration risk, while its larger assets under management guarantees better liquidity.

How do these funds select which stocks to hold? The Vaguard ETF tracks the CRSP US Small Cap Index, which targets companies ranked between the 85th and 98th percentile of cumulative market capitalization and weights them by free-float market capitalization. IJR tracks the S&P SmallCap 600 Index, which holds about 600 small-cap companies with market caps between $1 billion and $8 billion that meet “investability and financial viability requirements.”

As you can see from the comparison above, the two approaches have yielded similar results. Ultimately, you may decide you like the more concentrated approach of IJR, with its larger companies and heavier weight in financial services and industrials, or you may feel more comfortable with VB’s broader investment universe, heavier weight in technology stocks, and lower fees.

Sarah Sidlow has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bloom Energy, Ciena, EMCOR Group, Viavi Solutions, and iShares Core S&P Small-Cap ETF. The Motley Fool has a disclosure policy.