Vanguard Small-Cap Value ETF Outshines State Street on Fees But is It the Better Buy?

Small-cap value exchange-traded funds (ETFs) are a must for a diversified portfolio, particularly now. With large-cap stocks overvalued, many investors are looking for better values and are rotating into formerly beaten-down small-cap stocks, which are now resurgent.

Year to date, the Russell 2000 Value index is up 21%, and over the past year it has climbed 35%. It may surprise some that small-cap value stocks are the best performers both year to date and over the past 12 months, beating the S&P 500, Nasdaq Composite, S&P 400, Russell 1000, Russell 2000, and Russell 2000 Growth indexes.

Two of the best small-cap value ETFs are the Vanguard Small-Cap Value ETF (NYSEMKT: VBR) and the State Street SPDR S&P 600 Small Cap Value ETF (NYSEMKT: SLYV). But which is the better buy?

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Different small-cap value propositions

The Vanguard Small-Cap Value ETF and the State Street SPDR S&P 600 Small Cap Value ETF are two very different small-cap value ETFs. Each track features different small-cap indexes and offers distinct value propositions.

The Vanguard ETF tracks the CRSP US Small Cap Value index, which is different from the Russell 2000 in a couple of key ways. For one, its methodology tends to include some stocks that might otherwise be considered smaller mid-caps, but excludes some micro-caps at the other end of the spectrum. It also features more screens in determining which are value stocks.

The State Street ETF doesn't track the Russell 2000 either; instead, it mirrors the S&P 600 Small Cap Value index. This index is different because it only tracks small-cap value stocks that have actual earnings. This quality screen weeds out small caps that aren't yet profitable. So, with only 461 holdings, it is more concentrated than the Vanguard ETF, which holds about 840 stocks.

Because they are so different, their top holdings are dissimilar, too. The three largest holdings in the Vanguard ETF are Jabil, NRG Energy, and Tapestry. The three largest holdings in the State Street ETF are Molina Healthcare, Match Group, and Jackson Financial.

Which is the better buy?

You could really hold positions in both of these ETFs to diversify your portfolio because they are so different. But if you could only choose one, I'd probably go with the State Street ETF. The State Street ETF has outperformed the Vanguard ETF year to date and over the past 12 months.

^RUJ data by YCharts

As the chart shows, the State Street ETF has racked up a total return of 20.4% year to date and 40.1% over the past year, easily beating the Vanguard ETFʻs returns of 15.5% and 29.9% over those same two periods.

However, the performance tilts back in the other direction over the longer term. The Vanguard ETF has a five-year annualized return of about 10% compared to 8% for the State Street ETF. The 10-year returns are about even with both at 10%.

The Vanguard ETF has a lower expense ratio of 0.05% compared to 0.15% for the State Street ETF. However, the State Street offering has a slightly better 12-month distribution yield of 1.81% compared to 1.78% for the Vanguard fund.

Ultimately, these are both solid options for a small-cap value ETF, but I'd favor the State Street SPDR S&P 600 Small Cap Value ETF mainly because I like knowing that the stocks in its portfolio are more stable small caps with actual earnings.

While the fees are a little higher, the State Street ETF has a slightly better yield, much better recent performance, and solid long-term returns. But owning both would not be a bad strategy to cover the gamut of small-cap value stocks.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends NRG Energy. The Motley Fool recommends Match Group and Tapestry. The Motley Fool has a disclosure policy.