Vanguard (VB) vs. State Street (SPSM) in a Small-Cap ETF Showdown

Vanguard Morningstar Small-Cap ETF (NYSEMKT:VB) offers significantly broader diversification across 1,357 holdings, while State Street SPDR Portfolio S&P 600 Small Cap ETF (NYSEMKT:SPSM) focuses on a more concentrated selection of 607 smaller companies.

Small-cap ETFs offer growth potential by capturing the "small-firm effect," in which smaller companies may outperform larger peers over long investment horizons. While both of these funds aim for low-cost exposure, they track different indexes -- the CRSP U.S. Small Cap Index versus the S&P SmallCap 600 Index -- resulting in distinct portfolios and risk profiles.

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-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

With identical expense ratios of 0.03%, these funds are equally affordable core holdings for a diversified portfolio. However, the State Street fund currently provides a higher payout, with its yield sitting .28 percentage points above the Vanguard fund.

Performance & risk comparison

What's inside

Vanguard Morningstar Small-Cap ETF (VB) leans into technology and industrials, with its largest positions including Moderna (NASDAQ:MRNA) at 0.62%, Natera (NASDAQ:NTRA) at 0.54%, and Revolution Medicines (NASDAQ:RVMD) at 0.51%. The fund manages a massive portfolio of 1,357 holdings. It was launched in 2004. Vanguard Morningstar Small-Cap ETF has paid $3.65 per share over the trailing 12 months, which, on its recent ~$290.95 share price, works out to a 1.28% yield.

State Street SPDR Portfolio S&P 600 Small Cap ETF (SPSM) focuses more heavily on financial services, while its largest positions include Formfactor (NASDAQ:FORM) at 0.67%, Viasat (NASDAQ:VSAT) at 0.57%, and Glaukos (NYSE:GKOS) at 0.55%. It tracks a more selective group of 607 stocks. It was launched in 2013. State Street SPDR Portfolio S&P 600 Small Cap ETF has paid $0.82 per share over the trailing 12 months, which, on its recent ~$54.05 share price, works out to a 1.56% yield.

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Which looks like the better buy

First things first -- I don't think prospective investors can really "go wrong" with either one of these two small-cap ETFs. VB has delivered annualized total returns of 10.3% since 2013, while SPSM has generated similar returns of 9.6% over the same time.

However, despite stronger returns over the last 13 years, I might lean toward buying SPSM for a couple of reasons. First, its 1.56% dividend yield is reasonably higher than VB's at 1.28%, and SPSM has delivered stronger dividend growth over both the last five and ten years.

Furthermore, SPSM filters entrants to its small-cap portfolio by profitability, which helps make it a steadier, stronger portfolio. VB, meanwhile, doesn't have this profitability filter, making it slightly more volatile and helping explain why it may pay a small dividend with more speculative, growth-style holdings.

Ultimately, they are both fine selections for gaining small-cap exposure, but I'd lean ever so slightly toward SPSM for its higher yield and stronger profitability, especially since both maintain the same expense ratio.

Josh Kohn-Lindquist has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends FormFactor, Moderna, and Natera. The Motley Fool has a disclosure policy.