Vanguard vs. iShares: Is VBR or IWN the Superior Small-Cap Value ETF?

The biggest differences between Vanguard Small-Cap Value ETF (NYSEMKT:VBR) and iShares Russell 2000 Value ETF (NYSEMKT:IWN) are their expense ratios, sector exposures, and recent return profiles, with IWN showing more exposure to financials and delivering a higher one-year return.

Both VBR and IWN aim to provide investors with broad exposure to U.S. small-cap value stocks, but they track different indexes and exhibit notable differences in portfolio composition, cost structure, and risk. For investors considering these two popular options, the details below may help clarify which approach is the best fit for them.

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.

VBR looks more affordable with its 0.07% expense ratio compared to IWN’s 0.24%, and it also offers a slightly higher dividend yield, which could appeal to income-focused investors.

Performance & risk comparison

What's inside

IWN tracks a basket of 1,407 U.S. small-cap stocks that display value characteristics, with 26% in financial services, 12% in real estate, and 11% in industrials. Its top holdings are Echostar, Hecla Mining, and UMB Financial, each representing less than 1% of assets. IWN has a 25-year track record, providing a rich history for analysis.

VBR, in contrast, holds 841 stocks and leans more heavily into industrials (19%), financial services (18%), and consumer cyclicals (13%). Its largest positions include NRG Energy, Sandisk, and EMCOR Group, all with modest weightings. VBR’s portfolio is a bit more concentrated by sector.

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What this means for investors

Since 2004, VBR has generated annualized total returns of 9.2%, compared to IWN's mark of 7.8%. In addition to this track record of outperformance versus its peer, VBR seems like the clear winner to me due to its:

• expense ratio being one-third of IWN's
• slightly lower beta (volatility) and drawdown
• larger dividend yield
• lesser exposure to the financial industry
• higher allocation to the consumer sector
• bigger asset base

I'd say it is a clean sweep for me personally, outside of the fact that IWN may offer more depth within its portfolio, holding nearly twice as many stocks. Similarly, if investors are more interested in steady-Eddie small banks or REITs, IWN may be the better option for you.

IWN is a fine ETF for investors to consider -- and this is an investor-specific decision to make. However, when compared head-to-head with VBR, the latter emerges as the superior small-cap value ETF for investors to buy and hold for years.

Glossary

ETF: Exchange-traded fund; a pooled investment fund traded on stock exchanges like a stock.
Expense ratio: The annual fee, as a percentage of assets, that a fund charges to cover operating costs.
Dividend yield: Annual dividends paid by a fund divided by its current share price, expressed as a percentage.
Beta: A measure of an investment's volatility relative to the overall market, typically 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 specific period.
Small-cap: Refers to companies with relatively small total market values, typically between $300 million and $2 billion.
Value characteristics: Financial traits indicating a stock is undervalued, such as low price-to-earnings or price-to-book ratios.
Sector tilt: When a fund allocates more assets to certain sectors than the broader market or its benchmark.
Consumer cyclicals: Companies whose business performance is closely tied to economic cycles, like retailers or automakers.
Total return: The investment's price change plus all dividends and distributions, assuming those payouts are reinvested.
Index: A benchmark that tracks a group of securities, used to measure performance or guide fund holdings.

Josh Kohn-Lindquist 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.