Which Is the Better Small-Cap Value ETF, iShares' ISCV or Vanguard's VBR?

The iShares Morningstar Small-Cap Value ETF (NYSEMKT:ISCV) and Vanguard Small-Cap Value ETF (NYSEMKT:VBR) both provide low-cost exposure to small-cap value stocks, but they differ in scale, recent performance, and internal sector weightings.

Small-cap value stocks often appeal to investors seeking companies with low valuations relative to their fundamentals. While larger growth stocks frequently dominate headlines, these smaller value plays may offer distinct diversification benefits. This comparison looks at how the iShares and Vanguard offerings navigate this volatile but potentially rewarding market segment.

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.

Management fees are a critical component of long-term returns in the ETF world. Both of these funds are highly efficient, though the Vanguard ETF is slightly more affordable. While the iShares fund has a slightly higher payout, investors could weigh this against its smaller asset base.

Performance & risk comparison

What's inside

The Vanguard Small-Cap Value ETF employs a passive strategy to track a diversified portfolio of smaller value-oriented companies and was launched in 2004. This fund manages a portfolio of 841 stocks, where its largest positions include Jabil Inc. (NYSE:JBL) at 0.77%, Flex Ltd. (NASDAQ:FLEX) at 0.76%, and NRG Energy Inc. (NYSE:NRG) at 0.75%. The fund features no complex investment quirks and allocates 18% to financial services, 18% to industrials, and 13% to consumer cyclical. It paid $4.14 per share over the trailing 12 months.

The iShares Morningstar Small-Cap Value ETF was also launched in 2004 and mirrors an index of U.S. companies with small market capitalizations. It maintains a larger group of 1,069 holdings, with top positions including TD Synnex Corp. (NYSE:SNX) at 0.68%, Akamai Technologies Inc. (NASDAQ:AKAM) at 0.64%, and Alcoa Corp. (NYSE:AA) at 0.62%. Like its peer, the fund has no specific quirks and is heavily weighted toward financial services at 21%, consumer cyclical at 14%, and industrials at 12%. It has paid $1.41 per share over the trailing 12 months.

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

What this means for investors

Investing in value stocks was a key strategy famously employed by Warren Buffet. Applying this approach to small-cap stocks can be challenging due to the sheer number of companies involved.

That’s where funds such as the Vanguard Small-Cap Value ETF (VBR) and the iShares Morningstar Small-Cap Value ETF (ISCV) come in. They provide an efficient way to capture the upside potential of value stocks in this market segment. Choosing which to invest in depends on the factors that matter most to you.

ISCV sports a number of advantages over VBR, such as a higher one-year return and dividend yield. It also provides far greater diversification by holding over 1,000 stocks. This can help offset a downturn in a particular industry to support the ETF’s performance. If a diversified small-cap fund is what you seek, this can be the one for you.

However, ISCV’s AUM is significantly lower. That factor impacts liquidity and bid-ask spreads, which affects the money you pay on every trade.

In fact, VBR’s robust AUM of about $65 billion is a sign of its popularity, and helps it deliver a lower expense ratio. VBR also has a lower max drawdown, contributing to its larger five-year return. This is the fund for active traders and those with a “set-it-and-forget-it” mindset who want to buy and hold for the long term.

Robert Izquierdo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends NRG Energy. The Motley Fool recommends Akamai Technologies and Flex. The Motley Fool has a disclosure policy.