SPSM vs. VB: Which Small-Cap ETF Should You Buy Today?

State Street SPDR Portfolio S&P 600 Small Cap ETF (NYSEMKT:SPSM) and Vanguard Small-Cap ETF (NYSEMKT:VB) provide low-cost access to the smallest companies in the U.S. market. They offer identical costs but vary significantly in their portfolio breadth and sector concentrations.

While the State Street fund tracks the S&P SmallCap 600 Index, which requires companies to meet specific profitability criteria, the Vanguard fund follows the CRSP US Small Cap Index. This leads to distinct differences in portfolio depth and volatility profiles.

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.

Both funds are exceptionally affordable, each charging an expense ratio of 0.03%. While the cost to own is identical, the cash flow differs slightly. Investors in the State Street fund currently receive a higher trailing-12-month distribution yield of 1.4% compared to the 1.2% yield offered by the Vanguard fund.

Performance & risk comparison

What's inside

The Vanguard Small-Cap ETF provides deep exposure to the small-cap space with 1,310 holdings, offering a broad-based approach that limits the impact of any single company. Its sector allocation is led by industrials at 23%, technology at 16%, and financial services at 12%. Its largest positions include Flex at 0.69%, Astera Labs at 0.62%, and Ciena at 0.51%. Launched in 2004, the fund has a trailing-12-month dividend of $3.50 per share.

In contrast, the State Street SPDR Portfolio S&P 600 Small Cap ETF follows a more concentrated index of 607 holdings. This selection process results in different sector weights, with its portfolio tilting toward financial services at 19%, industrials at 17%, and consumer discretionary at 14%. Top holdings include FormFactor at 0.63%, BrightSpring Health Services at 0.6%, and Element Solutions at 0.59%. Launched in 2013, the fund paid $0.77 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

Small-cap stocks, which typically represent companies with less than $2 billion in market cap, can be a good vehicle for upside. These are usually companies that are still in the development stages of proving their businesses, which means they could be the next big thing — or they could be acquired or fold completely. Because of the increased risk from this market segment, small caps shouldn’t make up the majority of a long-term stock portfolio.

For investors looking to capture some of this small-cap growth potential, which ETF is the better buy? It comes down to how you feel about the indexes they track. SPSM tracks the S&P SmallCap 600 Index, which selects companies that fit the small-cap requirement and then screens for liquidity and financial viability. This gives the large fund a high concentration in financial stocks.

VB tracks the CRSP US Small Cap Index, which tracks the smallest 85% to 98% of companies in the market, but doesn’t require them to be profitable. It’s also larger than the SPSM ETF, has more assets under management, and has a higher concentration in industrials.

Their fees, recent performances, volatility, and dividend payouts are roughly the same, so the selection will likely come down to how willing you are to take on risk. I prefer SPSM here. VB’s larger holding count may work against it if several of these companies underperform, and it doesn’t carry the added protection of a profitability screen.

Sarah Sidlow has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Ciena. The Motley Fool recommends Astera Labs and Flex. The Motley Fool has a disclosure policy.