Vanguard Small-Cap Value ETF VBR provides a market-cap-weighted portfolio of the cheapest stocks in the small-cap market. Its broad diversification and razor-thin expense ratio make this one of the best small-cap value exchange-traded funds available.
The ETF tracks the CRSP US Small Cap Value Index, which captures the cheaper side of the small-cap market. Value stocks usually have low price/book and price/earnings ratios. Depressed valuations may be caused by slow earnings growth, poor fundamentals, or dim prospects. While these may not be the most exciting firms, the low expectations implied by their low valuations should be easier to beat.
Market-cap-weighting is an efficient way to weight holdings because it harnesses the market’s consensus opinion of each stock’s relative value. Stocks that grow in size take up a larger share of the portfolio, while smaller companies that may be struggling will have less importance. Generous buffers around the fund’s size and style constraints improve the breadth of the portfolio and help tame turnover.
The portfolio is well-diversified. None of its 800-plus holdings garner more than 1% of assets, with the top 10 holdings usually representing around 5% of the portfolio. Sector allocations largely resemble the Morningstar Category average. Financials and industrials stocks lead the way, accounting for around 20% of the portfolio each. Their combined 40% weighting is nearly identical to the category average. By most measures, the portfolio is similarly situated to the category and is an excellent representation of the market segment.
Vanguard Small-Cap Value ETF: Performance Highlights
Performance similarities should enable the fund’s low fee and superior diversification to carve a lasting advantage over the small-value category average. Indeed, the ETF outpaced the category norm by 1.8 percentage points annualized since it started tracking its current index in April 2013 through January 2025. Its larger market-cap orientation helped the fund maintain a lower standard deviation of returns than the category average over this time, allowing it to expand on its risk-adjusted advantage.
Slight portfolio differences between this fund and its competitors may lead to short-term underperformance. Market-cap-weighting and the fund’s broad reach mean the portfolio is underweight in some holdings popular among its category peers. Consultant Korn Ferry KFY and regional bank F.N.B. Corp FNB, companies common to competitor portfolios, enjoyed strong returns in 2021. Their tiny allocation here meant the fund did not receive the full performance boost those stocks gave to some peers. It lagged the category norm by 3.5 percentage points that year. These differences should even out over the long term, and the fund’s low fee should set it apart. The fund is an excellent representative of the small-value category and should perform well when value stocks are in favor.
Superior diversification helps control risk in this volatile category, even if it may hold the fund back from time to time. Additionally, its low expense ratio presents a low hurdle for this fund to expand on its risk-adjusted advantage going forward.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
