Key Morningstar Metrics for Vanguard Small-Cap Value ETF
- Morningstar Medalist Rating: Gold
- Process Pillar: Above Average
- People Pillar: Above Average
- Parent Pillar: High
Vanguard Small-Cap Value Index provides a market-cap-weighted portfolio of the cheapest companies in the small-cap market. Its broad diversification and razor-thin expense ratio make this one of the best small-cap value funds available.
The fund 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 future 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 representing only 5% of the portfolio as of Dec. 31, 2023. 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 41% 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 entire 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 exchange-traded fund share class, VBR, outpaced the category norm by 1.5 percentage points annualized since it started tracking its current index in April 2013 through January 2024. 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 FNB Corporation FNB, companies common to competitor portfolios, enjoyed strong performance in 2021. Their tiny allocation in this portfolio meant the fund did not enjoy the full performance boost those stocks gave to some peers, causing the fund to lag the category norm by 3.5 percentage points in what was a strong year for value stocks. These differences should even out over a full market cycle, and the fund’s low fee should set it apart.
Despite some differences, the fund remains 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.
