Small Cap ETFs: Which is the best?

If you are not a subscriber join 4,700+ legends who enjoy learning about finance and have a sense of humor.

Also, if this email is appearing in your spam or promotions tab do me a favor and drag it over to your main inbox.

Quote

“Money can bring happiness but it also brings complexity, and complexity can quickly lead to unhappiness.” - Morgan Housel

Battle of The Small Caps

Put on your nerdy glasses and dust off the sticky notes because today we are getting a bit more technical.

As you likely know the S&P 500 and Nasdaq 100 have had quite a year (up 14% and 40%). Though when you check out the Russell 2000 small cap index it’s struggling to stay in the green with a measly 1.3% gain.

This lack of performance has some investors pointing to small-caps as the land of opportunity. There is an argument to be had as small-caps have historically outperformed the S&P 500 during times of economic uncertainty.

For example, here is a quote from a CME Group article that breaks down Russell 2000 vs S&P 500 performance:

Following this “word on the street”, I have been researching and asking around to find the best small cap ETFs.

After a handful of YouTube videos, podcasts, articles, and (too many) reddit posts I was able to come up with a list of four small cap ETFs to consider for my portfolio.

Below is that list, minus the fat from my notes, to help you decide if one of these small cap ETFs deservers a spot in your portfolio.

VB - Vanguard Small-Cap ETF

Link to VB Morning Star Page

• Morning Star Ranking: ⭐️⭐️ ⭐️ ⭐️ 

• Inception Date: Jan 2004

• Expense Ratio: 0.05%

• 10 Year Avg: 8.12%

• YTD: 3.0%

• Div Yield: 1.65%

VB is one of the most popular small cap funds out there today. If you go and plug around Reddit or YouTube for small cap ETFs expect to see this name thrown around quite a bit. That’s for good reason as VB has been around since 2004 and as has just slightly under performed the S&P 500 over that time.

What most investors don't know is 1/3 of VB is invested in mid cap stocks. For a “small-cap” ETF, that is a large amount of exposure to mid cap stocks.

Disclaimer, VB has been the main choice for small cap allocation in my Roth IRA over the last couple of years.

VB allocation:

VB chart since inception:

VBR - Vanguard Small-Cap Value ETF

Link to VBR Morning Star Page

• Morning Star Ranking: ⭐️⭐️ ⭐️ ⭐️ 

• Inception Date: Jan 2004

• Expense Ratio: 0.07%

• 10 Year Avg: 8.2%

• YTD: 0.8%

• Div Yield: 2.37%

Similar to VB, VBR has earned the respect of many small cap ETF fans. It’s also an old dog, and has seen both good and bad times with an inception date of 2004.

The main difference with VBR is that it’s weight is more shifted to small-cap value stocks as shown by the graphic below. (and it also has quite a bit of mid cap holdings)

VBR Allocation:

VBR chart since inception:

AVUV - Avantis US Small-Cap Value ETF

Link to AVUV Morning Star Page

• Morning Star Ranking: ⭐️⭐️ ⭐️ ⭐️ ⭐️ 

• Inception Date: Sept 2019

• Expense Ratio: 0.25%

• Since inception: 12.8%

• YTD: 4.2%

• Div Yield: 1.6%

Watch out we have a 5-star recruit on the list. AVUV is an actively managed small-cap ETF. I’m not the biggest fan of actively managed funds because we know they will likely not beat the market long term. Some would argue though that small-caps are the best place to pay a higher expense ratio for active management.

AVUV has been making a case for itself with an average return of 12.8% since it’s inception in 2019 (this is double the performance of VB over the same time).

So while the recent performance has been good, they are the new kid on the block and should be treated as such.

AVUV allocation:

AVUV chart since inception:

VIOV - Vanguard Small-Cap 600 Value ETF

Link to VIOV Morning Star Page

• Morning Star Ranking: ⭐️⭐️ ⭐️ 

• Inception Date: Sept 2010

• Expense Ratio: 0.15%

• 10 Year Avg: 7.3%

• YTD: -2.0%

• Div Yield: 2.35%

There always has to be that guy who drags his feet. For our list, that unfortunately is VIOV. While recent performance lacks the other ETFs on this list VIOV does deserve a spot.

As you can see in the allocation chart below VIOV has similar holdings to AVUV and also a slightly higher dividend (if that’s your thing). The expense ratio is also a bit cheaper.

Right now, AVUV takes the cake between the two. If AVUV isn’t able to stay in the fast lane VIOV might be one to keep on the radar.

VIOV allocation:

VIOV chart since inception:

Conclusion

At the moment, VB is my choice for small caps ETFs. But…

My plan going forward is to add a small amount of AVUV to make sure I am getting that desired small cap exposure and keep what I have in VB. The small cap allocation in my portfolio will likely remain in the 5%-10% range with AVUV being less than 5% of that number to start.

I like what they are doing, but they are the new guy on the block and need to prove themselves first.

As always this is not investment advice, but I hope this post provided some information on small cap ETFs that you might not have know before.

We give all caps some love around here. ~ Cade

Cade's Finds

How Morning Star Ranks ETFs: If you are curious how Morning Star creates their star ranking system referenced above here is a page with more details.

Backdoor Roth IRA Explained - Do you make fat stacks and not qualify for a normal Roth IRA? If so check out this post by that breaks down how to complete the traditional to Roth IRA conversion (Rachael is also a great follow).

How the Israeli-Palestinian Conflict Began - You have likely heard by now or seen footage of the unfortunate events in Israel. Here is a short video I found if you want some background information on this historic conflict.

Best Memes

If only we could all be a Fed president.

Have 3 kids and that’s 6 million dollars. Easy.

Nothing in this email is intended to serve as financial advice. Do your own research. Thanks for reading, if you have any questions, comments, suggestions, etc. about the email don’t hesitate to send me a reply.