The Vanguard Small-Cap Index offers a well-diversified, low-turnover portfolio that is representative of the U.S. small-cap market. These features coupled with a best-in-class fee earn the cheapest share classes a Morningstar Medalist Rating upgrade to Gold from Silver. The more expensive investor share class retains its Silver rating.
The fund tracks the CRSP U.S. Small Cap Index, which sweeps in all small-cap U.S. stocks that meet its investability criteria. These criteria consider a stock’s market cap, liquidity, and float. They help ensure the index is representative of the opportunity set and easy to track. Vanguard managers also employ a “packeting” approach during rebalances. This makes it more difficult for stocks to enter or exit the portfolio, reducing turnover and associated transaction costs that can run high in the relatively illiquid small-cap market. 
The portfolio is market-cap weighted, which is an efficient approach 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 take on a less important role. Market-cap weighting also helps rein in turnover and promotes diversification. Annual turnover has averaged 16% for the 10 years through April 2023, a fraction of the average small-blend fund. The top 10 holdings account for just 3% of the portfolio, minimizing stock-specific risk. 
Sector allocations and their style orientation usually mimic the Morningstar Category average, which helps translate the fund’s low fee into a distinct performance advantage. As of April 2023, no sector weights deviated from the category average by more than three percentage points. 
The small-cap market tends to be quite volatile, but that volatility has translated into better long-term performance for small-cap stocks than their large-cap counterparts. This fund’s low fee and turnover-conscious approach help it capitalize on small-caps’ performance advantage at a low price. For the 10 years through April 2023, the exchange-traded fund share class outpaced the category average by 1.61 percentage points annually.

Analyst Rating

Best in class.

Analyst

Zachary Evens

Super Micro Computer

Builders FirstSource

Vertiv Holdings Co

Deckers Outdoor

Targa Resources

Axon Enterprise

Entegris

Booz Allen Hamilton Hld

Reliance Steel & Aluminum

The fund tracks the CRSP U.S. Small Cap Index, which is an excellent representative of the U.S. small-cap opportunity set. Indexing small-cap stocks can be a challenge because they are not as liquid as their large-cap peers, but these challenges are mitigated by index rules that promote investability and low turnover. The fund earns an Above Average Process Pillar rating.

Above Average

Process

The Vanguard Equity Index Group boasts seasoned managers and a dedicated supporting staff well-equipped to provide tight index tracking, earning it an Above Average People Pillar Rating. 
Gerard O'Reilly and William Coleman comanage this strategy. O'Reilly, a principal at Vanguard, has been with the firm since 1992. Coleman has been with Vanguard since 2006. They both started working on this strategy in 2016.
The managers are responsible for the fund's trading, providing more portfolio insights than a stand-alone trader. They are supported by a global team of dedicated personnel and sophisticated, scalable technology that improve index tracking while reducing managers' workload. Vanguard frequently rotates its managers to promote breadth and depth across the team. Its independent risk management team works closely with the managers to monitor trades and review any potential issues. Managers' compensation is tied to performance using a combination of tracking error and excess return metrics, which aligns their interests with investors’.

People

The Vanguard Group retains a High Parent rating. 

Mutual ownership, low costs, and a direct-to-investor playbook have helped spur Vanguard's leadership within the United States. Client service missteps notwithstanding, Vanguard over the past decade has grown its market share of U.S. open-end and exchange-traded fund assets at about a 5% annualized clip. At that rate, Vanguard's portion of the U.S. industry will cross 50% around 2035.

True, some competitors can now match or even undercut Vanguard on fees for broad market exposure. But Vanguard's burgeoning advice business could help it keep or even extend that lead. Through Digital Advisor and Personal Advisor Services, Vanguard has built an increasingly compelling ecosystem of advice for investors with simple to complex needs.

Vanguard is also using its advice business to expand overseas, but that's a work in progress. Of Vanguard's USD 7.6 trillion in global assets under management in March 2023, non-U.S. investors owned less than 10%, a figure that has changed little in recent years. Strategic shifts in China and other markets account for the slow pace, including returning money to institutions that had been layering on fees. Vanguard hopes to recoup that money and more by focusing on individual investors and the advisors who serve them. Provided Vanguard sticks to its playbook, its advantages should translate into success abroad, too.

High

Parent

Vanguard Small-Cap ETF

VB tracks the CRSP US Small Cap Index. The market-cap-weighted index includes the bottom 2-15% of the investable universe.

The fund seeks to track a market-cap-weighted portfolio that provides small-cap exposure to the US equity space.

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Small-cap stocks, not typically associated with dividends, are now gaining recognition for their potential in the dividend growth space.  Vanguard's Small-Cap Index Fund ETF (VB) stands out as a promising choice in this arena. VB has outperformed WisdomTree U.S. SmallCap Quality Dividend Growth Fund ETF and iShares Russell 2000 ETF in both total return and dividend growth. Differences in the long-term performance of VB, IWM, and DGRS may be influenced by various factors, including fund screening & weighting methodology and price-to-book valuations of the underlying index.

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Small-cap stocks are under pressure due to rising borrowing costs and a weak macroeconomic outlook, but are still beating expectations with 11% YTD returns. The Vanguard Small Cap ETF is a well-diversified index across value and growth stocks, tracking the performance of the CRSP US Small Cap Index. Despite lagging behind the large-cap index, VB has seen $1.5bn in net inflows over the past year, indicating a healthy investor appetite.

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I decided to sell the VB ETF fund due to its underperformance compared to the S&P 500 and Invesco Nasdaq-100 Trust. Despite its low expense ratio and solid 10-year average annual return, the VB ETF's increased diversification has not resulted in increased short-, medium-, or long-term returns. The VB ETF's over-weighting in the industrial and consumer discretionary sectors may not prove advantageous in the long run due to its under-weighting in the technology sector.

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