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. Its institutional, admiral, and exchange-traded fund share classes earn a Morningstar Analyst Rating of Gold, while the pricier investor shares receive a Silver rating.

The fund tracks the CRSP US Small Cap Value Index, which captures the cheaper side of the small-cap market. Value stocks are usually characterized by low price/book and low price/earnings ratios. Depressed valuations may be due to 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 on the relative value of each stock. 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 very well-diversified. None of its 862 holdings garners more than 1% of assets, with the top 10 holdings representing only 6% of the portfolio as of Dec. 31, 2022. Sector allocations largely resemble the Morningstar Category average. Financials stocks lead the way, accounting for 21% of the portfolio, 3.5% less than the typical peer. By most measures, the portfolio is similarly situated to the category and is an excellent representation of the entire opportunity set available to active managers.

Performance has been strong since the fund started tracking its current index in April 2013. It has outperformed its average category peer by more than 1.6 percentage points annually. Volatility has also been muted relative to the category, allowing the fund to post an even wider risk-adjusted-return advantage. Market-cap-weighting pushes the portfolio up the market-cap ladder, contributing to more consistent category-relative performance.

Analyst Rating

An outstanding small-cap value fund.

Associate Analyst

Zachary Evens

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Booz Allen Hamilton Hld

Jabil

Reliance Steel & Aluminum

Atmos Energy

IDEX

First Citizens BancShares

Builders FirstSource

Ovintiv

Carlisle Companies

The strategy effectively captures the full small-cap value market segment and diversifies away most stock-specific risk with its broad reach. Additionally, market-cap weighting is an efficient approach, allowing investors to harness the market's collective wisdom for a low fee. It earns an Above Average Process Pillar rating.

The CRSP US Small Cap Index excludes the largest 85% and smallest 2% of U.S. stocks by total market cap. CRSP buckets each eligible constituent in the corresponding growth or value index based on their composite style score. Each index weights constituents by float-adjusted market cap. The value index collects those landing in the cheaper half of the opportunity set. Stocks that land near the value/growth border may have their market cap split across value and growth indexes, but such instances are rare: The small-cap growth and value indexes share about 3% of their holdings.

Generous buffer rules and trading windows help tame turnover and the associated trading costs. For a holding to move into an adjacent index, its style traits or market-cap must change considerably. Should that occur, the fund initially trades 50% of the stock's market cap to protect against one-off fluctuations. This has put a lid on turnover, which has averaged less than 20% annually since 2014. CRSP spreads trades over five days to mitigate market-impact costs at each quarterly rebalance. These unique steps should reduce unnecessary turnover and marginally improve returns over time.

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 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 the 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. The 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 Value ETF

VBR tracks the CRSP US Small Cap Value Index. The index selects from a list of stocks in the 85-99% range of market cap, based on five value factors.

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