A strong management team and sound investment process underpin Vanguard S&P Small-Cap 600 Growth ETF's Morningstar Medalist Rating of Silver. The portfolio maintains a cost advantage over competitors, priced within the cheapest fee quintile among peers.  

 The strategy’s management team earns an Above Average People Pillar rating. The strategy merits an Above Average Process Pillar rating.  The strategy's parent organization earns the firm a High Parent Pillar rating. People, Process and Parent Pillar ratings for this strategy are indirectly assigned by a Morningstar analyst rather than algorithmically derived. Please see the notes following each pillar section for more details. The details of assigning methods can be found in each pillar section.

Analyst Rating

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The portfolio features smaller companies than most peers in the small-growth category. This fund's average market cap was just $2.4 billion as of Feb. 28, 2023, about half that of its typical peer. Average constituent size is smaller because this index is filled only after its larger siblings, the S&P MidCap 400 Index and S&P 500, claim the largest 900 largest profitable companies in the United States. As of February 2023, only stocks with market caps between $750 million and $4.6 billion are eligible for inclusion in the S&P SmallCap 600 Index.

The fund's broad reach minimizes stock-specific risk. The portfolio usually holds around 350 stocks, and only 10% of assets were concentrated in the fund's top 10 holdings as of Feb. 31, 2023. No one position claimed more than 2% of the portfolio.

The portfolio's sector composition looks a little different than its average peer because of its smaller size and the blend stocks it holds. For example, its financial services allocation was almost 8 percentage points heavier than the category average as of January 2023. A 13% stake in healthcare stocks, 9 percentage points less than the typical peer's, makes up for much of this difference.

Overall, the portfolio remains a good representation of the small-growth category. Most key growth metrics are closely tied to the category average. Long-term earnings growth has moved in lockstep with the category average over the last 10 years. Approximating the category average should help this fund turn its low fee into a distinct performance advantage.

Note: The Process Pillar rating and analysis are indirectly assigned by an analyst. When an analyst covers a passively managed vehicle that tracks a particular index, Morningstar associates the Process Pillar rating assigned to that vehicle with the index concerned. Morningstar then maps the Process Pillar associated with a given index to any other uncovered passive strategies that track the same index. This ensures that the analyst’s view is leveraged whenever available and promotes consistency when analyzing passive vehicles associated with a given index.

Above Average

Process

Vanguard S&P Small-Cap 600 Gr Idx Fund benefits considerably from its equity team, earning it an Above Average People Pillar rating. There are two managers listed on the fund: Nick Birkett, Kenny Narzikul. The team is inadequately equipped. Together, they average one years of portfolio management experience. Together, they manage a total of six strategies, with a Silver asset-weighted average Morningstar Medalist Rating, demonstrating their potential to deliver positive alpha relative to the category median in aggregate. The team has lacked continuity recently, with a manager leaving in the last six months, detracting from its rating. Even though it is a passive fund, high turnover can still hinder the effectiveness of the investment process. 

 Note: This People Pillar rating is indirectly assigned by an analyst. Morningstar analysts evaluate the People Pillar for passive products at the brand level and may also differentiate by asset class. There is at least one other passive strategy at the firm that is covered by a Morningstar analyst, so the People Pillar rating of the fund is inherited from the rating that the Morningstar analyst assigned to investment vehicles under the same brand name.

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 S&P Small-Cap 600 Growth ETF

VIOG tracks a market-cap-weighted index of US small-cap companies characterized by strong growth factors.

The Vanguard S&P Small-Cap 600 Growth ETF (VIOG) was launched on 09/09/2010, and is a passively managed exchange traded fund designed to offer broad exposure to the Small Cap Growth segment of the US equity market.

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