Vanguard Russell 2000 Value ETF’s Process Pillar rating is Average, but a strong management team still helps this strategy retain its Morningstar Medalist Rating of Bronze. The portfolio maintains a cost advantage over competitors, priced within the lowest fee quintile among peers.  

 The strategy’s management team earns an Above Average People Pillar rating. The strategy merits an 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

Chord Energy Corp

Permian Resources Corp

Commercial Metals

Murphy Oil

South State

Taylor Morrison Home

Meritage Homes

PBF Energy

Universal Forest Products

Essent Group

The fund fully replicates the Russell 2000 Value index, which captures the cheaper half of the Russell 2000 Index. It assigns a composite style score to all stocks in the Russell 2000 based on their price/book ratio, two-year analyst consensus growth forecast, and five-year sales per share growth. Price/book receives a 50% weight in the calculation, and the two growth measures each receive 25%. FTSE Russell then buckets the cheaper half into the value index, with the most growth-oriented firms fully allocated to the Russell 2000 Growth Index. Stocks landing near the midpoint are partially allocated to both based on style traits.

Market-cap weighting is an efficient way to allocate the portfolio 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 take on a less important role. This also helps rein in turnover, which has averaged 27% over the last 10 years, considerably lower than its average peer. This lean turnover ratio is compelling, but its lack of buffers at the lower market-cap threshold promotes greater churn among illiquid micro-cap stocks, running up trading costs that hurt performance.

The portfolio looks similar to the category average. Sector compositions usually mimic the average peer and valuations tend to follow. Approximating the category average means the fund’s low fee should aid its category-relative performance.

The fund’s average market-cap is about half that of the category average. Smaller stocks tend to be more volatile than their larger peers, but they may have more room to run. The micro-cap stocks that constitute a considerable chunk of the portfolio also tend to be of a lower quality than their slightly larger counterparts. The Russell 2000 Index does not incorporate any screens to limit low-quality names from entering the portfolio. Common quality metrics, like return on assets and return on invested capital, usually fall short of the average peer. This represents extra risk that may not be rewarded in an already volatile market segment.

Stocks in this portfolio have modest valuations that reflect the market’s dim view of their outlooks. Some are stable businesses whose asset-heavy balance sheets deflate their price/book ratios, like United Bankshares UBSI and Home BancShares HOMB. Others, like Jack In The Box JACK, claim a tiny market share in ultracompetitive industries. While many of these companies should prove worthy of their modest valuations, they represent a lower hurdle for firms to clear on the path to solid returns.

This fund tilts toward statistically cheaper sectors relative to the broad market. It leans heavily into financials, real estate, and utilities stocks at the expense of communication-services and technology companies. These sector biases are a source of active risk that the market may not reward over the long term.

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.

Average

Process

Vanguard Russell 2000 Value Index Fund's strong equity team drives the strategy's Above Average People Pillar rating. There are two managers listed on the fund: Kenny Narzikul, Nick Birkett. Overall, management experience is lacking on the team, with only an average of two years spent in the industry. 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.  

 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.

Above Average

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 Russell 2000 Value ETF

VTWV tracks an index of US small-cap value stocks. Holdings are selected and weighted based on price-to-book-value.

The fund is passively managed to hold US small-cap value stocks. Holdings are selected and weighted based on price-to-book-value.

Small-caps and value stocks have been underperforming, but they are expected to lead again in the future. Vanguard Russell 2000 Value Index Fund ETF Shares is worth considering for exposure to US small-cap value stocks. The VTWV ETF has slightly outperformed its competitor, the iShares Russell 2000 Value ETF, and has a low expense ratio.

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