Since our last visit with small-caps, which was just a week ago, gains by these stocks are materially accelerating. As of May 26, the Russell 2000 and S&P SmallCap 600 indexes are up 18%, and 16.11%, respectively, year-to-date.
As advisors know, there are games in town when it comes to small-cap indexes and ETFs with one of the more dominant options being the Vanguard Small-Cap Index ETF (VB). The $76.3 billion VB, which turned 22 years old in January, is up an admirable 14% this year though that only looks like “laggard” status on the surface.
VB follows the CRSP US Small Cap Index, which is different the two small-cap gauges mentioned above. When those indexes rebalance, the goal is to confine the rosters to companies with market values of no more than $2 billion – the high end of the strict definition of small-cap territory.
VB’s index is more encompassing, resulting in a median market value of its holdings of $10.8 billion, or slightly above the high end of mid-cap territory. That’s helpful on multiple fronts. First, VB’s lineup is expansive with more than 1,300 holdings. Second, by “cheating” and including what are obviously some mid-cap stocks, the Vanguard ETF’s three-year annualized volatility is below that of the Russell 2000 and S&P SmallCap 600 indexes.
With VB, Size Matters
VB’s embrace of stocks that are too big for standard small-cap indexes isn’t a detriment. In fact, over the past three years, the Vanguard fund beat the S&P SmallCap 600 Index by nearly 800 basis points. Translation: VB’s lack of confinement to strict small-cap rules worked in investors’ favor.
“The fund’s larger size also offered some reprieve during down markets. It has protected investors from downturns more effectively than the average of its peers,” observes Morningstar’s Zachary Evens. “A larger allocation to mid-cap companies than some peers should marginally help contain volatility and drawdowns during periods of market stress. It has captured 97% of the category’s average downside since 2004.”
VB has other distinguishing features. While about half of its holdings are also members of the Russell 2000, the ETF’s overlap by weight with that index is just 26%, according to ETF Research Center data.
As is to be expected, there are sector level differences, too. VB is slightly overweight industrial, consumer cyclical, consumer defensive, materials and real estate stocks relative to the Russell 2000.
The Fee Matters, Too
As is to be expected with a pure beta,, index-tracking Vanguard ETF, VB is cheap to own. Really cheap. The ETF’s annual fee is just 0.03%, or $3 on a $10,000 position, which is sure to delight to long-term investors and cost-conscious clients. That rock-bottom is additive when it comes to long-term performance.
“This fund’s low fee and turnover-conscious approach can help it capitalize on these periods of outperformance while controlling for unnecessary risk,” adds Evens. “That has translated into a strong long-term track record. The exchange-traded fund share class outperformed the category average by 1.7 percentage points, annualized from its 2004 inception through May 2026.”
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