Vanguard Small-Cap Value Index Fund ETF Shares VBR

Vanguard Small-Cap Value Index’s broad diversification and razor-thin expense ratio make this one of the best small-cap value funds available.

The fund tracks the CRSP US Small Cap Value Index, which captures the cheaper side of the small-cap market. Value stocks usually have low price/book and price/earnings ratios. Depressed valuations may be caused by 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 a cost-efficient way to weight holdings 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 have less importance. Generous buffers around the fund's size and style constraints improve portfolio breadth and help tame turnover.

The portfolio is well-diversified. None of its 800-plus holdings garners more than 1% of assets, with the top 10 holdings usually representing around 5% of the portfolio. Sector allocations largely resemble the Morningstar Category average. Financials and industrials stocks lead the way, accounting for around 19% of the portfolio each. Their combined 37% weighting is 3 percentage points less than the category average. By most measures, the portfolio is similarly situated to the category and is an excellent representation of the market segment.

Performance has been strong since the fund started tracking its current index in April 2013. The exchange-traded fund share class has outperformed its average category peer by more than 1.7 percentage points annualized through December 2025. Volatility has also been muted relative to the category, allowing the fund to post an even wider risk-adjusted-return advantage.

Morningstar has agreed to acquire the Center for Research in Security Prices, the provider of the index tracked by this fund, but the transaction has not yet closed. Morningstar analysts work independently from the index business, and their fund ratings for products tracking CRSP indexes are based solely on the fund’s investment merits.

This fund has a lot to like. The strategy effectively captures the full small-cap value market segment and diversifies away most stock-specific risks with its broad reach. It earns an Above Average Process Pillar rating.

The CRSP US Small Cap Index excludes the largest 85% and smallest 2% of US stocks by total market cap. CRSP buckets each eligible constituent in the corresponding growth or value index based on a 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 4% 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 steps should reduce unnecessary turnover and marginally reduce trading costs over time.

The portfolio effectively represents the entire small-cap value category. Its sector allocations and key value metrics are closely tied to the category average, which means its outstanding diversification and low fee should translate into a long-term performance edge.

The portfolio usually holds more than 800 stocks, with around 5% of assets typically allocated to its top 10 holdings. Like value index funds across the market-cap spectrum, financials and industrials stocks are the most prominent. Together, their 37% weight is 3 percentage points less than the category average, with its financials stake trailing the norm by almost 5 percentage points and industrials slightly overweight compared with the norm.

Down the portfolio, most other sector allocations mirror the category norm, apart from an overweight position in real estate stocks offset by an underweight position in energy stocks. These differences can steer short-term returns, but over time any impact should be overshadowed by portfolio similarities and the fund’s low fee.

Market-cap weighting contributes to a slightly larger orientation than the category norm, which improves the fund’s breadth. Its largest holdings are usually more common in mid-cap index funds than small-cap funds, but their presence and prominence here may temper overall volatility as larger firms tend to be more stable.

Vanguard's equity index group earns an Above Average People Pillar rating for its well-supported and stable management team adept at leveraging Vanguard's comprehensive resources. Its portfolio managers benefit from the firm's global infrastructure and advanced portfolio management technology, which facilitates cost-efficient trading around the globe. The infrequent turnover of managers, coupled with Vanguard's practice of rotating them across various funds, enhances their expertise and understanding of different market segments.

The fund's managers directly handle trading, providing them with deeper insights into the portfolio's operations than a stand-alone trader might have. They are backed by a global team of dedicated personnel and employ sophisticated, scalable technology to minimize their workload and enhance tracking accuracy. Vanguard's independent risk-management team plays a crucial role in ensuring its funds adhere to predetermined tracking tolerances. It collaborates closely with the managers to oversee trades and address potential issues proactively. Vanguard compensates managers based on tracking error and excess return metrics to foster a culture of accountability and ensure that the management team's interests are closely tied to investors'.

Vanguard maintains its High Parent Pillar rating as it continues to grow under new leadership.

CEO Salim Ramji has had a busy first year captaining Vanguard’s crew, and the ship remains pointed in the right direction. The firm made its largest round of fee cuts in early 2025, which came at an estimated cost of USD 350 million. It established a separate division dedicated to its advice and wealth management efforts, a sign that it wants to seriously compete within those lines of business. Asset growth has continued to be a huge success. Only BlackRock’s inflows rival the money Vanguard is taking in. Likewise, the number of clients it serves has more than doubled since 2015.

Despite that success, an ever-growing number of clients has presented a challenge: Vanguard can’t grow its services fast enough to keep up with demand. In some instances, it has had to curb certain services and capabilities or raise fees on others to cope, causing some loyal clients to criticize what they perceive as deteriorating services.

Vanguard has ambitions to bring its disruptive legacy to the bond market. It created roughly a dozen low-cost bond exchange-traded funds for US investors and several others abroad over the 12 months through June 2025. All have low fees in their respective categories, and the actively managed strategies align with Vanguard’s philosophy. They are relatively easy to understand and are conservatively managed.

Vanguard has another opportunity to prove that clients are still its priority. On the surface, its endeavor into the high-fee deal-making world of private assets alongside Wellington and Blackstone looks like a cultural mismatch. So far, the collaboration hasn’t produced anything that’s concerning.

Portfolio similarities should enable the fund’s low fee and superior diversification to carve a lasting advantage over the small-value category average. The exchange-traded share class outpaced the category norm by 1.7 percentage points annualized since it started tracking its current index in April 2013 through December 2025. Its larger market-cap orientation helped the fund maintain a lower standard deviation of returns than the category average over this time, allowing it to expand on its risk-adjusted advantage.

Despite similarities to many peers, portfolio differences exist and may lead to short-term performance deviations. Market-cap weighting and the fund's broad reach mean the portfolio can underweight some holdings that are popular among its category peers and overweight others. Recently, these tendencies have been a tailwind for the fund, outpacing the category norm by 2.8 percentage points for the past two years through December 2025. Lesser exposure to lagging consumer cyclical and energy companies is partly to thank for that advantage. Diversifying across hundreds of stocks means the fund may own less of some names than peers, which can help returns when those stocks falter. However, these differences may not always work out positively for the fund when it is underweight the best performers. This happened in 2021, and the fund lagged the category average by 3.6 percentage points.

Superior diversification helps control risk in this volatile category, even if it may hold the fund back from time to time. Additionally, its low fee presents a low hurdle for this fund to maintain its risk-adjusted advantage going forward.

Vanguard Small-Cap Value ETF's Prospectus Adjusted Expense Ratio is 0.05% per year. It places it in the cheapest quintile of the Morningstar US Fund Small Value Category, where the median fee is 1.02% per year. This cost positioning translates into a Medalist Rating Price Score of 2.46, which reflects its relative price positioning within the category. The Price Score ranges from -2.50 (most expensive) to +2.50 (cheapest), with higher scores indicating better cost competitiveness.