Vanguard S&P Small-Cap 600 Index Fund Institutional Shares VSMSX

Vanguard S&P Small-Cap 600 Index’s low fee, broad diversification, and profitability bias make it hard to beat.

This fund tracks the S&P SmallCap 600 Index, which collects the smallest 600 stocks in the S&P 1500 Composite Index. Each constituent must meet initial market cap, liquidity, and profitability criteria to be eligible. The final portfolio weights each stock by its float-adjusted market capitalization.

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. Faster-growing companies take up a larger share of the portfolio, while smaller companies that may be struggling take on a less important role. This helps rein in turnover and associated trading costs.

The S&P SmallCap 600 Index operates on the smaller end of the small-cap market. Its average market cap was USD 3.5 billion as of February 2026, which is smaller than most index competitors. Small-cap stocks tend to be more volatile than their larger peers. However, the fund’s parent S&P 1500 Composite Index includes only profitable names. This removes the lowest-quality small-cap stocks and helps contain volatility.

While the smaller names that constitute this portfolio can be volatile, the strategy’s broad reach ensures that one stock’s misfortune should not derail the entire portfolio. It stashes just 6% of its assets in its top 10 holdings. That breadth helped the exchange-traded fund share class return 11.2% annualized in the 10 years through February 2026, 91 basis points better than the Morningstar Category norm.

A preference for profitable firms and sound diversification should minimize the risks of the fund's smaller market-cap orientation. It earns an Above Average Process Pillar rating.

The fund tracks the S&P SmallCap 600 Index, which captures the small-cap segment of the total investable US equity market. An index committee determines the 600 constituents from a universe of US-domiciled stocks that pass its investability criteria. These criteria include a market cap between USD 1.2 billion and USD 8.0 billion, minimum liquidity requirements, and positive generally accepted accounting principles earnings for the past 12 months and in the most recent quarter. The profitability requirement helps shield it from less stable companies, especially among its smallest constituents. IPOs are eligible for inclusion only after 12 months of trading. This helps to ensure that these firms are financially viable and allows time for the market to incorporate a broader swath of market participants' views into their share prices.

The index does not reconstitute on a regular cadence like competitor indexes and instead makes changes as the committee sees fit. Existing constituents are removed only if they continually and substantially violate the index’s inclusion criteria, as the index committee allows temporary deviations. This approach allows for more flexibility around reconstitution, thus reducing unnecessary turnover. Historical turnover for the index hovers around 20%, better than most active funds and consistent with many index fund peers.

The committee will step in when a stock far exceeds the upper market-cap limit, preventing the portfolio from drifting too far from its small-cap moniker. Some small-cap index funds may be required to hold stocks long after they’ve left small-cap territory because of a rigid rebalance schedule. The S&P SmallCap 600 Index can remove them once they get far too large, ensuring the portfolio remains representative of the market it tracks. As a result, some competitor indexes hold stocks with market caps larger than USD 25 billion, while constituents here rarely eclipse USD 10 billion.

Small companies tend to be more volatile than their larger counterparts but may offer greater upside potential. While their businesses may not yet be mature and stable, the growth potential of promising small-cap stocks can lift the entire segment. Diversifying across a broad selection of small stocks is sensible as it spreads risk yet allows a portfolio to benefit from the winners.

By closely tracking the portfolio characteristics of its benchmark index, the fund minimizes stock-specific risk. No one position collects more than 1% of the portfolio, and the top 10 holdings account for just 6% of the portfolio.

Stocks from the industrials and financials sectors claim most of the portfolio, together accounting for about 33% as of February 2026. Utilities and communications stocks barely make a dent, together representing less than 5%. While indicative of the small-cap US stock universe, these sector allocations represent a source of concentration risk that may not be rewarded.

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 those of 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.

Smaller stocks can rise quickly during market rallies, boosting the fortunes of funds targeting the smallest end of the market. The strategy has been a beneficiary, realizing an upside-capture ratio of 108% relative to the average of its peers since its inception. Small but high-flying stocks proved especially helpful to the strategy in recent years. However, since this fund will sell a position once it exits small-cap territory, it may not receive the stock’s full benefit.

Small-cap funds tend to be quite volatile, and this strategy is no exception. Its focus on the smallest names in the small-cap market can make for an especially bumpy ride, but its profitability screen prevents volatility from straying too far from the norm. From the fund’s 2010 inception through February 2026, the exchange-traded share class returned a sturdy 11.6% annualized, 1.7 percentage points better than the category average. Volatility was higher but not so much to weigh on its risk-adjusted return advantage.

The fund’s low fee presents a low hurdle for outperformance, and sound diversification spreads risk. Its profitability bias should also control risk in what can be an especially volatile arena. These compelling features position the strategy for long-term outperformance.

Vanguard S&P Small-Cap 600 Index I's Prospectus Adjusted Expense Ratio is 0.03% per year. It places it in the cheapest quintile of the Morningstar US Fund Small Blend Category, where the median fee is 0.94% per year. This cost positioning translates into a Medalist Rating Price Score of 2.43, 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.