Better Value ETF: Vanguard’s Small Cap-Focused VBR vs. the iShares IJJ Targeting Mid-Cap Stocks

While the iShares S&P Mid-Cap 400 Value ETF (IJJ +0.26%) targets the middle of the market, the Vanguard Morningstar Small-Cap Value ETF (VBR +0.26%) provides more affordable access to smaller-sized value companies with a much larger portfolio.

Both ETFs seek to provide exposure to undervalued segments of the U.S. market, though they target different size tiers. The iShares fund focuses on mid-cap stocks, which often attempt to balance the stability of large companies with the growth potential of smaller ones, while the Vanguard fund leans strictly into the small-capitalization space.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from monthly returns over the available fund history (up to five years). The 1-year return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

The Vanguard Morningstar Small-Cap Value ETF stands out as the more affordable choice for cost-conscious investors with an expense ratio of 0.05%, which is notably lower than the 0.18% charged by the iShares S&P Mid-Cap 400 Value ETF. Investors may also notice that the Vanguard fund offers a slightly higher distribution yield.

Performance & risk comparison

What’s inside

The Vanguard Morningstar Small-Cap Value ETF is a broad portfolio of 841 holdings focusing on Financial Services (17%), Industrials (17%), and Consumer Cyclical (14%) sectors. Its largest positions include Jabil (JBL -1.94%) at 0.87%, NRG Energy (NRG +5.42%) at 0.66%, and Tapestry (TPR +0.46%) at 0.63%. The fund was launched in 2004. The Vanguard Morningstar Small-Cap Value ETF has paid $4.32 per share over the trailing 12 months, which on its recent ~$251.00 share price works out to a 1.7% yield.

The iShares S&P Mid-Cap 400 Value ETF holds 303 stocks, with heavy weights in Financial Services (22%), Industrials (18%), and Consumer Cyclical (14%). Its top holdings include U.S. Foods (USFD -1.06%) at 1.38%, Reliance Steel & Aluminum (RS +0.62%) at 1.23%, and TD Synnex (SNX +1.63%) at 1.08%. This fund was launched in 2000. The iShares S&P Mid-Cap 400 Value ETF has paid $2.34 per share over the trailing 12 months, which on its recent ~$151.28 share price works out to a 1.5% yield.

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Which looks like the better buy

Investing in mid- and small-cap companies is an efficient way to capture robust returns for your portfolio, especially amid the secular trend of artificial intelligence, which affects wide swaths of the economy, not just tech stocks. Add a value tilt toward these parts of the market, and that increases the potential for strong performance.

The Vanguard Morningstar Small-Cap Value ETF (VBR) and iShares S&P Mid-Cap 400 Value ETF (IJJ) offer this kind of exposure. But which is the better fund? That depends on the considerations most important to your investment objectives.

VBR’s focus on small-cap enterprises can deliver strong growth as these companies expand. This is illustrated in its greater one-year and five-year returns. In addition, the fund’s combination of a far lower expense ratio and a higher dividend yield helps put more money in your pocket.

VBR’s 841 stocks delivers greater diversification than IJJ’s 303 holdings, which helps to shield the ETF’s performance from a downturn in a particular sector. Its much bigger AUM provides greater liquidity as well. However, small-cap stocks tend to experience higher volatility, as illustrated by VBR’s larger max drawdown.

IJJ’s mid-cap holdings tend to have less volatility, making this the better choice for investors seeking more stability while maintaining good returns. It strikes a balance between VBR and large-cap companies, although its downsides include the bigger expense ratio, and it hasn’t delivered the same level of return as VBR.