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What Can This Small Cap Index Do For Investors Over The Long-Term?

Why is the small-cap growth ETF by Vanguard a great addition to a healthy and diverse portfolio and how will it benefit you as an investor?

The Vanguard Small-Cap Growth ETF (NYSEARCA: VBK) is an interesting option for any investor as it has great potential. Although focused upon small-cap stocks, its share price has increased by 46% over the last 12 months. There are multiple reasons why a small-cap ETF should be considered as a potential investment, and in particular, the Vanguard Small-Cap Growth ETF, which is why we will explore how this particular fund can be an asset to your portfolio.

What is it all about?

Small-cap companies tend to have a valuation of under $2 billion and whilst they generally have higher return potential than mid and large-cap companies in the short-term, the risk is higher for investors. For the Vanguard Small-Cap Growth ETF, its assets under management total around $16 billion and it contains around 600 companies, reducing the single-stock risk significantly. It has a dividend yield of around 0.4% and an expense ratio of around 0.7%.

Every index has certain criteria that it focuses upon, for example, the Ark Innovation ETF only includes companies that it deems as innovative and groundbreaking in its industry. In a similar manner The Vanguard Small-Cap Growth ETF has a number of criteria that it focuses upon:

  • Seeks to track the performance of the CRSP US Small Cap Growth Index.
  • Small-cap growth equity.
  • Low expenses minimize net tracking error.

In addition, it employs a passively managed full-replication strategy, and the fund remains fully invested. Although this is not nearly as exciting as the Ark Innovation Fund, it has a strong investment strategy tracking the performance of small-cap businesses. 

This ETF has grown 42% in the last 12 months and almost 200% in the last 5 years. With a large, yet carefully selected, stock list, it aims to track the growth of small companies in the U.S. this fund is a steady and stable investment opportunity. 

Diversification

Diversification within your portfolio is extremely important as it can minimize risk, particularly in the event of a pandemic induced recession. ETFs in general offer diversification in one simple package as a wide variety of industries are usually represented. Small-cap ETFs are no different and, as such, they are very transparent with many disclosing their holdings on a daily basis. 

This ETF has a heavy focus on tech start-ups, with around one-quarter of the portfolio made up of Healthcare stocks, while a further 22% is made up of tech companies. This might seem like a lot, but when each company does not even amount to 1% of its holdings, the Vanguard Small-Cap Growth ETF has plenty of diversification.

This fund does contain some better-known companies such as Enphase Energy, Zendesk, and MongoDB, as well as some lesser-known businesses. By choosing an ETF such as this one, investors can put money into a wide variety of growth-focused companies, without as much of the risk that investing in a single small-cap firm would hold. 

Small-cap versus large-cap

Whilst large-cap indexes have more consistent growth overall, historically, small-cap indexes tend to do better when coming out of a recession in both 1-year and 3-year annualized returns. With the U.S. and many other countries entering a COVID-induced recession in 2020, small-cap ETFs or indexes could be a great option for any investor right now. 

For an ETF in particular, expense ratios are a factor that becomes very important as cheaper funds will often outperform more expensive ones over the long-term. Large-cap indexes will grow and they will have much less risk involved, but growth will often be slower on an annualized basis than that of small-cap indexes. Thus a high risk, high reward, small-cap ETF could be an interesting option to add to your portfolio. 

One thing an investor should do is take the return potential from a small-cap ETF such as the Vanguard Small-Cap Growth fund and then add it to a portfolio that already has other mid and large-cap companies or ETF’s. The instability and risks of small-cap investments are offset by the stability and strength of mid or large-cap investments.

Overall, small-cap ETFs, and in particular, the Vanguard Small-Cap Growth ETF, are a great option for any potential investor who is looking to add an extra layer of diversification but doesn’t want the risk associated with a single small-cap stock investment.

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MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here

Poppy Murray
Poppy is a contributing writer to MyWallSt. Poppy likes companies that go the extra mile. Her favorite stock is Amazon because she is fond of its innovation, variety, and creative solutions to sustainability.