Maximum Reach or Strategic Focus?

Small-cap stocks are typically defined as companies with market capitalizations below $2 billion. They offer investors exciting high-growth potential but they also come with elevated volatility. Both of these ETFs offer diversified access to this space at a similar price, but differ in their size and approach.

Because VB tracks the CRSP US Small Cap Index with around 1,300 holdings, it casts a wider net across smaller companies. Its 0.05% expense ratio and $163 billion in assets make it one of the largest small-cap funds available. That size means tighter bid-ask spreads and easier trading for investors. SPSM follows the S&P SmallCap 600 with roughly 600 stocks and an ultra-low 0.03% expense ratio, appealing to cost-conscious investors despite its smaller $13 billion asset base.

Both funds favor industrials and technology, but have some differences in their sector allocations and top holdings. VB leans a bit more heavily into industrials, while SPSM allocates more to financials. Choose VB if you want maximum diversification across the small-cap universe and don’t mind paying slightly more. Opt for SPSM if you prefer a tighter portfolio of 600 established small caps at rock-bottom cost, though small-cap volatility means both ETFs require a tolerance for market swings.

ETF: Exchange-traded fund that holds a basket of securities and trades on an exchange like a stock.
Index-based: Investment strategy that seeks to replicate the performance of a specific market index, not beat it.
Expense ratio: Annual fund operating costs expressed as a percentage of the fund’s average assets.
Dividend yield: Annual dividends per share divided by the current share price, shown as a percentage.
Beta: Measure of an investment’s volatility relative to the overall market, typically compared with the S&P 500.
AUM: Assets under management; the total market value of all assets a fund manages.
Total return: Investment return including price changes plus all dividends and distributions, assuming reinvestment.
Max drawdown: Largest peak-to-trough decline in an investment’s value over a specific period.
Small-cap: Companies with relatively small market capitalizations, generally offering higher growth potential and higher risk.
Sector weight: Percentage of a portfolio’s assets invested in a particular industry or sector.
Replication: Method where a fund holds the same securities as its index, in similar proportions.
Leverage: Use of borrowed money or derivatives to increase exposure beyond the fund’s net assets.

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Sara Appino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Comfort Systems USA and Vanguard Index Funds – Vanguard Small-Cap ETF. The Motley Fool recommends LKQ. The Motley Fool has a disclosure policy.

VB vs. SPSM Small-Cap Showdown: Maximum Reach or Strategic Focus? was originally published by The Motley Fool