VB: Adding U.S. Small Cap Equity Exposure To A Portfolio

| About: Vanguard Small (VB)

Summary

This article reviews VB, a good ETF to provide, or increase, exposure to U.S. small-cap equities in the core portion of most investors’ portfolios.

VB provides a convenient method to match the performance of a diversified group of U.S. small-cap companies across growth and value styles.

With the recent market volatility, VB has fallen back to mid-2013 price levels.

Although valuations remain high, this might be a good time for long term investors that have been waiting for a correction in prices, to start adding to positions.

Vanguard Small-Cap ETF (NYSEARCA:VB) - Investment Synopsis

This article reviews the Vanguard Small-Cap ETF (VB). VB seeks to track the performance of the CRSP U.S. Small Cap Index, which measures the investment return of small-capitalization stocks. VB provides a convenient method to match the performance of a diversified group of small-cap companies across growth and value styles. VB follows a passively managed, full-replication approach.

Performance compared to the S&P 500

Click to enlarge

Source: Yahoo Finance (01/17/2016)

As the chart above shows, the performance of VB has fairly closely tracked that of the S&P 500 over the last 5 years. However, there have been periods of outperformance and underperformance and recently VB has significantly underperformed the S&P 500. Over the 5 year period, VB is up approximately 37%, while the S&P 500 is up approximately 47%. With the recent market volatility, VB has fallen back to mid-2013 price levels. While valuations remain high, this might be a good time for long term investors that have been waiting for a correction in prices, to start adding to positions.

Equity Characteristics

Source: Vanguard (as of 12/31/2015)

As the table above shows, VB is fairly diversified with 1509 stocks. The price/earnings ratio is 28.8 (as of the last available data on 12/31/2015 and down approximately 10% since then). This is extremely high compared to historical levels, the S&P 500, foreign equities and the estimated 3-5 year earnings per share growth rate of 11.1%. With the recent decline in stock prices, long term investors might start adding to positions. However, valuations remain elevated and it might be prudent to save a portion of your available cash to see how things develop. Those investors who are dollar cost averaging, can just stick with their plan.

Top 10 Holdings

Source: Vanguard (as of 12/31/2015)

VB's top ten holdings make up just 3.0% of total assets and are, as probably expected, for the most part not very well known companies. VB makes a good core portfolio holding with a diversified mix of small cap companies across growth and value styles.

Expenses and dividend yield

VB's expense ratio is 0.09%, this is well below the average expense ratio of similar funds, although Schwab has a similar U.S. small-cap ETF with an expense ratio even lower at 0.08%. Even with the recent market correction, U.S. markets remain relatively high priced. It is likely that future returns, may be lower than those experienced over the last 5 years. In this environment, it is important that the core of your portfolio is allocated to funds with low expense ratios.

VB's dividend yield is 1.60%.

Equity Sector Diversification

Source: Vanguard (as of 12/31/2015)

VB's largest stock holdings are in the financial sector, investors that are already heavily invested in financial stocks may want to consider this when evaluating VB as an addition to their portfolio.

ETF's in the same category

Source: Seeking Alpha (01/17/2016)

Above is a list of the top 10 U.S. small-cap ETF's, listed by assets under management (AUM). VB is the third largest ETF by AUM in the U.S. small-cap ETF category behind the iShares Russell 2000 ETF (NYSEARCA:IWM) and the iShares Core S&P Small-Cap ETF (NYSEARCA:IJR). For those that want to do further research, additional detail on these ETFs is available on Seeking Alpha's ETF Hub.

Conclusion

VB provides a convenient method to match the performance of a diversified group of U.S. small cap companies across growth and value styles.

VB is the third largest ETF by AUM in the U.S. small-cap ETF category behind the iShares Russell 2000 ETF and the iShares Core S&P Small-Cap ETF. VB's expense ratio is 0.09%, this is well below the average expense ratio of similar funds, although Schwab has a similar U.S. small-cap ETF with an expense ration of 0.08%.

With the recent market volatility, VB has fallen back to mid-2013 price levels. While valuations remain high, this might be a good time for long term investors that have been waiting for a correction in prices, to start adding to positions. However, valuations remain elevated and it might be prudent to save a portion of your available cash to see how things develop.

Addendum - Simply Investing Philosophy

Keep investing simple, consistent, diversified, low cost and long term and you will significantly increase your chance of success.

Investing doesn't have to be difficult, time consuming or involve large fees. The problem with investing, for many investors, is that it can get complex quickly and when it gets complex and then the prices of investments start falling (like recently), it is easy for an investor to lose focus on the original investment objective and make mistakes.

Establishing a portfolio with a core investment in well-diversified, low expense ETF's, held for the long term, is a good way to either get started investing or to reduce the complexity of an investment portfolio. The core of the portfolio can be as simple as one well diversified global ETF with a low expense ratio, like Vanguard Total World Stock ETF (NYSEARCA:VT). Typically, the core of the portfolio would include exposure to large-cap, mid-cap and small-cap stocks in the U.S., foreign developed market stocks, emerging markets and fixed income.

As an investor's experience, time dedicated to investing activities and desired risk, increases, the investor may choose to adjust the core portion of the portfolio. Investors that enjoy the process and want to gain exposure to new areas or increase exposure to areas that the investor believes will outperform, can allocate a percentage of their portfolio to "edge" positions, which offer additional risk and opportunity.

ETF Investing Guide - Written by Seeking Alpha's Founder in 2006 is a great guide to setting up a portfolio of ETF's.

One Page Summary of the Entire Guide - The one-page summary of the ETF Investing Guide gets you started.

Disclosure: I am/we are long VT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.