Seeking Alpha
What is your profession? ×
Profile| Send Message|
( followers)

Vanguard ETFs have been a phenomenal success: it is rapidly becoming the most favorable ETF provider by investment advisors and average investors, even though iShares retains the largest market share.

We compare U.S. small cap stock ETFs in the following tables:

U.S. Small Cap Blend 09/28/2012

DescriptionSymbol1 Yr3 Yr5 Yr
Vanguard Small Cap ETFVB30.28%13.93%3.01%
iShares S&P SmallCap 600 IndexIJR31.71%14.44%3.05%
iShares Russell 2000 IndexIWM30.13%12.43%2.16%

U.S. Small Cap Growth 09/28/2012

DescriptionSymbol1 Yr3 Yr5 Yr
Vanguard Small Cap Growth ETFVBK30.23%15.76%4.16%
iShares Russell 2000 Growth InIWO28.4%13.83%3.02%
iShares S&P SmallCap 600 GrowthIJT28.61%16.06%3.68%

U.S. Small Cap Value 09/28/2012

DescriptionSymbol1 Yr3 Yr5 Yr
Vanguard Small Cap Value ETFVBR33.88%13.67%2.78%
iShares S&P SmallCap 600 ValueIJS34.83%12.7%2.43%
iShares Russell 2000 Value IndIWN31.5%10.89%1.02%

From the above, one can see that iShares Russell 2000 ETFs clearly lag behind both Vanguard and iShares in terms of performance. This can not be explained by expense ratios along, especially between iShares S&P index ETFs and iShares Russell 2000 index ETFs. For example, in value index ETFs, both IJS and IWN have 0.25% expense ratio, even though IWN under performed IJS by 1.41% annually in the last 3 years!

On the other hand, iShares S&P small cap index ETFs can still rival Vanguard's ETFs. In fact, iShares small cap 600 index IJR slightly out performed Vanguard small cap ETF VB in the last 3 years, though it under performed the Vanguard counterparts in the other two categories.

We believe if iShares can slash its expense ratio from 0.25% to 0.1%, which is what Vanguard charges right now, iShares S&P small cap index ETFs can be as good or even better than Vanguard's. The S&P index methodology is clearly proven and sound.

In conclusion, among broad-base small-cap index ETFs, there are clearly only two index providers that matter: Vanguard and iShares S&P 600. Investors should monitor both providers and their ETFs.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.