Entering text into the input field will update the search result below

Vanguard Small Cap ETF: The Trade Is Still On


  • The Vanguard Small Cap ETF has performed superbly since November 2020 – but has it gone too far?
  • The combination of economic fundamentals and relative valuation supports my renewed convictions on small cap for the next few months.
  • Until early signs of a reversal surface, I believe that "milking" the small cap trade continues to make sense.
  • Looking for a helping hand in the market? Members of Storm-Resistant Growth get exclusive ideas and guidance to navigate any climate. Learn More »

"I cannot think of a better time for small cap's outperformance to kick in than right around now". This is how I summarized my bullish stance on the Vanguard Small Cap ETF (NYSEARCA:VB) back in early November 2020. Four months and 11 percentage points of outperformance over the S&P 500 later, I believe that the trade still makes sense today.

My confidence in the outperformance of the US small cap index, VB's official benchmark, slowly wanes as the Russell 2000 continues to handily beat the broad market – especially mega-cap growth stocks included in the Nasdaq (QQQ). But I believe Vanguard's ETF still has legs, as well as the best chance of producing superior returns in 2021.

Portfolio composition

Whenever I justify my bullishness towards small caps, which I have argued for since September 2020, I do so relative to an investment in the Nasdaq. At least from the perspective of capitalization size, valuation and cyclical exposure, the two groups of stocks are about as close as it gets to polar opposites.

The graph below depicts the difference in portfolio allocation between VB and QQQ across a few select sectors. In a 2021 environment of (1) economic recovery, (2) rising interest rates and (3) potential inflationary pressures, including in crude oil and other commodities, I find it hard to make a strong case in favor of an index that is light on industrials, financials, and materials plus energy, respectively.

Source: DM Martins Research, data from ETFRC

Supporting the bullish case on the Nasdaq is the upcoming fiscal stimulus package which, on the verge of being approved by the US Congress, will put money in the pockets of consumers soon. This should bode well for the discretionary sector, including Apple (AAPL), Amazon (AMZN) and Microsoft (MSFT

Join our community

"Thinking outside the box" is what I try to do everyday alongside my Storm-Resistant Growth (or SRG) premium community on Seeking Alpha. Since 2017, I have been working diligently to generate market-like returns with lower risk through multi-asset class diversification. To become a member of this community and further explore the investment opportunities, click here to take advantage of the 14-day free trial today.

This article was written by

DM Martins Research profile picture

Daniel Martins is a Napa, California-based analyst and founder of independent research firm DM Martins Research. The firm's work is centered around building more efficient, easily replicable portfolios that are properly risk-balanced for growth with less downside risk.

- - -

Daniel is the founder and portfolio manager at DM Martins Capital Management LLC. He is a former equity research professional at FBR Capital Markets and Telsey Advisory in New York City and finance analyst at macro hedge fund Bridgewater Associates, where he developed most of his investment management skills earlier in his career. Daniel is also an equity research instructor for Wall Street Prep.

He holds an MBA in Financial Instruments and Markets from New York University's Stern School of Business.

- - -

On Seeking Alpha, DM Martins Research partners with EPB Macro Research, and has collaborated with Risk Research, Inc.

DM Martins Research also manages a small team of writers and editors who publish content on several TheStreet.com channels, including Apple Maven (thestreet.com/apple) and Wall Street Memes (thestreet.com/memestocks).

Analyst’s Disclosure: I am/we are long AMZN, AAPL, MSFT. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (7)

10 Jun. 2021
Do analysts like yourself choose a security they "like" and then rationalize the investment? Or do they look at charts for performance leaders, like VXF, the Vanguard Extended Market, comprising everything outside the S&P 500? This has been a better performer than VB and it has well diversified portfolio, Square Inc being the largest holding at 1.2%, though I believe it is a cap weighted fund. How long the disparity in performance will last is an interesting speculation as it seems more to be continuing a consolidation while VB is more rising still.
I find many prognosticators do have their likes which do not completely align with highest market performance. "Small Cap" is such an easily understood category, "Extended Market+ - what the heck is that?
Both VB and (more so) VXF have outperformed QQQ, of late.
This trade has a lot of legs I still believe, I have been basically 100% VB with all retirement holdings since the March 2020 collapse, based on this same rationale. Cheapest lowest risk way I believe to play the continued rebound throughout this Summer, to set it and forget it. Hit an all time high today, and out performed every major index, but the DOW over the last trailing year, and of course with the limited holdings of the Dow, not really a true comparision to SP500, Nasdaq or total market (VTI).
GameBuzz profile picture
Thanks for the update, Daniel, much appreciated. I finally jumped into UVM which I think is the "sterioidal" version of VB.
Chip Chipperson profile picture
At last check (today), GME is the top holding in Vanguard's Small Cap funds the VIOV (value) and VIOG (growth)? Ridiculous. No way I'm touching ANY of Vanguard's small caps, even with VB's top of PLUG, especially with the stimulus package passage. Buy the dips in tech and watch what happens. No one will be talking up small caps at year's end.
06 Mar. 2021
You promote small but you own large?
05 Mar. 2021
So. what's VXF? Chopped liver?
CashFlow13 profile picture
Small Cap and Small Cap Value have been shining this year. Diversification across equity factors works.
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.