VTWO: Why This Is My Least Favorite Small-Cap Fund

seekingalpha05-07

ALLVISIONN Investment Thesis Vanguard’s Russell 2000 Index Fund ETF (NASDAQ:VTWO) warrants a sell rating due to its disadvantages compared to peer small-cap funds. While small caps have performed very...

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While small caps have performed very...</p>\n\n<a href=\"https://seekingalpha.com/article/4689965-vtwo-why-this-is-my-least-favorite-small-cap-fund\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>VTWO: Why This Is My Least Favorite Small-Cap Fund</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nVTWO: Why This Is My Least Favorite Small-Cap Fund\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-05-07 11:25 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4689965-vtwo-why-this-is-my-least-favorite-small-cap-fund><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>ALLVISIONN Investment Thesis Vanguard’s Russell 2000 Index Fund ETF (NASDAQ:VTWO) warrants a sell rating due to its disadvantages compared to peer small-cap funds. While small caps have performed very...</p>\n\n<a href=\"https://seekingalpha.com/article/4689965-vtwo-why-this-is-my-least-favorite-small-cap-fund\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"VTWO","symbol_name":"Vanguard Russell 2000 ETF","start_time":0,"source_url":"https://seekingalpha.com/article/4689965-vtwo-why-this-is-my-least-favorite-small-cap-fund","article_id":"2433921482","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1289737217/image_1289737217.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2433921482","pubTimestamp":1715052350,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"ALLVISIONN Investment Thesis Vanguard’s Russell 2000 Index Fund ETF (NASDAQ:VTWO) warrants a sell rating due to its disadvantages compared to peer small-cap funds. While small caps have performed very","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"VTWO":"Vanguard Russell 2000 ETF","MGC":"Vanguard Mega Cap ETF","UPRO":"三倍做多标普500ETF","SH":"标普500反向ETF","MSTR":"MicroStrategy","IVV":"标普500指数ETF","SSO":"两倍做多标普500ETF","BK4585":"ETF&股票定投概念","LU1814569148.SGD":"WELLINGTON GLOBAL QUALITY GROWTH \"D\" (SGDHDG) ACC","BK4588":"碎股","BK4550":"红杉资本持仓","BK4534":"瑞士信贷持仓","LU0868494617.USD":"UBS (LUX) EQUITY SICAV - US TOTAL YIELD SUSTAINABLE \"P\" (USD) ACC","LU1861215975.USD":"贝莱德新一代科技基金 A2","SCHA":"Schwab US Small-Cap ETF","SPXU":"三倍做空标普500ETF","OEF":"标普100指数ETF-iShares","LU1861220033.SGD":"Blackrock Next Generation Technology A2 SGD-H","IJR.AU":"ISHARES S&P SMALL CAP ETF/AU","BK4086":"建筑产品","BLDR":"Builders FirstSource","OEX":"标普100",".SPX":"S&P 500 Index","IJR":"标普小型股600指数ETF-iShares","SPY":"标普500ETF","MGC.AU":"MG Unit Trust","SMCI":"超微电脑","MSTR.AU":"MORNINGSTAR INTL SHARES ACT","VO":"Vanguard Mid-Cap ETF","FDN":"First Trust Dow Jones Internet I","SDS":"两倍做空标普500ETF","VBR":"Vanguard Small-Cap Value ETF","VOO":"Vanguard标普500ETF"},"translate_title":"VTWO：为什么这是我最不喜欢的小盘股基金","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"SMCI":1,"VTWO":1,"VOO":1,"VO":1,"VBR":1,"SCHA":1,"MSTR.AU":1,"MSTR":1,"MGC.AU":1,"MGC":1,"IJR.AU":1,"IJR":1,"BLDR":1,"US3Y.BOND":0.9,"US30Y.BOND":0.9,"US2Y.BOND":0.9,"US12M.BOND":0.9,"US10Y.BOND":0.9,"US5Y.BOND":0.9,"US6M.BOND":0.9,"SPY":0.9,"US7Y.BOND":0.9,"FDN":0.9,"US912797GK78.BOND":0.6,"US912797GB79.BOND":0.6,"US912797FS14.BOND":0.6,"US912797FH58.BOND":0.6,"US912797GL51.BOND":0.6,"US912797GW17.BOND":0.6,"US912797HE00.BOND":0.6,"US912797HH31.BOND":0.6,"UPRO":0.6,"SSO":0.6,"SPXU":0.6,".SPX":0.6,"SH":0.6,"SDS":0.6,"OEX":0.6,"OEF":0.6,"ESmain":0.6,"IVV":0.6},"content_text":"ALLVISIONN Investment Thesis Vanguard’s Russell 2000 Index Fund ETF (NASDAQ:VTWO) warrants a sell rating due to its disadvantages compared to peer small-cap funds. While small caps have performed very well over the past century, they have underperformed large caps over the past decade. Consequently, small-cap funds are attractively valued currently and may be a great addition for investors with significant exposure already to S&P 500 or large cap funds. Unfortunately, VTWO has several downsides, making other peer small-cap funds more favorable. Fund Overview and Compared ETFs VTWO is an ETF that seeks to track the Russell 2000 Index. This index captures the 2,000 smallest public companies by market cap within the Russell 3000 Index. While specific definitions vary somewhat, small-cap stocks are generally those with market capitalizations between $300M and $2B. With its inception in 2010, the fund has 1,962 holdings and $10.02B in AUM. VTWO is a small blend fund with a mix of growth and value holdings. Its largest sector weights are industrials (19.0%), followed by health care (15.2%) and financials (14.9%). For comparison purposes, other funds examined are the Schwab U.S. Small-Cap ETF (SCHA), the iShares Core S&P Small-Cap ETF (IJR), and the Vanguard Small-Cap Value ETF (VBR). SCHA is a passively managed fund that tracks the Dow Jones U.S. Small-Cap Total Market Index and therefore is slightly less diversified than VTWO. It is also more concentrated on financials (16.6%). IJR seeks small-cap U.S. stocks by following the S&P SmallCap 600 Index. It is also heaviest on financials at 17.8%. Finally, VBR is a passively managed fund that seeks small caps based on their assessed value and is heaviest in industrials at 24.80%. Performance, Expense Ratio, and Dividend Yield Compared The first downside for VTWO compared to peer small-cap funds is its performance over the past decade. VTWO has seen a 10-year average annual return of 7.26%, lower than SCHA, IJR, and VBR. Additionally, VTWO has seen the lowest total 5-year price return, as shown in the figure below. 5-Year Total Price Return for Compared Small-Cap Funds (Seeking Alpha) VTWO's performance has also been significantly lower than the S&P 500 Index over the past 10 years, which has seen a 10-year average return of 12.4%. While small caps have underperformed the market over the past decade, a wider time period of 100 years paints a different picture for small-cap performance. I will cover more on this later. Aside from performance, the second downside for VTWO is its expense ratio. While low fees are consistent with Vanguard’s brand, VTWO has the highest of compared small-cap funds at 0.10%. Additionally, VTWO has an average dividend yield compared to peer funds, with VBR offering the highest yield at 2.09%. Expense Ratio, AUM, and Dividend Yield Comparison     VTWO SCHA IJR VBR   Expense Ratio 0.10% 0.04% 0.06% 0.07%   AUM $10.02B $16.51B $77.74B $55.51B   Dividend Yield TTM 1.39% 1.36% 1.32% 2.09%   Dividend Growth 5 YR CAGR 8.44% 6.42% 4.92% 7.58%   Click to enlarge Source: Seeking Alpha, 6 May 24 VTWO Holdings and Reasons Why It Lags Peer Small-Cap Funds VTWO has the greatest diversification compared to peer small-cap funds at 1,962 holdings. While each of VTWO’s holdings receive roughly an equal weight at each rebalancing in late December, holdings like Super Micro Computer (SMCI) and MicroStrategy Incorporated (MSTR) have an outsized weight currently due to their YTD performance. Despite these returns, VTWO has low weight on its top 10 holdings at a combined 5.52%. Top 10 Holdings for VTWO and Compared Small-Cap ETFs   VTWO – 1,962 holdings SCHA – 1,725 holdings IJR – 670 holdings VBR – 856 holdings   SMCI – 1.88% MSTR – 0.52% XTSLA – 2.04% BLDR – 0.78%   MSTR – 0.92% NTNX – 0.43% ATI – 0.64% BAH – 0.59%   FIX – 0.41% CVNA – 0.36% SPSC – 0.58% RS – 0.59%   ELF – 0.39% WING – 0.33% ENSG – 0.57% CSL – 0.58%   LNW – 0.34% FIX – 0.32% FN – 0.56% IEX – 0.57%   CVNA – 0.33% NTRA – 0.31% ANF – 0.56% FCNCA – 0.54%   ONTO – 0.32% TXRH – 0.31% MTH – 0.56% ATO – 0.51%   SSD – 0.32% WSM – 0.35% MLI – 0.56% EME – 0.51%   VKTX – 0.31% CNM – 0.29% SPXC – 0.52% JBL – 0.50%   WFRD – 0.30% ONTO – 0.28% SM – 0.50% WSM – 0.50%   Click to enlarge Source: Multiple, compiled by author on 6 May 24 All small-cap ETFs examined are highly diversified, with low weights on any particular holding. Therefore, it would be an ineffective method to analyze the expected performance of each top holding. Instead, we must look at the outlook for small caps in general and whether VTWO is best postured to capture small-cap returns. For reasons discussed below, I believe small-cap value funds such as VBR will outperform VTWO looking forward. A Decade of Small-Cap Underperformance To answer whether small-cap funds are worthy of investment, we can first examine their performance compared to mid and large cap funds. As shown below, the larger the market capitalization, the better the fund has performed over the past 10 years. Vanguard Mid-Cap Index Fund ETF (VO), Vanguard S&P 500 ETF (VOO), and Vanguard Mega Cap Index Fund ETF (MGC) have all outperformed both VTWO and VBK. There have been two primary reasons why small caps have underperformed over this period. The first is relative earnings growth. Small-cap earnings have grown slower than large and mega caps, resulting in smaller increases in share price. However, small-cap stock performance cycles can last more than a decade. VTWO Compared to Mid-Cap, S&P 500, and Mega Cap Funds (10-Year Total Price Return) (Seeking Alpha) The second reason has been elevated interest rates. The U.S. Federal Reserve has maintained relatively high interest rates resulting in higher borrowing costs. This has hit small-cap companies hard, as many rely on borrowing to achieve growth. The silver lining for small caps is that their underperformance has resulted in favorable valuations. Comparatively, small caps relative to large caps look more attractive than they have in over 20 years. Utilizing price-to-earnings ratios, VTWO's P/E ratio stands at 16.3, while VOO’s P/E ratio is 26.1, and MGC’s P/E ratio is 27.3. Historic Performance Trends Looking back at an even broader time horizon, small-cap underperformance has not always been the theme. Between 1926 and 2000, small-cap companies on average have outperformed large caps by 1.6%. Between 1950 and 2015, the rolling median 10-year return for small caps has been 11.9%, while the S&P 500’s median 10-year return was at 10.6%. Expanding this time window to 20 years, the difference is over 2% in favor of small caps. Trailing Returns for Small Cap Stocks compared to S&P 500 (Anchor Capital Advisors) Therefore, while large caps have seen a great run over the past decade, a mean reversion for both small and large caps will pay off for small-cap investors. Looking at comparative valuations, small caps appear ready to make this correction. Therefore, the next question is which small-cap fund will best capture these returns. The Russell 2000’s Specific Disadvantages I believe small caps will see a turnaround to revert to their long-term trend. However, I do not see VTWO as the best small-cap fund. Historically, over very long time periods, small-cap value has seen strong performance. One major advocate for small-cap value, Paul Merriman, has extensively studied the combination of the S&P 500 with small-cap value. He found that a combination of these two categories had powerful results together. Between 1970 to 2022, he found that equal parts of S&P 500 and U.S. small-cap value stocks grew an initial $10,000 investment to $4.48 million. This value is twice what the S&P 500 alone returned for the same $10,000 initial investment. In contrast, looking at trailing 10- and 15-year returns leading up to 2020, the Russell 2000 has notably underperformed. As listed in the below graph, nearly every small-cap index outperformed the Russell 2000. Trailing Returns Comparison for Small Cap Indexes (Morningstar Direct, 2020) The explanation for this underperformance likely stems from VTWO’s average market capitalization. Although each fund examined in this article has “small cap” in the name, they are not exclusively comprised of small-cap holdings. The average market cap of the Russell 2000 is $4.82B, with a median market cap of just $960M. By weight, VTWO includes 54.8% small cap and 37.5% micro-cap holdings. Small-cap value fund, VBR, only includes 11.2% micro-cap while it has 57.6% small cap and 29.8% mid-cap weight. For example, Builders FirstSource (BLDR), VBR’s #1 holding, has a market cap of $23B, which technically categorizes the company as a mid-cap. This combination of small cap with some mid-cap and minimal micro caps has made VBR superior over VTWO in terms of performance. Current Valuation VTWO has seen average performance compared to examined small-cap funds over the past year. Interestingly, small-cap value fund VBR has seen the best performance with about a 21% return. While none of the funds have kept up with the S&P 500’s 25% one-year return, I believe small caps are due for a come-back for multiple reasons previously discussed. One Year Performance: Compared Small Cap ETFs (Seeking Alpha) Utilizing P/E and P/B ratios as a measure of valuation, VBR is the most attractive. While I never select ETFs for investment solely based on their valuation, small-cap value has had a long-term track record of performing well. Conversely, the Russell 2000 has underperformed. Therefore, I believe small caps are currently attractive and VBR is the best positioned not only based on valuation but based on historical trend. Valuation Metrics for VTWO and Peer Competitors     VTWO SCHA IJR VBR   P/E ratio 16.30 16.92 15.46 14.50   P/B ratio 2.0 2.09 1.66 1.80   Click to enlarge Source: Compiled by Author from Multiple Sources, 6 May 24 Risks to Investors Despite each fund’s high diversification, small caps have greater volatility. Utilizing beta value as an implied measure of volatility, VTWO’s beta is 1.14 compared to Dow Jones U.S. Total Stock Market Index. Small caps are notoriously sensitive to economic conditions and interest rates. While Fed Chairman Powell has stated that the next interest rate movement will likely not be an increase, multiple factors could change the Federal Reserve’s calculus including inflation and unemployment data. Concluding Summary  Small caps have recently underperformed the broader market significantly. However, this has not always been the case. Over the past 100 years, small caps cyclically outperform and can be a great investment when combined with an S&P 500 fund. Yet, the Russell 2000 has had a history of underperformance. Therefore, VTWO is not my favorite small-cap fund and does not deserve a buy rating. Alternatively, small-cap value has been an attractive choice and VBR demonstrates favorable valuation metrics. VBR also has a lower expense ratio and higher dividend yield than VTWO. While small-cap funds demonstrate increased volatility, I believe they will soon achieve performance in line with their long-term trend.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2433921482"}