Small-cap stocks have been on fire relative to large-caps over the last three weeks. It does look like we may have seen a bottom in terms of their relative performance, which should it continue could result in meaningful leadership for several months to come. If you prefer growth-style investing and are getting more and more excited over small-caps, then you may want to consider the Vanguard S&P Small-Cap 600 Growth Index Fund ETF Shares (NYSEARCA:VIOG). This exchange-traded fund tracks the S&P SmallCap 600 Growth Index and gives investors shares in a portfolio of growth-oriented, small capitalization stocks.
Now to be clear, I, personally, prefer value to growth from a style perspective. However, small-cap growth does look appealing here regardless.
A Look At The Holdings
When we look at the top 10 holdings, we see a well-diversified mix of small-cap growth stocks. The largest position makes up just 1.25% of the fund, making this look almost the opposite of what you see in the top 10 of the S&P 500 (SP500) given the high concentration in those weightings.
What do these companies do? ATI Inc (ATI) develops and manufactures technically advanced specialty materials and components that solve some of the world’s most challenging problems for critical applications in the aerospace, defense, medical, energy, and other high-profile industries. Fabrinet (FN) is a world-class provider of end-to-end optical packaging and precision optical, electromechanical, and electronic manufacturing services that produce complex products for original equipment manufacturers in the demanding telecommunications, datacom, and industrial laser markets. Mueller Industries, Inc (MLI) is a global leader in the manufacture and distribution of copper, brass, aluminum, and plastic products for the construction, automotive, industrial and other markets. The Ensign Group, Inc. (ENSG) operates in the healthcare sector, and provides skilled nursing, rehabilitative care services and assisted living services within the United States. And SPS Commerce, Inc. (SPSC), is a cloud-based provider of supply-chain-management solutions.
A good mix overall.
Sector Composition and Weightings
From a sector perspective, given the growth tilt, Industrials make up the largest allocation, followed by Technology and Consumer Discretionary. Notice that the top 3 sectors are close in overall portfolio weighting — a stark contrast from large-cap growth funds, where Tech makes up 50% on average.
This diversified industry exposure allows VIOG to benefit from the growth of several economic sectors, reducing the concentration risk of its portfolio and capitalizing on the growth potential of numerous industries.
Peer Comparison
True, VIOG is an excellent offering in the small-cap growth ETF universe – but it’s hardly the only one. A close competitor is the iShares S&P Small-Cap 600 Growth ETF (IJT) which tracks the same index. When we look at the price ratio of VIOG to IJT, we find that the two funds track each other sideways. There’s no clear differentiation here between the funds that’s noteworthy.
Pros and Cons
The good news is that small-cap growth stocks have historically outperformed their larger counterparts by a large margin over the course of economic expansions (pre-2011), which should lead to large capital appreciation if the cycle has changed. The other good news about VIOG is that it is passively managed and has a very low expense ratio of just 0.15%. This means its tracking error (if any) compared with its underlying index should be relatively low.
But there are real dangers lurking with small-caps, which tend to be more volatile and vulnerable to general market fluctuations. Small-cap growth stocks could be more sensitive to macroeconomic variables such as interest rate movements, inflation dynamics and geopolitical tensions. Although portfolio diversification across sectors mitigates part of these risks, it doesn’t eliminate them.
Conclusion
The low-cost, indexed, passively managed Vanguard S&P Small-Cap 600 Growth ETF is an attractive way for US investors to gain exposure to the promising growth segment of the small-cap area of the US equity market. The fund’s structure provides the diversification of numerous small-cap companies, the transparency of plain-vanilla investment, and the relative efficiency of extremely low fees.
I like Vanguard S&P Small-Cap 600 Growth Index Fund ETF Shares. If the tide has indeed turned for small-caps, this could be one of the funds you want to consider from one of the largest fund issuers in the world in Vanguard.
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