Vanguard Has 17 Small And Mid-Cap ETFs. Which Are Best Right Now? (2024)

Granted there are a myriad number of small and mid-cap ETFs and mutual funds available from a large number of investment companies, how can an investor decide which ones are best right now?

Let me begin by narrowing down my recommendations to just Vanguard funds. Here are my reasons. Vanguard is one of the world's largest asset managers and is a favorite of most investors who value low cost and a large line up of available investment funds through their brokerage. They also have some of the best money market funds that one can retreat to if you want to try to avoid downdrafts in your chosen fund(s).

Note though that since other companies also have a lineup of low-cost ETFs tied to an index, there may not be much difference between Vanguard results and those of other companies.

Although some people have found reasons to criticize Vanguard in recent years, especially for its customer service, if you are looking mainly at performance and don't need much help with your investments or account(s), Vanguard should continue to be a great place to be. I personally have almost never gone wrong with Vanguard, except for maybe choosing the wrong asset class at a given juncture, which hurt investors in other fund companies as well.

Where To Begin

In deciding where to begin given the 17 mid- and small-cap unmanaged ETFs (see below for the list), first let's look at 5-year annualized performances of the seven blend funds, that is, funds that are mixture of growth and value stocks. (You can also find identical funds, in many cases, within Vanguard mutual funds lineup. For example, Vanguard Mid-Cap ETF (VO) has the identical portfolio to the mutual fund Vanguard Mid Cap Index Admiral (VIMAX), but each come with slightly different investment rules. Many investors these days have come to prefer ETFs over mutual funds.) (Note: All performance figures shown are annualized and occurred between Mar. 1, 2019 and Feb. 29, 2024.)

All the seven funds have extremely high correlations with each other; that is, greater than .90, except for Vanguard FTSE All-World ex-US Small-Cap Index ETF (VSS), which has a somewhat lower correlation with the others; that is, in the .80s. Correlation here measures whether two funds tend to go up and down in unison; the higher the number, the more they do.

This should not be too surprising since VSS is the only international stock fund in the group. International stocks have lagged far behind US stocks over the last five years, lowering the correlation. So, let's eliminate VSS from the analyses below.

This does not mean that no matter which fund you might have chosen, you would have done equally as well. Vanguard Mid-Cap ETF (VO) did the best at 10.30% annualized along with Vanguard S&P Mid-Cap 400 (IVOO) at 10.25%; Vanguard S&P Small-Cap 600 (VIOO) did the worst (7.68 %).

Now let's look at the 10 Growth and Value ETFs. While the Growth funds still correlate highly with each other, and Value funds correlate highly with other Value funds, we see lower correlations between Growth and Value funds. This would indicate that if one of your aims is to diversify your holdings, there may be an advantage to having at least one of these Growth ETFs and at least one Value ETF, or just a Blend fund. The data shows that Vanguard Mid-Cap Growth (VOT) would have been the best Growth performer at 11.21% while Vanguard Russell 2000 Growth (VTWG) was the worst Growth performer (6.52%). The best Value performer was Vanguard S&P Mid-Cap 400 Value at 9.16% The Russell 2000 Value (VTWV) was the worst Value performer at 6.57%.

Why am I placing a lot of emphasis on correlation between funds? This is because since high correlations between funds means they tend to rise and fall together, having highly correlated funds will likely not protect you from a possible bear market. In fact, having lower correlations may suggest if one goes down, the other fund may not go down as much. On the other hand, if the overall stock market is doing well, such as now, a lower correlation would likely mean that one fund may not go up as much the other. And , of course, owning two highly correlated funds means that you may be getting nearly the same results from two funds, so why not only own one.

You may argue that not a single one of these small and mid-cap funds beat the performance of Vanguard Total Stock Market ETF (VTI) at 13.82% over the past five years, so why should I own any of them. But this should not have been your purpose in owning both large and smaller cap funds. By definition, a diversified portfolio will include a number of fund categories, both big and small, not only to play it safe, but also to make sure you capture a fund category that happens to be one of the best performers that year. I can guarantee you that large cap funds will not always the best performing category - for proof, see here.

Putting It All Together

So, given this data, which of these 16 funds would I recommend right now and why?

We first need to choose between the Growth, Blend, and Value fund sub-categories.

The category averages for annualized returns are: the five Growth funds at 8.8%; 6 Blend funds at 8.9%, and Value funds at 8.2%. Given the close results of the three categories, for me, the best choice at this point would be Blend funds which include both Growth and Value. Therefore, all things considered, I would select VO or IVOO, or both.

Next, we need to choose between 7 midcaps and 9 small caps. Here, over the last five years, midcaps have had a clear advantage (10.0 vs 7.58%). Of the midcaps, the best performer was VOT again at 11.21%.!

You may criticize the above analyses because I am relying totally on past performance to pick these choices. We all know that past performance is not necessarily indicative of future performance. Instead, you may want to consider the funds with the lowest 5-year performance because they may be the most likely to be undervalued or to spring back over the next year or two ahead. Or, you may want to consider the fund with the lowest correlation with its comparison group as having the best prospects; this would likely apply if you considered some of the remaining funds as overvalued. But since most investors likely don't think that way, I will stick to my above recommendations.

Also consider that some of the differences in 5-year performance, especially between funds in the same category, are quite small and could be a result of mere chance.

Finally, the above analysis only compares unmanaged index funds. In my Feb. article, I showed that four actively managed Vanguard ETFs consistently beat some of the above-mentioned unmanaged Vanguard best performers. Here are the updated 5-year results for these funds through Feb. 29, 2024:

Vanguard U.S. Momentum Factor ETF (VFMO) 14.30%

Vanguard U.S. Quality Factor ETF (VFQY) 12.10%

Vanguard U.S. Multifactor ETF (VFMF) 11.62%

Vanguard U.S. Value Factor ETF (VFVA) 11.04%

So, if you are willing to invest in managed ETFs, any of these funds may represent your best choice(s), especially VFMO for Growth and VFVA for Value.

To Conclude

For relatively short-term outperformance, that is, over the next year or two, the above-mentioned strong performers are likely to continue their positive momentum. But, in addition, let's take into account the two categories of funds that may be highly worthy of consideration due to their huge underperformance over the last ten years. While VOT returned 10.11%, VSS returned only 3.33% and VTWV returned only 6.32%. Thus, from a standpoint of being likely overdue for a springback, one might want to take a chance on one or both of them, but patience may be required to see a potentially bigger reward than the index-based funds.

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The 17 are index-based funds are:

Extended Market ETF (VXF), FTSE All-World ex-US Small-Cap ETF (VSS), Mid-Cap ETF (VO), Mid-Cap Growth ETF (VOT), Mid-Cap Value ETF (VOE), Russell 2000 ETF (VTWO), Russell 2000 Growth ETF (VTWG), Russell 2000 Value ETF (VTWV), S&P Mid-Cap 400 ETF (IVOO), S&P Mid-Cap 400 Growth ETF (IVOG), S&P Mid-Cap 400 Value ETF (IVOV), S&P Small-Cap 600 Growth ETF (VIOO), S&P Small-Cap 600 Growth ETF (VIOG), S&P Small-Cap 600 Value ETF (VIOV), Small-Cap ETF (VB), Small-Cap Growth ETF (VBK), Small-Cap Value ETF (VBR)

Tom Madell