Choosing Between VBR and ISCV: Size, Yield, and Risk in Small-Cap Value ETFs

The small-cap value segment of the equity market has long been a battleground for investors seeking growth and value. For long-term investors, the choice between the Vanguard Small-Cap Value ETF (VBR) and the iShares Morningstar Small-Cap Value ETF (ISCV) hinges on three critical factors: liquidity, cost efficiency, and risk-adjusted returns. These metrics not only shape the practicality of an investment but also its alignment with broader portfolio goals. By dissecting these dimensions, we can better understand which ETF might serve as a more effective building block for a diversified, long-term strategy.

Cost Efficiency: The Subtle Edge of Expense Ratios

Cost efficiency remains a cornerstone of passive investing. VBR and ISCV, both tracking small-cap value indices, offer nearly identical expense ratios: 0.07% for VBR and 0.06% for ISCV according to Vanguard data. While the 0.01% difference may seem trivial, it compounds meaningfully over decades. For instance, a $100,000 investment held for 30 years would incur $2,100 more in fees with VBR compared to ISCV, assuming no market changes. However, this narrow gap must be weighed against other cost-related factors, such as trading liquidity.

Liquidity: The Hidden Cost of Illiquidity

Liquidity, often overlooked in favor of expense ratios, is a critical determinant of an ETF's usability. VBR's average daily trading volume of 320,782.62 shares according to ETF comparison data dwarfs ISCV's 17.75K shares according to Robinhood data, indicating far greater market depth. This disparity translates into tangible differences in transaction costs. VBR's bid-ask spread is 0.05% according to Vanguard data, while ISCV's is 0.20% according to ETF comparison data. For an investor purchasing $10,000 of either ETF, this means an implicit cost of $5 for VBR versus $20 for ISCV. Over time, such spreads can erode returns, particularly for frequent traders or those making large purchases.

Risk-Adjusted Returns: Balancing Volatility and Reward

For long-term investors, risk-adjusted returns are paramount. Both VBR and ISCV exhibit similar Sharpe ratios: 0.49 for VBR according to AlphaCubator analysis and 0.50 for ISCV according to PortfolioLab data. However, the underlying risk profiles diverge. VBR's standard deviation of 19.42% according to LazyPortfolio data is marginally lower than ISCV's 20.35% according to BlackRock data, reflecting slightly less volatility. Max drawdowns further highlight this trend: ISCV's -25.34% according to The Fool coverage versus VBR's -24.19% according to The Fool coverage. While these differences are modest, they underscore ISCV's higher beta (1.22 vs. VBR's 1.12) according to The Fool analysis, suggesting greater sensitivity to market downturns.

Synthesis: The Long-Term Investor's Dilemma

The choice between VBR and ISCV ultimately depends on an investor's priorities. ISCV's marginally lower expense ratio and slightly higher Sharpe ratio may appeal to those prioritizing cost and risk-adjusted returns. However, VBR's superior liquidity-evidenced by its narrower bid-ask spread and higher trading volume-makes it a more practical choice for most investors, particularly those who value ease of execution and lower implicit transaction costs.

For long-term portfolios, where liquidity needs are less frequent but critical when they arise, VBR's robust market depth offers a buffer against slippage. Conversely, ISCV's lower cost could justify its use in tax-advantaged accounts or for investors with a higher risk tolerance. Yet, given the small-cap value sector's inherent volatility, the added liquidity of VBR may provide a more stable foundation for compounding returns over decades.

Conclusion

In the VBR versus ISCV debate, there is no definitive winner. However, for the typical long-term investor, VBR's combination of cost efficiency, liquidity, and moderate risk makes it the more versatile option. ISCV, while slightly cheaper and with a comparable Sharpe ratio, carries higher implicit costs due to its illiquidity and greater volatility. As always, the optimal choice depends on the investor's specific context, but the data tilts toward VBR as the more balanced selection for most portfolios.