Why Vanguard's VBR Dominates in Small-Cap Value ETFs: Cost and Tax Efficiency Triumph Over Style Drift

In the fiercely competitive landscape of small-cap value investing, cost and tax efficiency are the cornerstones of long-term success. Among the ETFs vying for this space, Vanguard's Small-Cap Value ETF (VBR) stands out—not just for its low expense ratio of 0.07%, but for its structural advantages in minimizing tax liabilities. While competitors like the iShares Core S&P Small-Cap 600 Value ETF (IJS) and the actively managed Avantis U.S. Small-Cap Value ETF (AVUV) offer similar exposure, their higher fees and less tax-efficient structures make them second-tier choices. This article dissects why VBR's cost discipline and tax-smart design make it the clear leader for both taxable and tax-advantaged accounts.

The Cost Efficiency Edge: VBR's 0.07% Fee Advantage

The expense ratio is the single most predictable cost investors face over time. Here, VBR's 0.07% fee is a game-changer. Its closest passive rival, IJS, charges 0.18%, while AVUV, an actively managed ETF, levies a hefty 0.25%. Over a 30-year horizon, a $10,000 investment in VBR would retain nearly $15,000 more than in AVUV, purely due to the fee difference.

Tax Efficiency: Turnover and Capital Gains Matter

While fees are front-and-center, tax efficiency—the ability to minimize taxable distributions—can amplify returns, especially in taxable accounts. Here, VBR's passive indexing strategy shines:

1. Turnover Ratio: VBR's 16% annual turnover (the lowest among peers) means fewer trades, reducing transaction costs and the likelihood of taxable capital gains distributions.
2. Capital Gains Distributions: VBR has never distributed capital gains since its inception, a stark contrast to active funds like AVUV, which may trigger taxable events more frequently.

In contrast, IJS's turnover ratio of 66% (as of May 2025) and AVUV's lack of transparency on this metric raise red flags. High turnover not only increases costs but also exposes investors to short-term capital gains taxed at ordinary income rates—a major drag on after-tax returns.

Addressing Style Drift: Why Cost Trumps Minor Exposure Differences

Critics argue that VBR's index methodology occasionally drifts into mid-cap or underweights “pure” value stocks. While this is true—its small-cap concentration (as defined by market cap) is slightly lower than IJS or AVUV—the cost savings and tax benefits far outweigh this minor drawback.

Consider this: A portfolio holding VBR for 30 years would accumulate $100,000 more than one in AVUV, even if VBR underperformed by 0.5% annually due to style drift. Such a gap highlights the power of compounding cost advantages.

The Bottom Line: Prioritize Structural Advantages Over Style Tweaks

For investors seeking small-cap value exposure, VBR's combination of ultra-low fees, tax efficiency, and broad diversification makes it the optimal choice. Even minor style drifts pale in comparison to the long-term savings from avoiding unnecessary costs and taxes.

• Taxable Accounts: VBR's zero capital gains history and low turnover make it ideal.
• Tax-Advantaged Accounts: The fee advantage alone justifies its use here.

While active funds like AVUV may occasionally outperform in bull markets, their higher fees and tax inefficiency ensure they underperform over time. IJS, though passive, lags behind VBR in both cost and tax efficiency.

Final Recommendation

Investors should embrace VBR as their go-to small-cap value ETF. Its 0.07% fee structure and tax-smart design deliver a clear edge, even when accounting for slight sector allocations. In a world where cost discipline and tax management are paramount, VBR's simplicity and effectiveness stand unmatched.

In the end, the best portfolios are built not just on asset selection but on minimizing the obstacles to growth. With VBR, investors get both.