VBR vs. ISCV: Evaluating Cost, Diversification, and Risk in Small-Cap Value ETFs

For long-term investors seeking exposure to small-cap value equities, the choice between the Vanguard Small-Cap Value ETF (VBR) and the iShares Morningstar Small-Cap Value ETF (ISCV) hinges on a nuanced balance of cost efficiency, sector diversification, liquidity, and risk-adjusted returns. Both funds aim to capture the growth potential of undervalued small-cap stocks, but their structural differences-rooted in indexing methodologies, expense ratios, and portfolio allocations-could tilt the decision for investors prioritizing specific strategic goals.

Cost Efficiency: A Marginal Edge for ISCV

Expense ratios remain a critical factor in long-term wealth accumulation, as even minor differences in fees compound over decades. As of 2025, VBR carries an expense ratio of 0.07%, while ISCV offers a slightly lower cost at 0.06%. This 0.01% disparity may seem negligible, but for a $100,000 investment held for 30 years, it could result in a $1,500 difference in returns, assuming a 7% annualized return. While both funds are competitively priced relative to their peers, ISCV's edge in cost efficiency could appeal to investors prioritizing fee minimization.

Sector Allocation: Diversification vs. Concentration

Sector exposure shapes an ETF's risk profile and alignment with macroeconomic trends. VBR's portfolio is more evenly distributed, with its largest allocations in industrials (19%), financial services (18%), and consumer cyclicals (13%). In contrast, ISCV tilts heavily toward financials (24.65%), followed by consumer discretionary (13.52%) and industrials (13%) according to its product page. This concentration in financials could amplify ISCV's sensitivity to interest rate cycles or regulatory shifts in the banking sector. Conversely, VBR's broader diversification across industrials and real estate (8.3%) may offer more balanced risk exposure according to Validea's analysis. Investors with a macroeconomic outlook favoring financials might lean toward ISCV, while those seeking sector neutrality could prefer VBR.

Liquidity and Volatility: VBR's Structural Advantages

Liquidity and volatility metrics reveal stark contrasts between the two funds. VBR, with $60 billion in assets under management (AUM), dwarfs ISCV's $575 million, making it significantly more liquid and less prone to price slippage. This liquidity advantage is critical for investors requiring ease of trading or large-scale portfolio adjustments.

On the volatility front, ISCV exhibits a higher beta (1.22) compared to VBR (1.12), indicating greater sensitivity to market downturns. Historical data also shows ISCV's maximum drawdown (-25.34%) outpacing VBR's (-24.19%) over the past five years. While both funds hold small-cap value stocks-typically more volatile than large-cap counterparts-ISCV's broader diversification (nearly 1,100 holdings vs. VBR's 840) has not fully offset its higher risk profile according to recent analysis. For risk-averse investors, VBR's lower volatility and superior liquidity may justify its marginally higher expense ratio.

Growth Trajectories: ISCV's Recent Outperformance

Performance metrics highlight ISCV's recent edge in returns. As of December 2025, ISCV delivered a five-year annualized return of 11.5%, outperforming VBR's 7.98%. This gap, though modest, suggests ISCV's Morningstar index methodology-focusing on broad value characteristics-may have captured stronger growth in undervalued small-cap stocks. However, past performance is not a guarantee of future results, and investors must weigh this against ISCV's higher volatility.

Strategic Implications for Long-Term Investors

The optimal choice between VBR and ISCV depends on an investor's risk tolerance, liquidity needs, and sector preferences. For those prioritizing cost efficiency and recent performance, ISCV's 0.06% expense ratio and 11.5% five-year return make it an attractive option. However, VBR's larger size, lower volatility, and more balanced sector exposure could better suit investors seeking stability and ease of trading.

In a diversified portfolio, both ETFs can play complementary roles. For example, an investor might allocate to ISCV for its cost advantage and financial-sector exposure while using VBR to hedge against sector-specific risks. Ultimately, the decision should align with a broader strategic framework that balances growth potential with risk management.