Investment management firm Vanguard Group has over 90 exchange-traded funds (ETFs), many of which offer low-cost fees. The worst-performing in 2025 is the Vanguard Small-Cap 600 Value ETF (VIOV +0.34%) -- which is down just over 12% year to date at the time of this writing.
Here are three reasons why the beaten-down ETF may be worth buying now and one factor that may make it worth passing on.
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1. A way to invest in new companies rather than adding to existing positions
The fund includes 460 holdings with a median market capitalization of just $2.3 billion. This is a far different approach than funds that concentrate on just a handful of holdings.
Even the Vanguard S&P 500 ETF (VOO 0.27%), which mirrors the performance of the S&P 500, has over 35% of its holdings in just 10 companies. No single company in the Vanguard Small-Cap 600 Value ETF has more than a 1.1% weighting.
Top holdings include semiconductor company Qorvo, medical device company Teleflex, auto parts company BorgWarner, mortgage lender Mr. Cooper Group, and insurance company Jackson Financial, among others. Many of these companies are hardly household names, but their hidden-gem nature could appeal to value investors looking for exposure to companies they don't already own.
2. Sector diversification relative to the S&P 500
One of the most appealing attributes of the Vanguard Small-Cap 600 Value ETF is that it is spread out across stock market sectors. And the sectors it concentrates on tend to be more value-oriented. Here's a look at how its sector concentration stacks up against the Vanguard S&P 500 ETF.
|
Sector |
Vanguard Small-Cap 600 Value ETF |
Vanguard S&P 500 ETF |
|---|---|---|
|
Financials |
23.9% |
14.4% |
|
Industrials |
15.5% |
8.5% |
|
Consumer discretionary |
13.8% |
10.4% |
|
Information technology |
10% |
30.4% |
|
Healthcare |
8.2% |
10.8% |
|
Real estate |
7.5% |
2.2% |
|
Materials |
6.4% |
2% |
|
Utilities |
4.1% |
2.6% |
|
Consumer staples |
3.9% |
6.2% |
|
Energy |
3.6% |
3.2% |
|
Communication services |
3.1% |
9.3% |
Data source: Vanguard.
The composition of the Vanguard Small-Cap 600 Value ETF is nothing like the S&P 500, which may interest folks looking for more exposure to value-focused and cyclical sectors like financials and industrials and less exposure to growth-focused sectors like tech.
3. A dirt cheap valuation and a good yield
What stands out the most about the Vanguard Small-Cap 600 Value ETF compared to the Vanguard S&P 500 ETF is valuation. The small-cap value-focused ETF sports a mere 13.7 price-to-earnings (P/E) ratio and a 2.2% dividend yield compared to a 25.9 P/E ratio and 1.4% yield for the Vanguard S&P 500 ETF. Granted, small-cap stocks arguably deserve to trade at a discount to their large-cap peers because large-cap companies have numerous advantages over smaller companies.
For example, Microsoft benefits from its size and exposure to multiple end markets across hardware, software, gaming, cloud computing, artificial intelligence, and more. These advantages give Microsoft network effects, meaning more customers who buy into Microsoft's software suite, use tools like GitHub, or join Microsoft Cloud, benefit Microsoft by making these products and services widespread.
Network effects support pricing power and lead to margin expansion, which allows Microsoft to grow profits faster than sales and support a growing stock buyback program and dividend. This snowball effect is powerful when compounded over a multiyear time frame. Many small-cap companies simply don't have these advantages and must work much harder to compound in value.
Microsoft is the largest company by market cap in the world, so it is a key holding in the S&P 500, Nasdaq Composite, Dow Jones Industrial Average, and many growth-focused funds. It's the kind of stock that can have a high weighting in an ETF, and therefore, play into an investment thesis. But the Vanguard Small-Cap 600 Value ETF contains no such companies.
A potentially useful tool for value investors
The Vanguard Small-Cap 600 Value ETF could be a useful tool for investors looking to put new capital to work in the market and generate passive income from stocks they don't already own. But there is a glaring disadvantage of the fund compared to other Vanguard ETFs like the S&P 500 ETF, Vanguard Growth ETF, Vanguard Value ETF, or even the Vanguard Dividend Appreciation ETF. The small-cap value ETF lacks leadership -- making it difficult to build an investment thesis around companies.
With investing, it's important to know what you own and why you own it -- and that applies to individual stocks and ETFs. Even though the S&P 500 ETF contains over 500 components, it's still possible to get a decent grasp of the companies that drive the fund by looking at the top 20 or so holdings. But that's not the case with the Vanguard Small-Cap 600 Value ETF because the fund is ultra-diversified.
Again, this structure may appeal to investors looking for general exposure to small-cap value stocks in key sectors like industrials and financials -- but it may not be the best choice for folks looking to build a portfolio around companies they are confident can grow over time.
