The 7 Best Small Cap ETFs (3 From Vanguard) for 2023

Small-cap stocks have delivered greater returns than large-cap stocks historically. Below we'll review some of the best small cap ETFs to capture that risk premium in 2023.

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In a hurry? Here's the list:

1. VB – Vanguard Small-Cap ETF
2. ISCB – iShares Morningstar Small-Cap ETF
3. IJR – iShares Core S&P Small-Cap ETF
4. VIOO – Vanguard S&P Small-Cap 600 ETF
5. SCHA – Schwab U.S. Small-Cap ETF
6. IWM – iShares Russell 2000 ETF
7. VSS – Vanguard FTSE All-World ex-US Small-Cap ETF

Introduction – Why Small Cap Stocks?

Small-cap stocks account for roughly 10% of a total market index fund by weight. Many investors like to overweight or tilt small-cap stocks due to their historical outperformance:

Small-cap stocks tend to have more room to move than large-caps, so they exhibit greater volatility. More importantly, small-caps are more risky than more stable, large-cap stocks. Because of this, investors demand higher returns for this greater risk, so small-cap stocks have historically paid a risk premium, referred to as the Size factor premium. As an added bonus, small caps aren't perfectly correlated with large caps, offering a small diversification benefit.

Including small caps also took the famous 4% Rule up to 4.5% historically.

For those wanting to specifically focus in narrower on small cap value or small cap growth, I made lists for them here and here respectively.

So now that we know why small-caps may deliver market outperformance, let's explore the best small cap ETFs.

The 7 Best Small Cap ETFs

Below are the 7 best small cap ETFs:

VB – Vanguard Small-Cap ETF

The Vanguard Small-Cap ETF (VB) seeks to track the CRSP US Small Cap Index. With over $90 billion in assets, it is the one of the most popular ETFs to capture the small cap market segment. The fund has over 1,300 holdings and an expense ratio of 0.05%.

ISCB – iShares Morningstar Small-Cap ETF

iShares recently slashed fees on some of their funds. ISCB is one. It now only costs 0.04%, 1 basis point less than Vanguard's VB above. ISCB also conveniently captures smaller stocks, whereas VB above has some mid-caps. The fund seeks to track the Morningstar US Small-Cap Extended Index and has about $230 million in assets.

IJR – iShares Core S&P Small-Cap ETF

The iShares Core S&P Small-Cap ETF (IJR), as the name suggests, seeks to track the S&P Small Cap 600 Index. The fund has over $40 billion in assets, 600 holdings, and an expense ratio of 0.06%.

This fund has the most loading on the Size factor of all the funds on this list, meaning it captures the smallest stocks. It also provides some convenient exposure to Profitability through the S&P earnings screen. IJR would my choice out of this list for a U.S. small cap blend fund.

VIOO – Vanguard S&P Small-Cap 600 ETF

VIOO from Vanguard tracks the same index as IJR above (the S&P Small Cap 600 Index), so it provides excellent exposure to small stocks, albeit at a slightly higher price of 0.10%. That said, if for some reason you prefer Vanguard funds, this would be my choice. This fund has about $1.75 billion in assets.

SCHA – Schwab U.S. Small-Cap ETF

The Schwab U.S. Small-Cap ETF (SCHA) seeks to track the Dow Jones U.S. Small-Cap Total Stock Market Total Return Index. This fund is another great, low-fee option for investing broadly in small-cap stocks. This ETF ties for the cheapest on the list with an expense ratio of 0.04%.

IWM – iShares Russell 2000 ETF

Investors seeking broader exposure to the small-cap segment may want to target the Russell 2000 Index with the iShares Russell 2000 ETF. The fund has over $40 billion in assets and has an expense ratio of 0.19%.

VSS – Vanguard FTSE All-World ex-US Small-Cap ETF

Ready to target international (ex-US) small-cap stocks? The Vanguard FTSE All-World ex-US Small-Cap ETF (VSS) tracks the MSCI ACWI ex USA Small Cap Index at a low fee of only 0.11%.

Where to Buy These Small Cap ETFs

All these small cap ETFs should be available at any major broker. My choice is M1 Finance. M1 has zero trade commissions and zero account fees, and offers fractional shares, dynamic rebalancing, and a sleek, user-friendly interface and mobile app. I wrote a comprehensive review of M1 Finance here.

Canadians can find the above ETFs on Questrade or Interactive Brokers. Investors outside North America can use eToro or possibly Interactive Brokers.

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Disclosures:  None.

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Disclaimer:  While I love diving into investing-related data and playing around with backtests, this is not financial advice, investing advice, or tax advice. The information on this website is for informational, educational, and entertainment purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. I always attempt to ensure the accuracy of information presented but that accuracy cannot be guaranteed. Do your own due diligence. All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future results. Opinions are my own and do not represent those of other parties mentioned. Read my lengthier disclaimer here.