VIOO: A Simple Low-Cost ETF for Broad Exposure to Small Stocks (NYSEARCA:VIOO)

Funding thesis

S&P Small-Cap 600 ETF (NYSEARCA: Mirrors) is an easy resolution for traders looking for broad publicity to market-cap-weighted US small-cap shares. Competing straight with IJR and SPSMVIOO’s expense ratio of 0.10% is the very best, however the variations are small, and any of the three is price contemplating. Right this moment, I will be evaluating VIOO towards the Vanguard Small-Cap ETF (VB), the next high quality fund that’s extra appropriate for progress traders than worth. I will additionally introduce you to the iShares US Small-Cap Fairness Issue ETF (SMLF), a barely costlier choice that looks like a superb compromise. I look ahead to introducing you to the statistics I’ve collected and I hope you get pleasure from studying them.

Overview of VIOO

Technique dialogue

VIOO tracks the S&P Small-Cap 600 Index, a subdivision of the S&P Composite 1500 Index, which incorporates 600 U.S. firms primarily based on market capitalization. The Index makes use of an earnings display for all members, a characteristic that the Russell 2000 Index doesn’t have and which researchers at S&P Dow Jones Indices attribute to its superior long-term efficiency. This text notes how the S&P Small-Cap 600 outperformed 17 of the 25 years between 1994 and 2019. Because the index additionally outperformed in 2021 and 2022 and lagged in 2020 and 2023, the typical worth of the index is a formidable 66% (19/29 years). ).

The underside line is that VIOO, IJR and SPSM shareholders are heading in the right direction. High quality issues, and the S&P Small-600 does it a lot better than the Russell 2000, with a weighted common web return 2.32% increased (9.18% vs. 6.86%) and a free money move margin of two.95 % is best (7.44% vs. 4.49). %).

Efficiency evaluation

The next desk reveals the periodic whole returns for chosen small-cap blended ETFs with a historical past of at the least seven years. These returns as of April 30, 2024 present that VIOO ranks extremely with a 10-year whole return of 124.36%, with VB and IJR barely forward. SPSM’s decrease yield of 116.28% displays how the ETF used to trace the SSGA Small Cap Index and the Russell 2000 Index, however you may notice that the returns lately have been barely higher than IJR and VIOO, reflecting a decrease expense ratio.

Over the previous 5 years, VIOO’s whole return of 40.48% ranked 24/36, so it has had some struggles lately. Of the 23 that surpassed the VIOO, 17 are listed within the desk above, that means the opposite six are comparatively new. They embody:

1. Constancy Small-Mid Issue ETF (FSMD): 53.46%
2. iShares ESG MSCI USA Small-Cap ETF (ESML): 46.17%
3. iShares Russell 2500 ETF (SMMD): 44.81%
4. Goldman Sachs ActiveBeta US Small Cap Fairness ETF (GSSC): 43.09%
5. Franklin LibertyQ US Small Cap ETF (FLQS): 42.58%
6. John Hancock Multifactor Small Cap ETF (JHSC): 42.10%

On the very least, traders appear to have loads of choices. As I discussed earlier than, I selected SMLF as my comparator, however should you’re concerned about any of those options, I hope you may get again to us within the feedback part afterwards.

VIOO evaluation

Sector publicity and high 10 holdings

The next desk reveals the VIOO sectors together with the VB and SMLF. The highlights are principally related. Nevertheless, VB allocates extra funds to industrials, whereas VIOO dominates financials.

What’s not apparent is how VIOO assigns considerably much less weight to “larger” small-cap shares, as evidenced by its weighted common market cap of $3.06 billion. VB and SMLF have $8.52 billion and $7.07 billion respectively, so you could run into some overlap should you already personal ETFs within the mid-cap area. For instance, VIOO has 0% of the Vanguard S&P Mid-Cap 400 ETF (IVOU), however VB and SMLF overlap by 45% and 40%, respectively. Given the extensive variation within the composition of small-cap ETFs, evaluating how properly an ETF matches into your portfolio is important.

VIOO’s high 10 holdings as of April 30, 2024 are listed beneath. They embody ATI ( ATI ), Ensign Group ( ENSG ) and SPS Commerce ( SPSC ), and make up 5.54% of the portfolio.

Weighting ratios have been little modified in Might, with Fabrinet (FN) now has the very best retention price of 0.75%. Shares are up 43.71% previously month after reporting report gross sales and earnings, and Stephen Kress, who’s headhunting Quant Methods Alpha, additionally highlighted this final week. Nevertheless, the small-cap market continues to be pretty well-diversified, with no single inventory dominating the fund. This allocation contrasts with large-caps, the place Magnificent Seven shares make up greater than 25% of many ETFs.

VIOO fundamentals by sub-branches

Since an evaluation of VIOO’s largest holdings would supply little worth, I’ve as an alternative compiled a desk of chosen fundamentals for its 25 largest subsectors. This evaluation covers 53.68% of the fund, and VIOO has some publicity to 122/160 GICS subsectors, making it probably the most diversified small-cap funds available on the market.

Listed below are three observations to contemplate:

1. VIOO is properly diversified, however so are VB and SMLF, with 50.20% and 54.57% allotted to their high 25 sub-sectors. For these , the Invesco S&P SmallCap Momentum ETF (XSMO), one of the best performer during the last 10 years, is among the worst diversified ETFs within the class. So I strive to not equate higher diversification with higher returns. As a substitute, I see it as a danger administration instrument. The extra diversified an ETF is, the extra possible it’s to provide near-average returns in any given yr.

2. Volatility is one characteristic that small-cap traders ought to embrace. VIOO’s five-year beta is 1.26 and the class common is 1.19. There are some exceptions, such because the iShares MSCI Min Vol USA Small-Cap ETF (SMMV), however for essentially the most half volatility and dimension are inversely correlated. VIOO’s annualized normal deviation since its inception is nineteen.10%, in comparison with 17.38% and 14.39% for IVOO and the Vanguard S&P 500 ETF (FLIGHT).

3. VIOO trades at 19.53x ahead earnings utilizing the straightforward weighted common technique and 15.38x utilizing the harmonic weighted common technique you may discover on websites like Morningstar. Both approach, it is buying and selling at a reduction to VB and SMLF, which is smart as a result of it gives decrease estimated progress in gross sales and earnings per share. Trying on the desk, regional banks make up 8.55% of the portfolio, which is near the class common of 8.26%. SMLF is decrease at 6.88% and as you’ll be able to think about this decrease publicity contributes to the next progress profile. Earnings progress expectations for subsequent yr are successfully unchanged, so I believe limiting publicity to this business is a good suggestion regardless of its enticing worth traits.

VIOO Ranking: Small Combine Class

To assist put issues into perspective, I’ve ranked VIOO, VB, and SMLF on the ten elements that contribute to ETF success. As proven, VIOO ranks moderately properly by way of property below administration and costs. Nevertheless, there are some basic trade-offs that I need to spotlight.

1. The ranking is in comparison with 50 ETFs within the small-cap class. As you’ll be able to see, VIOO ranks common in danger, progress, high quality and sentiment and above common in worth and momentum. This “all climate” method could be the purpose why VIOO performs so persistently. As an example, right here is VIOO’s annual return for 2014-2023.

• 2014: 5.40% (#10/19)
• 2015: -2.15% (#6/20)
• 2016: 26.77% (#7/23)
• 2017: 13.17% (#15/27)
• 2018: -8.63% (#10/34)
• 2019: 22.67% (#23/35)
• 2020: 11.47% (#22/37)
• 2021: 26.74% (#17/42)
• 2022: -16.27% (#26/46)
• 2023: 16.18% (#34/48)

Word that VIOO didn’t rank within the backside quartile in any yr. This was not the case for VB, which ranked 20/23 in 2016 and 36/42 in 2021, nor for SMLF, which ranked 28/35 in 2019 and 29/37 in 2020.

2. Whereas I contemplate VIOO’s constant efficiency to be a optimistic, its low rankings for progress and high quality are most likely why it has fallen behind lately. The multifactor method of SMLF higher emphasizes the standard issue how does VB because it contains extra shares with increased market capitalization. As a reminder, I like to recommend contemplating fund overlaps, however VB and SMLF ought to do higher in a “flight to high quality” market.

Funding advice

VIOO is a stable small-cap ETF with an affordable expense ratio of 0.10%, good diversification, and a median or higher ranking on key fundamentals reminiscent of danger, progress, worth, momentum, high quality and sentiment. Due to this all-weather method, VIOO has averted bottom-quartile efficiency within the small-cap combine class over the previous decade, indicating a comparatively secure long-term play. IJR and SPSM observe the identical S&P SmallCap 600 index, and since they’ve decrease charges, I want them over VIOO.

Nevertheless, traders might discover VB or SMLF extra acceptable if they need larger publicity to progress and high quality elements whereas sustaining enough diversification. I imagine these are pretty much as good, if not higher, options, which is why I’ve given VIOO a impartial “maintain” ranking. Thanks for studying and I hope to reply any questions you’ll have within the feedback beneath.