VIOO - VIOO: Small-Caps Hold The Key

2024-01-14 03:40:04 ET

Summary

• Small-caps need to make new highs for confirmation of a bull market, and the Vanguard S&P Small-Cap 600 Index Fund ETF is a way to play that.
• Investing in small-cap stocks offers advantages such as long-term outperformance, agility, innovation, undervalued opportunities, and diversification.
• VIOO is a passively managed ETF that replicates the performance of the S&P SmallCap 600 Index, with diversified holdings and a low expense ratio.

Those who follow me on social media know I continuously say "small-caps hold the key" because until small-caps definitively make new nominal highs, we won't know if we actually are in a bull market or not. Let's say we are and small-caps do lead the next wave higher for equities this year. If that's the case, the Vanguard S&P Small-Cap 600 Index Fund ETF ( VIOO ) is one way to play that. Small-cap stocks represent an essential segment of the stock market with significant importance for both monitoring and investing. These stocks, typically defined by a market capitalization between $300 million to $2 billion, are shares of relatively smaller companies that possess the potential for substantial growth and returns.

Investing in small-cap stocks offers several advantages. Firstly, they frequently outperform their larger counterparts over the long term, providing an excellent opportunity for investors to boost their portfolio's growth. Secondly, these companies are often in the early stages of development and can adapt quickly to market changes, making them agile and innovative leaders in their respective industries. Furthermore, small-cap stocks are less scrutinized by large institutional investors, which can lead to undervalued investment opportunities for individual investors willing to conduct thorough research. Lastly, including small-cap stocks in an investment portfolio adds diversification, reducing overall risk and smoothing out volatility from larger, more established companies. However, it is worth noting that small-cap investments also come with higher volatility and risk, necessitating careful analysis and consideration.

VIOO is a passively managed exchange-traded fund that aims to replicate the performance of the S&P SmallCap 600 Index. The index represents the small-cap segment of the U.S. equity market. The fund, sponsored by Vanguard, has amassed assets over $4 billion, making it one of the more substantial ETFs in its category.

The Fund's Holdings: A Closer Look

When we look at the holdings of VIOO, we see that no single position makes up more than 0.73% of the portfolio. This is as diversified as it gets in an ETF wrapper.

Sector Composition and Weightings

VIOO's asset allocation leans heavily towards Financials, Consumer Discretionary, and Industrial. This has a natural value tilt because of the Financials and Industrials exposure alone, and the discretionary side also means that small-caps are very tied to domestic economic growth expectations.

Peer Comparison: VIOO vs. Similar ETFs

Several ETFs track similar indices to VIOO. Among these are the iShares Russell 2000 ETF ( IWM ) and the iShares Core S&P Small-Cap ETF ( IJR ). Although IWM and IJR have larger assets under management, VIOO stands out for its lower expense ratio. VIOO's annual operating expenses stand at 0.10%, making it one of the least expensive funds in its category.

Pros and Cons of Investing in VIOO

Like all investment vehicles, VIOO has its advantages and potential drawbacks.

Pros

• Lower Expense Ratio: VIOO boasts a low expense ratio, which can significantly increase net returns over time.

• Diversification: Thanks to its wide sector representation, VIOO offers investors a diversified portfolio.

• Potential for High Returns: Historical data suggests that small-cap stocks often outperform large-cap stocks over the long term.

Cons

• Higher Volatility: Small-cap stocks are often more volatile than their large-cap counterparts, potentially leading to larger short-term losses.

• Recession Vulnerability: Small-cap stocks are typically more sensitive to economic downturns, which can negatively impact the fund's performance.

The Verdict: To Invest or Not to Invest?

VIOO presents an attractive investment opportunity for those seeking exposure to small-cap U.S. stocks. Its low expense ratio, sector diversification, and potential for high returns make it a compelling choice. However, the increased volatility and sensitivity to economic downturns should be considered. If bullish on equities, I think being bullish on small-caps make sense so long as zombie companies don't go bankrupt en masse in the average, in which case we have bigger things to worry about than equities.

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