Best Long-Term Performance U.S. Small Cap Blend ETFs

• One of the best performing asset classes over the last 46 years has been the U.S. Small Cap Blend Equity asset class
• IJR is one of the two oldest ETFs available in this asset class and has outperformed the S&P 500 by a whopping 4.53% CAGR (compounded annual growth rate) over the last 18 years
• There are 11 ETFs available in this asset class that have existed for 10 years or longer
• 8 of these 11 ETFs have outperformed the S&P 500 over the last 10 years

US Small Cap Blend vs US Large Cap Blend: January 1972 thru December 2017

Source: Portfolio Visualizer

In the chart above I have used Portfolio Visualizer to compare the US Small Cap Blend asset class to the US Large Cap Blend asset class. In this comparison you can readily see the outperformance of the US Small Cap Blend asset class. The small caps have outperformed the large caps by 1.59% CAGR over the last 46 years. In the example given, $10,000 invested in 1972 in a small cap blend fund would have netted over $850,000 more than if it were invested in a large cap blend fund. Based on this chart alone, I believe this is an asset worth considering investing in, but, let’s look a little deeper.

IJR vs S&P 500: June 2000 thru January 2018

Source: Portfolio Visualizer

On May 22nd, 2000, Blackrock introduce the iShares Core S&P Small-Cap ETF (IJR). From June 2000 thru January 2018 IJR has outperformed the S&P 500 by 4.53% CAGR. A $10,000 investment in IJR in June of 2000 would have produced over $30,000 more than an S&P 500 index fund. This is simply astounding; but are there any other small cap blend funds that do as well as or better than IJR?

Source: Scottrade

As of February 2018, there were 11 ETFs available that are 10 years old or older in the Morningstar Category of U.S. Small Cap Blend. Eight of those funds have outperformed the S&P 500 over the last 10-year period. I have compared all 11 head-to-head utilizing tools available at Portfolio Visualizer. The 4 that came out on top are the 4 that I will use to compare further.

SLY vs EES vs PRFZ vs S&P 500: March 2007 thru January 2018

Source: Portfolio Visualizer

SLY vs EES vs PRFZ vs IJR: March 2007 thru January 2018

Source: Portfolio Visualizer

As you can see in the two charts above, there is very little difference in performance in the four best performing ETFs in this asset class. In fact, there is only 0.34% CAGR difference between #1 and #4 over an 11-year time-frame. That is minute. With such a small difference, it may be best to decide which one to invest in based on the expense ratios or whether you can buy them commission-free at your brokerage house. We have decided to invest in the 2nd best ETF in this asset class, the WisdomTree U.S. SmallCap Earnings Fund (EES), because it trades commission-free at our brokerage house.

Product details of the top four performing US Small Cap Blend ETFs (Source: fund family websites):

SLY – SPDR® S&P® 600 Small Cap ETF – The SPDR® S&P® 600 Small Cap ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P® SmallCap 600 IndexSM (the “Index”). The selection universe for the S&P SmallCap 600 Index includes all U.S. common equities with market capitalizations generally between $400 million and $1.8 billion at the time of inclusion. The Index is float-adjusted and market capitalization weighted
EES – WisdomTree U.S. SmallCap Earnings Fund – WisdomTree U.S. SmallCap Earnings Fund seeks to track the investment results of earnings-generating small-cap companies in the U.S. equity market. Gain broad U.S. small cap equity exposure to profitable companies. Use to complement or replace small cap active and passive strategies with the potential for more favorable valuations.
PRFZ – PowerShares FTSE RAFI US 1500 Small-Mid Portfolio – The PowerShares FTSE RAFI US 1500 Small-Mid Portfolio is based on the FTSE RAFI US 1500 Small-Mid Index. The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Index. The Index is designed to track the performance of the equity securities of small and medium-sized US companies. Companies in the index are selected based on the following four fundamental measures of size: book value, cash flow, sales and dividends. Each of the equities with a fundamental size ranking of 1,001 to 2,500 in the universe of 3,000 is then selected and assigned a weight equal to its fundamental value. The Portfolio and the Index are reconstituted annually.
IJR – iShares Core S&P Small-Cap ETF – The iShares Core S&P Small-Cap ETF seeks to track the investment results of an index composed of small-capitalization U.S. equities. Exposure to U.S. small cap stocks. Low cost and tax efficient. Use at the core of a portfolio to seek long-term growth.

Key Statistics of the top four US Small Cap Blend ETFs:

Source: ETFdb.com & Scottrade

In conclusion, I believe the U.S. Small Cap Equity asset class is a very desirable place to invest long term savings. With eight ETFs to pick from that have outperformed the S&P 500 over the last 10 years, it should be relatively easy to pick a fund that suits your investment needs. I do not put all our investments in this asset class and do not recommend others do so either. But, I do believe this asset class is worthy of a 10% to 25% allocation in a balanced portfolio.

Thank you for your time and for reading this article. Please share it with a friend.

Very Respectfully, Micah McDonald, aka the Deep Value ETF Accumulator

3 Replies to “Best Long-Term Performance U.S. Small Cap Blend ETFs”

  1. Thank you for the work on this and the writeup, I was really surprised to see the difference in ETFs. IJR and VB are big holdings of mine. Can you find any explanation on why the SPDR offering of SLY performed so much better than the Blackrock or Vanguard offerings. I’ve always viewed these as interchangable on their total market or S&P 500 funds.

    1. Hello Mr.Shirts
      I have been looking at this anomaly for some time. I think it has something to do with the way SLY handles capital gains. In a taxable account, the outperformance of SLY would probably disappear due to some tax inefficiency. I will look into this further and get back to you.
      Thank you for the questions.
      Micah

    2. Hello again Mr. Shirts
      I’ve done some additional back testing on VB, IJR & SLY.
      I cannot exactly put my finger on why SLY has outperformed.
      VB tracks an index with 1400 stocks.
      Both IJR & SLY track the S&P 600 index and both track the same 600 stocks (approximately).
      SLY has a history of occasionally paying a large dividend.
      While this may attribute to SLY’s outperformance, it might not be a good reason to select it over one of the others.
      SLY could possibly outperform in the future in a tax advantaged account, but I believe this outperformance might be nullified in a taxable account.
      I have sent the back test pictures to your email for your review.
      Thanks again for your comments on my site.
      Micah

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