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Better Buy: Vanguard Small Cap Growth ETF or iShares Russell 2000 Growth ETF?

If you look at the performance of small-cap stocks over the past few years, the returns pale in comparison to those of large-cap stocks. Over the last five years, the Russell 2000 has a total return of about 39% while the S&P 500 is up about 65% over that same period.

But historically, small caps have performed better than large caps coming out of recessions. In each of the last four recessions -- 1981, 1990, 2001, and 2007 -- small caps have beaten large caps in both one-year and three-year annualized returns after the recessions, according to an analysis by Invesco. The only exception was the three-year return out of the 1981 recession.

Big block letters lying on a brown surface that read ETF.

Image source: Getty Images.

The U.S. is currently in a recession, but you can already see the trend continuing. Since the market crashed in March, the Russell 2000 is up 65% while the S&P 500 is up 54%. Based on these trends, investors may want to consider adding some small-cap growth exchange-traded funds (ETFs) to their portfolios. Here is a look at two of the biggest and the best -- the Vanguard Small Cap Growth ETF (NYSEMKT: VBK) and the iShares Russell 2000 Growth ETF (NYSEMKT: IWO).

Vanguard Small Cap Growth ETF

The Vanguard Small Cap Growth ETF tracks the CRSP US Small Cap Growth Index, which includes about 570 small-cap growth stocks, as identified by CRSP using their specific growth screens. The ETF is up about 14% year to date through Oct. 23. Over the past year through Sept. 30, the ETF is up 18.8% with annualized returns of 13.7% and 13.3% over the previous five- and 10-year periods, respectively.

The 10 largest holdings include Immunomedics, Horizon Therapeutics, Insulet, Etsy, Catalent, Zebra Technologies, Teradyne, Pool Corp., HubSpot, and Monolithic Power Systems. The top 10 holdings make up about 7.8% of the portfolio. About 26% of the portfolio is in the healthcare sector, while 22% is in technology and 16% is in industrials.

The ETF has about $12 billion in assets under management with a minuscule expense ratio of 0.07%.

iShares Russell 2000 Growth ETF

The iShares Russell 2000 Growth ETF invests in a different index than the Vanguard ETF, tracking stocks within the Russell 2000 index that exhibit certain growth characteristics. It includes about 1,100 names, so it has greater diversification than the Vanguard ETF.

The top 10 holdings are Sunrun, iRhythm Technologies, LHC Group, Churchill Downs, Mirati Therapeutics, Deckers Outdoor, MyoKardia, RH, Momenta Pharmaceuticals, and BJ's Wholesale Club Holdings. The top 10 holdings make up about 6.3% of the portfolio. The largest sectors are healthcare (25%), technology (17%), and industrials (12%).

The ETF is up about 10% year to date. It has a one-year return of 15.6% through Sept. 30, and annualized returns of 11.5% and 12.4% over the last five- and 10-year periods, respectively. The ETF has about $9.5 billion in assets under management and an expense ratio of 0.24%.

Which is the better buy?

These are both excellent small-cap growth ETFs, but if you have to pick one, I'd go with the Vanguard Small Cap Growth ETF. It has better returns, both in the short term and the long term, and a considerably lower expense ratio. While the Vanguard ETF features a more concentrated portfolio with about half as many names as the Russell 2000 Growth ETF, there is no difference in the volatility measures between the funds. Both have betas of around 1.23% and the Vanguard ETF actually has a lower standard deviation of 21.5% compared to 22.4% for the Russell ETF.

Keep in mind, small-cap growth stocks are more volatile, which is why it's good to have broad diversification and less concentrated holdings. But if history is any indication, these ETFs should both outperform their large-cap rivals coming out of the recession -- or at least be very competitive.

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Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Etsy, HubSpot, and Vanguard Small-Cap Growth ETF. The Motley Fool owns shares of LHC Group. The Motley Fool recommends Churchill Downs, Immunomedics, Insulet, Pool, RH, Teradyne, and Zebra Technologies. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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