Key takeaways:

• Net assets for the Vanguard MSCI Australian Small Companies Index ETF are significantly higher than the iShares S&P/ASX Small Ordinaries ETF, and the fund is more liquid

• VSO has also regularly delivered superior returns to ISO, while managing to charge unitholders a lower management fee

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Back in November, we profiled a pair of exchange-traded funds offering exposure to cash, with BetaShares’ Australian High Interest Cash ETF (ASX: AAA) and iShares’ Core Cash ETF (ASX: BILL) squarely in the spotlight.

On this occasion, we’re looking at the two largest ETFs dedicated to tracking ASX-listed small-cap stocks. The small-cap sector has delivered strong returns over the last couple months, which follows a period of nearly two years where small-cap shares trailed their large-cap peers.

All this means we’re taking a look at the Vanguard MSCI Australian Small Companies Index ETF (VSO) and the iShares S&P/ASX Small Ordinaries ETF (ASX: ISO).

Fund Objective

The Vanguard MSCI Australian Small Companies Index ETF seeks to track the return of the MSCI Australian Shares Small Cap Index before taking into account fees, expenses, and tax.

VSO provides low-cost, broadly diversified exposure to small companies listed on the ASX. There is a particular emphasis on long-term capital growth, which can be typical of the small company market sector.

Meanwhile, the iShares S&P/ASX Small Ordinaries ETF aims to provide investors with the performance of the S&P/ASX Small Ordinaries Accumulation Index, before fees and expenses. The index which ISO tracks offers access to an institutional benchmark of small-cap ASX-listed equities.

Fund Profiles and Holdings

First listed on the ASX in May 2011, the Vanguard MSCI Australian Small Companies Index ETF now boasts around $845.1 million in assets under management (AUM).

By way of comparison, the iShares S&P/ASX Small Ordinaries ETF made its way to the board of the ASX around six months earlier, in December 2010. However, the fund is much smaller than its peer, with its net assets currently standing at $125.3 million.

Based on trading data from all broker participants in November, VSO recorded growth of $57.1 million in funds under management (FUM). This was aided by $15.6 million in fund inflows throughout the course of the month, across more than 4,000 trades.

On the other hand, the ISO ETF saw no net change in fund flows in November. Nonetheless, the fund’s assets under management grew by approximately $7.4 million during the month. ISO was far more illiquid than VSO, with the total number of trades in the iShares S&P/ASX Small Ordinaries ETF around 12% of that of its larger peer.

In terms of holdings, the VSO ETF invests in stocks from a diverse range of sectors, with industrials, materials, and consumer discretionary comprising nearly 50% of the fund’s assets. At the end of November, VSO held 195 unique holdings, with a median market cap of $3.0 billion. The top 10 holdings contributed to 17.5% of all assets.

ISO has a broader focus, with the ETF designed to measure the performance of small-cap ASX-listed stocks included in the S&P/ASX 300 index, but not in the S&P/ASX 100 index. At the time of writing, the fund was made up of 201 ASX-listed securities. The top 10 holdings in the iShares S&P/ASX Small Ordinaries ETF account for 13.5% of the fund’s assets.

VSO^

1. Evolution Mining (ASX: EVN): 2.2%

2. Atlas Arteria (ASX: ALX): 1.9%

3. NextDC (ASX: NXT): 1.9%

4. Worley (ASX: WOR): 1.8%

5. Lynas Rare Earths (ASX: LYC): 1.8%

6. AGL Energy (ASX: AGL): 1.6%

7. Whitehaven Coal (ASX: WHC): 1.6%

8. Incitec Pivot (ASX: IPL): 1.6%

9. ALS (ASX: ALQ): 1.6%

10. Altium (ASX: ALU): 1.5%

ISO*

1. Pro Medicus (ASX: PME): 2.0%

2. Viva Energy Group (ASX: VEA): 1.5%

3. Flight Centre Travel (ASX: FLT): 1.4%

4. Sandfire Resources (ASX: SFR): 1.3%

5. Chorus (ASX: CNU): 1.3%

6. Csr (ASX: CSR): 1.2%

7. Neuren Pharmaceuticals (ASX: NEU): 1.2%

8. Champion Iron (ASX: CIA): 1.2%

9. Paladin Energy (ASX: PDN): 1.2%

10. National Storage Reit (ASX: NSR): 1.2%

^ = as at Nov 30, 2023; * = as at Dec 22, 2023

Performance and Distributions

Since inception, VSO has delivered an average return of 5.42% per annum. Over the last one, three, and five years, the ETF has yielded returns of -4.7%, 3.37% per annum, and 7.68% per annum.

Based on said performance data, if $10,000 was invested five years ago, that investment would be worth approximately $14,478 as at the end of November.

For the iShares S&P/ASX Small Ordinaries ETF, the fund has returned 2.47% per annum since inception. Its returns over the last one, three, and five years are -4.1%, -0.8% per annum, and 3.6% per annum.

If $10,000 was invested in ISO five years ago, that outlay would be worth approximately $13,424 at the time of writing.

Past performance is not indicative of future performance, and these results do not provide any guarantee that future returns will be of the same magnitude, or that returns will be positive.

Both ETFs have established a record of paying biannual distributions to unitholders. It should be said, the amount and timing of distributions will vary from period to period, and there may even be periods where no distributions are made.

Fees

The Vanguard MSCI Australian Small Companies Index ETF has a management fee of 0.30% of the fund’s Net Asset Value (NAV) per annum. According to Vanguard, there are no indirect fees attributed to the ETF, while transaction fees were estimated to be 0.01% of the NAV of the Fund per annum.

Shifting attention to the iShares S&P/ASX Small Ordinaries ETF, the management fee for ISO is 0.55% per annum, inclusive of indirect costs. Transaction costs are disclosed as being 0.03% per annum, and are reflected in the Fund’s unit price.

It should be reiterated, there may be other fees that apply, including buy/sell spreads. Please refer to the relevant Product Disclosure Statements for up-to-date details on costs and expenses, which may be deducted from the fund’s assets as and when they are incurred. 

Summary

Both VSO and ISO hold an extensive and diverse list of securities, many of which investors might find boast larger valuations than one might expect for two funds focused on small-cap securities. The Vanguard MSCI Australian Small Companies Index ETF is significantly larger than the iShares S&P/ASX Small Ordinaries ETF, and recent trading data suggests it is also far more liquid.

While both funds pay semiannual distributions, Vanguard’s VSO ETF attracts a notably lower management fee compared with iShares’ ISO, at 0.30% per annum versus 0.55% per annum. In addition, it has also outperformed its smaller rival since inception, as well as over three and five-year timeframes. Instead, the iShares S&P/ASX Small Ordinaries ETF has only delivered a superior return over the last year.

VSO

• Benchmark: MSCI Australian Shares Small Cap Index

• Net Assets: $845.1 million

• Top 10 Holdings (weight): 17.5%

• Performance since inception (p.a.): 5.42%

• Distributions: Biannual

• Management Fees (p.a.): 0.30%

ISO

• Benchmark: S&P/ASX Small Ordinaries Accumulation Index

• Net Assets: $125.3 million

• Top 10 Holdings (weight): 13.5%

• Performance since inception (p.a.): 2.47%

• Distributions: Biannual

• Management Fees (p.a.): 0.55%