VB tracks the CRSP US Small Cap Index, providing diversified exposure to approximately 1,400 smaller US companies below the large-cap tier. At 0.05% expense ratio, it is the cheapest broad small-cap ETF available. Small-cap companies are more domestically oriented than large-caps — they earn most revenue in the US, which reduces foreign currency exposure but increases sensitivity to US domestic economic conditions. They also tend to carry more leverage and depend more on bank credit availability, making them more sensitive to tightening credit conditions and rising interest rates. The long-term historical case for small-caps rests on a documented size premium — smaller companies have historically outperformed large-caps over very long periods, though this premium has been elusive in recent decades as mega-cap technology dominated returns. VB covers a broader and somewhat higher-quality small-cap universe than IWM, which tracks the Russell 2000. The CRSP methodology excludes the smallest and least liquid micro-caps that drag down Russell 2000 returns. For investors, VB is the most efficient way to add small-cap diversification to a Vanguard-based portfolio, providing domestic exposure that complements international holdings and reduces the mega-cap concentration inherent in cap-weighted large-cap funds.
