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IWM vs. VMBS: What’s The Difference?

The iShares Russell 2000 ETF (IWM) and the Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS) are both among the Top 100 ETFs. IWM is a iShares Small Blend fund and VMBS is a Vanguard Intermediate Government fund. So, what’s the difference between IWM and VMBS? And which fund is better?

The expense ratio of IWM is 0.14 percentage points higher than VMBS’s (0.19% vs. 0.05%). IWM also has a high exposure to the healthcare sector while VMBS is mostly comprised of AAA bonds. Overall, IWM has provided higher returns than VMBS over the past ten years.

In this article, we’ll compare IWM vs. VMBS. We’ll look at annual returns and risk metrics, as well as at their performance and holdings. Moreover, I’ll also discuss IWM’s and VMBS’s fund composition, portfolio growth, and industry exposure and examine how these affect their overall returns.

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Summary

IWMVMBS
NameiShares Russell 2000 ETFVanguard Mortgage-Backed Securities Index Fund ETF Shares
CategorySmall BlendIntermediate Government
IssueriSharesVanguard
AUM66.48B16.61B
Avg. Return13.52%2.89%
Div. Yield0.86%1.23%
Expense Ratio0.19%0.05%

The iShares Russell 2000 ETF (IWM) is a Small Blend fund that is issued by iShares. It currently has 66.48B total assets under management and has yielded an average annual return of 13.52% over the past 10 years. The fund has a dividend yield of 0.86% with an expense ratio of 0.19%.

The Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS) is a Intermediate Government fund that is issued by Vanguard. It currently has 16.61B total assets under management and has yielded an average annual return of 2.89% over the past 10 years. The fund has a dividend yield of 1.23% with an expense ratio of 0.05%.

IWM’s dividend yield is 0.37% lower than that of VMBS (0.86% vs. 1.23%). Also, IWM yielded on average 10.63% more per year over the past decade (13.52% vs. 2.89%). The expense ratio of IWM is 0.14 percentage points higher than VMBS’s (0.19% vs. 0.05%).

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Fund Composition

Holdings

IWM - Holdings

IWM HoldingsWeight
AMC Entertainment Holdings Inc Class A0.52%
Intellia Therapeutics Inc0.33%
Crocs Inc0.3%
BlackRock Cash Funds Treasury SL Agency0.29%
Tenet Healthcare Corp0.26%
Lattice Semiconductor Corp0.26%
Tetra Tech Inc0.25%
II-VI Inc0.25%
EastGroup Properties Inc0.24%
Arrowhead Pharmaceuticals Inc0.24%

IWM’s Top Holdings are AMC Entertainment Holdings Inc Class A, Intellia Therapeutics Inc, Crocs Inc, BlackRock Cash Funds Treasury SL Agency, and Tenet Healthcare Corp at 0.52%, 0.33%, 0.3%, 0.29%, and 0.26%.

Lattice Semiconductor Corp (0.26%), Tetra Tech Inc (0.25%), and II-VI Inc (0.25%) have a slightly smaller but still significant weight. EastGroup Properties Inc and Arrowhead Pharmaceuticals Inc are also represented in the IWM’s holdings at 0.24% and 0.24%.

VMBS - Holdings

VMBS Bond SectorsWeight
AAA100.01%
Below B0.0%
B0.0%
BB0.0%
BBB0.0%
A0.0%
AA0.0%
US Government0.0%
Others-0.01%

VMBS’s Top Bond Sectors are ratings of AAA, Below B, B, BB, and BBB at 100.01%, 0.0%, 0.0%, 0.0%, and 0.0%. The fund is less weighted towards A (0.0%), AA (0.0%), and US Government (0.0%) rated bonds.

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Risk Analysis

IWMVMBS
Mean Return1.120.21
R-squared77.7365.78
Std. Deviation18.872.02
Alpha-5.120.37
Beta1.230.54
Sharpe Ratio0.680.94
Treynor Ratio9.563.47

The iShares Russell 2000 ETF (IWM) has a R-squared of 77.73 with a Mean Return of 1.12 and a Alpha of -5.12. Its Beta is 1.23 while IWM’s Treynor Ratio is 9.56. Furthermore, the fund has a Standard Deviation of 18.87 and a Sharpe Ratio of 0.68.

The Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS) has a Beta of 0.54 with a Alpha of 0.37 and a Sharpe Ratio of 0.94. Its Mean Return is 0.21 while VMBS’s Treynor Ratio is 3.47. Furthermore, the fund has a R-squared of 65.78 and a Standard Deviation of 2.02.

IWM’s Mean Return is 0.91 points higher than that of VMBS and its R-squared is 11.95 points higher. With a Standard Deviation of 18.87, IWM is slightly more volatile than VMBS. The Alpha and Beta of IWM are 5.49 points lower and 0.69 points higher than VMBS’s Alpha and Beta.

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Performance

Annual Returns

IWM vs. VMBS - Annual Returns

YearIWMVMBS
202019.89%3.77%
201925.42%6.17%
2018-11.02%0.87%
201714.66%2.37%
201621.36%1.43%
2015-4.33%1.43%
20144.94%5.81%
201338.85%-1.28%
201216.39%2.47%
2011-4.19%5.89%
201026.76%5.24%

IWM had its best year in 2013 with an annual return of 38.85%. IWM’s worst year over the past decade yielded -11.02% and occurred in 2018. In most years the iShares Russell 2000 ETF provided moderate returns such as in 2017, 2012, and 2020 where annual returns amounted to 14.66%, 16.39%, and 19.89% respectively.

The year 2019 was the strongest year for VMBS, returning 6.17% on an annual basis. The poorest year for VMBS in the last ten years was 2013, with a yield of -1.28%. Most years the Vanguard Mortgage-Backed Securities Index Fund ETF Shares has given investors modest returns, such as in 2017, 2012, and 2020, when gains were 2.37%, 2.47%, and 3.77% respectively.

Portfolio Growth

IWM vs. VMBS - Portfolio Growth

FundInitial BalanceFinal BalanceCAGR
IWM$10,000$28,94113.52%
VMBS$10,000$13,2652.89%

A $10,000 investment in IWM would have resulted in a final balance of $28,941. This is a profit of $18,941 over 10 years and amounts to a compound annual growth rate (CAGR) of 13.52%.

With a $10,000 investment in VMBS, the end total would have been $13,265. This equates to a $3,265 profit over 10 years and a compound annual growth rate (CAGR) of 2.89%.

IWM’s CAGR is 10.63 percentage points higher than that of VMBS and as a result, would have yielded $15,676 more on a $10,000 investment. Thus, IWM outperformed VMBS by 10.63% annually.


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