ASX Small Cap ETFs Compared: VSO vs SMLL vs ISO vs SSO

Small-cap companies represent significant growth opportunities within the Australian equity market, but also carry higher risk than large-cap alternatives. For investors seeking small-cap exposure, ETFs provide diversified access to this segment through a single investment.

This educational comparison examines four ASX-listed small-cap ETFs—VSO, SMLL, ISO, and SSO—highlighting their key differences in strategy, holdings, fees, and risk profiles to help investors understand their options.

Quick Comparison Table

ETF	Provider	Fee	Holdings	Strategy	Market Cap Focus
VSO	Vanguard	0.32%	~196	Passive (broad)	MSCI Small Cap
SMLL	BetaShares	0.38%	50-100	Smart beta (quality)	Ranks 91-350
ISO	iShares	0.55%	~200	Passive (broad)	Small Ordinaries
SSO	SPDR	0.50%	~200	Passive (broad)	Small Ordinaries

Understanding Small-Cap Investing

Small-cap companies typically represent businesses with market capitalisations between approximately $100 million and $2 billion on the ASX. These companies sit outside the ASX 100, offering different characteristics compared to large-cap blue chips:

Potential Benefits:

• Higher growth potential than established large caps

• Less analyst coverage creating pricing inefficiencies

• Greater exposure to domestic Australian economy

• Portfolio diversification beyond large-cap concentration

Key Risks:

• Higher volatility than large-cap stocks

• Lower liquidity (wider bid-ask spreads)

• Greater sensitivity to economic cycles

• Higher business failure rates

• Less financial resources during market stress

Understanding these trade-offs helps investors determine appropriate small-cap allocation within broader portfolios.

Comparison infographic of 4 ASX small cap ETFs showing VSO, SMLL, ISO, and SSO with management fees, holdings count, strategy types, and market cap focus for Australian small cap investors

VSO: Vanguard MSCI Australian Small Companies Index ETF

Overview

VSO tracks the MSCI Australian Shares Small Cap Index, providing broad exposure to approximately 196 Australian small-cap companies. As Vanguard's small-cap offering, VSO emphasises low-cost, diversified market-cap weighted exposure.

Key Characteristics

Management Fee: 0.32% per annum (lowest among the four)

Holdings: Approximately 196 companies

Index Methodology: MSCI Australian Shares Small Cap Index targets approximately 14% of free-float adjusted market capitalisation of the Australian share market, representing smaller companies beyond MSCI's large and mid-cap coverage.

Sector Allocation:

• Materials: 25%

• Real Estate: 13%

• Industrials: 12.5%

• Financials: 11.8%

• Consumer Discretionary: 10%

• Technology: 8.3%

• Energy: 6.6%

Market Cap Range: Companies generally below $2-3 billion market capitalisation

Investment Approach: Passive Broad Market

VSO employs pure passive index replication, holding nearly 200 companies to provide comprehensive small-cap coverage. This approach captures the full small-cap market segment without quality screens or active selection.

The broad diversification (196 holdings) reduces single-stock risk but means the portfolio includes both high-quality companies and potentially challenged businesses. Top 10 holdings represent approximately 19% of the portfolio, indicating relatively even distribution across holdings.

SMLL: BetaShares Australian Small Companies Select Fund

Overview

SMLL tracks the Nasdaq Australia Small Cap Select Index (as of January 2025 restructure), employing quality screening to identify profitable small-cap companies with strong fundamentals. This smart-beta approach sits between pure passive indexing and active management.

Key Characteristics

Management Fee: 0.38% per annum (second lowest)

Holdings: 50-100 companies (typically 60-80)

Index Methodology: Nasdaq Australia Small Cap Select Index applies systematic screens focusing on:

• Positive earnings (profitability requirement)

• Strong debt serviceability (balance sheet quality)

• Relative valuation metrics

• Price momentum indicators

• Liquidity standards

Market Cap Range: Companies ranked 91-350 by free-float market capitalisation on ASX

Investment Approach: Smart Beta (Quality Focus)

SMLL differs fundamentally from the other three ETFs through its quality screening process. Rather than holding all small caps, the fund selectively includes companies meeting specific financial criteria designed to identify sustainable, profitable businesses.

This methodology aims to avoid companies with deteriorating fundamentals, excessive leverage, or poor earnings quality—common characteristics in small-cap "value traps." The concentrated portfolio (50-100 holdings vs 196-200 in alternatives) creates higher single-stock exposure but potentially higher quality holdings.

January 2025 Restructure: BetaShares restructured SMLL to reduce fees (from higher levels) and align more clearly with the Nasdaq index methodology. The changes maintain the quality-focused approach while improving cost competitiveness.

ISO: iShares S&P/ASX Small Ordinaries ETF

Overview

ISO tracks the S&P/ASX Small Ordinaries Accumulation Index, providing exposure to companies in the S&P/ASX 300 but outside the S&P/ASX 100. This represents the traditional definition of Australian small caps.

Key Characteristics

Management Fee: 0.55% per annum (highest among the four)

Holdings: Approximately 200 companies

Index Methodology: S&P/ASX Small Ordinaries Index includes S&P/ASX 300 constituents ranked 101-300 by market capitalisation.

Sector Allocation:

• Materials: 25%

• Consumer Discretionary: 15%

• Real Estate: 11%

• Financials: 10.5%

• Industrials: 10%

• Technology: 9%

• Energy: 6%

Market Cap Range: Companies ranked 101-300 on ASX by market cap

Investment Approach: Passive Broad Market

ISO employs straightforward index replication similar to VSO but tracks the S&P/ASX Small Ordinaries benchmark—one of Australia's most established small-cap indices. The approach provides comprehensive small-cap market exposure without quality screens.

The higher management fee (0.55%) compared to VSO (0.32%) represents a significant cost disadvantage for similar broad-market passive exposure. Over 20 years, the 0.23% fee difference compounds to approximately $500 on a $10,000 investment.

SSO: SPDR S&P/ASX Small Ordinaries Fund

Overview

SSO tracks the same S&P/ASX Small Ordinaries Index as ISO, providing virtually identical market exposure through State Street's SPDR platform.

Key Characteristics

Management Fee: 0.50% per annum

Holdings: Approximately 200 companies

Index Methodology: S&P/ASX Small Ordinaries Index (identical to ISO)

Sector Allocation: Similar to ISO given identical index tracking

Market Cap Range: Companies ranked 101-300 on ASX

Investment Approach: Passive Broad Market

SSO employs the same passive replication strategy as ISO, tracking the identical benchmark index. The primary differences between SSO and ISO lie in management fee (0.50% vs 0.55%), fund size, and provider (State Street vs BlackRock).

For investors deciding between ISO and SSO, the lower fee makes SSO marginally more cost-effective, though both carry higher fees than VSO or SMLL.

Growth vs Value Characteristics

Small-cap ETFs typically exhibit different growth/value characteristics based on index construction and screening methodologies:

Growth-Tilted: SMLL

SMLL's momentum screening and focus on profitability tends to favour companies with positive earnings trajectories and improving fundamentals—characteristics often associated with growth-style investing. By excluding companies with deteriorating metrics, the fund naturally tilts toward businesses in growth phases.

Balanced/Market-Weighted: VSO, ISO, SSO

The three broad-market passive ETFs (VSO, ISO, SSO) maintain market-cap weighted exposure across the entire small-cap segment, capturing both growth and value stocks proportionally to their market representation. This balanced approach provides neutral style exposure.

Sector allocations across all four ETFs show heavy materials concentration (24-25%), reflecting the resource-heavy composition of Australian small caps. This creates natural cyclical exposure tied to commodity prices regardless of growth/value orientation.

Active vs Passive Management

Passive (Rules-Based): All Four ETFs

Importantly, all four ETFs employ passive, rules-based strategies tracking published indices. None involves discretionary active management where portfolio managers make subjective company selection decisions.

However, the degree of "passiveness" varies:

Pure Passive: VSO, ISO, SSO hold all or most index constituents with minimal screening beyond market capitalisation and liquidity requirements.

Smart Beta (Enhanced Passive): SMLL applies systematic quality screens, creating a more selective portfolio while remaining rules-based and transparent. This represents "enhanced passive" or "strategic beta" rather than traditional active management.

The distinction matters for several reasons:

1. Cost: Pure passive typically costs less than smart beta

2. Tracking: Pure passive tracks broad market movements more closely

3. Concentration: Smart beta creates more concentrated exposures

4. Quality: Smart beta aims to improve risk-adjusted returns through screening

Risk and Volatility Considerations

Systematic Risk: All Four ETFs

All small-cap ETFs carry elevated volatility compared to large-cap alternatives. Historical data shows small caps typically experience 20-30% greater volatility than the ASX 200 during market stress.

Key risk factors affecting all four:

• Economic cycle sensitivity

• Funding availability during credit tightening

• Lower institutional ownership (less price support)

• Higher correlation during market selloffs

• Liquidity constraints in stressed markets

Idiosyncratic Risk: Concentration Differences

Higher Concentration Risk: SMLL

• 50-100 holdings creates greater single-stock impact

• Quality screens may concentrate in specific sectors

• Momentum screens can increase cyclical exposure

Lower Concentration Risk: VSO, ISO, SSO

• 196-200 holdings provide broader diversification

• Single-stock failures have minimal portfolio impact

• More representative of overall small-cap market behaviour

Quality vs Diversification Trade-Off

SMLL's quality focus may reduce certain risks (avoiding companies with weak fundamentals) but increases concentration risk through smaller holding counts. VSO, ISO, and SSO provide broader diversification but include lower-quality companies that may underperform or fail.

Neither approach eliminates risk—they simply emphasise different risk profiles.

Fee Comparison and Long-Term Costs

Management fees significantly impact long-term wealth accumulation:

Fee Rankings:

1. VSO: 0.32% (lowest)

2. SMLL: 0.38%

3. SSO: 0.50%

4. ISO: 0.55% (highest)

20-Year Cost Impact on $10,000:

• VSO: ~$700

• SMLL: ~$830

• SSO: ~$1,090

• ISO: ~$1,200

The 0.23% difference between VSO and ISO compounds to approximately $500 over 20 years—material for cost-conscious investors especially when both provide similar broad-market exposure.

SMLL's 0.38% fee sits in the middle, representing a reasonable cost for enhanced passive quality screening versus pure passive alternatives.

Sector Allocation Similarities

Despite different index providers, all four ETFs show remarkably similar sector exposures:

Common Sector Concentrations:

• Materials: 24-25% across all four

• Consumer Discretionary: 10-15%

• Real Estate: 10-13%

• Financials: 10-12%

• Industrials: 10-12.5%

This consistency reflects the underlying composition of Australian small caps, where resources and property represent dominant sectors regardless of indexing approach. The similarity means sector allocation doesn't meaningfully differentiate these ETFs—instead, focus on fee structure, quality screening, and diversification level.

Which ETF for Different Investors?

For Cost-Conscious Investors: VSO

VSO's 0.32% fee provides the lowest-cost small-cap exposure. Combined with 196-holding diversification, VSO suits investors prioritising broad market exposure at minimal cost.

For Quality-Focused Investors: SMLL

SMLL's systematic quality screens appeal to investors willing to accept higher concentration (50-100 holdings) in exchange for potentially higher-quality companies with positive earnings and strong balance sheets.

For S&P Index Investors: SSO

Investors specifically wanting S&P/ASX Small Ordinaries exposure while minimising costs should favour SSO (0.50%) over ISO (0.55%) for identical index tracking.

When to Avoid ISO

ISO's 0.55% fee makes it the highest-cost option among the four. Unless investors have specific reasons to prefer BlackRock's iShares platform, VSO provides similar exposure at 0.32%, or SSO tracks the identical index at 0.50%.

Portfolio Construction Considerations

Small-cap ETFs work best as satellite holdings within diversified portfolios rather than core positions. Typical allocation ranges:

Conservative Portfolios (5-10% small caps): Lower allocation given higher volatility

Balanced Portfolios (10-15% small caps): Moderate allocation for growth potential

Growth Portfolios (15-20% small caps): Higher allocation accepting increased volatility

Regardless of allocation, small caps should complement—not replace—large-cap core holdings, providing diversification and growth potential without excessive portfolio risk.

Summary: Choosing Between the Four

No single small-cap ETF suits all investors. Selection depends on priorities:

Lowest Cost + Broad Diversification: VSO (0.32%, 196 holdings)

Quality Focus + Smart Beta: SMLL (0.38%, 50-100 holdings with screens)

S&P Small Ords Tracking: SSO (0.50%) over ISO (0.55%) for cost

Key Differentiators:

1. Fees: VSO cheapest, ISO most expensive

2. Methodology: SMLL uses quality screens; others pure passive

3. Holdings: SMLL more concentrated (50-100); others broadly diversified (196-200)

4. Risk Profile: SMLL higher concentration risk, potentially lower quality risk

For most investors, VSO's combination of low fees and broad diversification provides compelling value. Investors specifically seeking quality-screened small caps should consider SMLL despite slightly higher fees and concentration. SSO serves those wanting S&P Small Ordinaries exposure. ISO's 0.55% fee disadvantages it relative to alternatives providing similar exposure.

Educational Disclaimer

This article provides educational information only and does not constitute financial advice, recommendations, or endorsements. It does not consider individual circumstances, objectives, or financial situations.

Small-cap ETFs involve significant risks including higher volatility, lower liquidity, business failure risk, and market-cycle sensitivity. Investors may lose capital. Past performance does not indicate future results.

Before investing, carefully consider investment objectives, risk tolerance, time horizon, and appropriate small-cap allocation. Always read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) before investing. Consider seeking advice from a licensed financial adviser. Disclaimer: Finer Market Points Pty Ltd, CAR 1304002, AFSL 526688, ABN 87 645 284 680. This general information is educational only and not financial advice, recommendation, forecast or solicitation. Consider your objectives, financial situation and needs before acting. Seek appropriate professional advice. We accept no liability for any loss or damages arising from use.

Data Sources: Vanguard Australia, BetaShares, BlackRock Australia, State Street Global Advisors, ASX data (January 2026)