Down 17% in 20 months, is it time to buy the Vanguard MSCI Australian Small Companies Index ETF (VSO)?

I think this unique ETF is looking good today.

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Most ASX index fund investors have suffered through some pretty shoddy returns over the past 20 months. That's especially the case when it comes to the Vanguard MSCI Australian Small Companies Index ETF (ASX: VSO).

Most of the ASX's most popular exchange-traded funds (ETFs) are index funds that track either the ASX 200 Index or in the case of the Vanguard Australian Shares Index ETF (ASX: VAS), the S&P/ASX 300 Index (ASX: XKO).

Between December 2021 and 2023 (as of today), the S&P/ASX 200 Index (ASX: XJO) has gone backwards by around 3.7%. That means that any index fund tracking the ASX 200 Index would have given investors around that same loss. Mitigated by dividend returns, of course.

It would be a similar story with the ASX 300-based VAS ETF. That's because the ASX 200 and ASX 300 are highly correlated and share all of the same top holdings, but in slightly different proportions.

However, the Vanguard Small Companies ETF has had a far more horrible time over the past 20 months.

Back on 31 December 2021, VSO units hit what is still this ETF's all-time high of $75.11 per unit. But fast forward to today, and those same units are trading for just $61.40 each. That means that this ETF has lost a horrid 18.25% since that December 2021 peak 20 months ago.

Of course, that poor performance would be tempered by the dividend distributions this ETF has paid out quarterly since then as well. But still, no one can deny that it's been a less-than-rosy time for VSO investors since the end of 2021.

Why has the VSO ETF had a rough time on the ASX?

However, I think that this extended performance slump is a perfect time to consider buying this ETF, particularly for passive investors. The Vanguard Small Companies ETF is a fund that works quite differently from the more popular ASX 200 or ASX 300 ETFs out there.

The likes of the Vanguard Australian Shares ETF are dominated by the big four banks, BHP Group Ltd (ASX: BHP), CSL Limited (ASX: CSL) and Woodside Energy Group Ltd (ASX: WDS). However, the Vanguard Small Companies ETF doesn't even hold these shares.

Instead, this fund offers a portfolio made up of the smaller companies of the ASX. Its largest holdings are the likes of Carsales.com Ltd (ASX: CAR), Allkem Ltd (ASX: AKE), Lynas Rare Earths Ltd (ASX: LYC) and NEXTDC Ltd (ASX: NXT).

These sorts of companies tend to perform very differently from the shares that move and shake traditional ASX index funds. Sure, this corner of the market has had a rough 20 months. But I think that eventually the tide will turn, and we will see the smaller companies on the ASX turn things around.

Yes, the VSO ETF's performance since the start of 2021 has been rather lacklustre. Even so, this fund has still managed to eke out an average annual return of 7.84% per annum over the ten years to 31 August. Additionally, the Vanguard Small Companies ETF currently offers a trial dividend yield of 5.97%.

So I think there's a lot going for this ETF right now, and ASX investors, especially those who prefer passive index investing, should take a second look today.

Motley Fool contributor Sebastian Bowen has positions in Vanguard Australian Shares Index ETF and Vanguard Msci Australian Small Companies Index ETF. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended CSL. The Motley Fool Australia has recommended Carsales.com. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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