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Small-Cap ETFs Face Off: IWM Vs. IJR

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Wall Street has been enjoying record highs lately. The rallies have been driven by encouraging study results from AstraZeneca (AZN - Free Report) , Moderna (MRNA - Free Report) and Pfizer (PFE - Free Report) related to COVID-19 vaccines. Markets anticipate the availability of vaccines soon, which may lead to the end of the pandemic and swift economic recovery.

While the rally has been broad-based, small-cap stocks have been outperforming their large-cap peers. The Russell 2000 and S&P Small Cap 600 indexes are up about 10.8% and 11.2%, respectively, over the past month. In comparison, the S&P 500 and Dow Jones have gained 4.1% and 3.1%, respectively while the S&P Mid Cap Index rose 7.5% (read: Small-Caps Beat Bigger Peers Last Week: 5 Top ETFs).

Small-cap companies are closely tied to the U.S. economy and are thus poised to outperform when the economy improves. Additionally, the super-easy monetary policy has been driving the small-cap rally. Fed Chairman Jerome Powell pledged to keep rates at lower levels until the end of 2023. A low interest rate bodes well for small-cap stocks as it pushes up economic activities and results in higher spending, thus boosting domestically focused companies.

Looking at historical performance, December typically yields the second-best monthly performance, according to Sam Stovall, chief investment strategist at CFRA Research in New York. The Russell 2000 averages a 2.15% return in December, climbing 76% of the time for the highest frequency of advance, compared to an average gain of 1.47% for the S&P 500 and a 73% frequency of advance. Moreover, the “January Effect,” which is a seasonal increase in stock prices largely due to year-end tax considerations, has been fueling a rally in the small-cap space.

As such, investors are looking to tap the small-cap indexes in the ETF form. The two ultra-popular ETFs — iShares Russell 2000 ETF (IWM - Free Report) and iShares Core S&P Small-Cap ETF (IJR - Free Report) — offer diversified exposure to the small-cap space. Though both ETFs saw asset inflows of nearly $2 billion over the past month and have AUM of $52 billion, IWM has a Zacks ETF Rank #3 (Hold) and IJR has a Zacks ETF Rank #2 (Buy). The duo has gained more than 11% in a month.

Though the duo might appear similar at a glance, there are a number of key differences between the two. We have highlighted them below:

Index Tracking

IWM tracks the Russell 2000 Index, which measures the performance of the bottom 2,000 stocks in the Russell 3000 Index. On the other hand, IJR follows the S&P SmallCap 600 Index, which is designed to track companies that meet specific inclusion criteria to ensure that they are liquid and financially viable. As such, the index has some value tilt, as it requires companies to have positive reported earnings in the most recent quarter as well as over the most recent four quarters. This quality factor makes IJR superior to IWM (read: Small Cap ETFs Deliver Big Gains for Investors).

Additionally, the S&P SmallCap 600 can change its constituents at any point of time due to changes in market capitalization, sector representation, profitability, mergers and acquisitions, free float, corporate actions, and new IPOs among other reasons compared with the Russell 2000, which adopts a more rigid, once-a-year rebalance approach in June.


Though both ETFs are widely diversified across securities, IWM has a broad basket of 2,011 securities while IJR is home to 601 stocks. The top 10 holdings account for 3.82% for IWM and 6% for IJR. The sector exposure does not differ much for both funds with health care, financials, industrials, information technology, and consumer discretionary each taking a double-digit allocation in the basket (read: 5 Sector ETFs That Beat the Market in November).

Expense Ratio

IWM is the most actively traded ETF, with average daily volume of around 23.4 billion and 0.19% in expense ratio. On the other hand, IJR is relatively less liquid, trading in average daily volume of 4.4 billion, which ensures slight additional cost in the form of marginal bid/ask spread. However, the latter costs just 6 bps in annual fees, 13 bps less than the Russell 2000 ETF. The low fee makes IJR an exciting pick.

Bottom Line

A low fee and the quality aspect have made IJR a top-ranked ETF.

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