Investors seeking exposure to small-cap stocks have two notable options: the iShares Core S&P Small-Cap ETF (IJR) and the iShares Morningstar Small-Cap ETF (ISCB). Each fund presents distinct advantages tailored to different investment strategies.
The iShares Core S&P Small-Cap ETF, boasting a total asset base of approximately $102.9 billion, has a slightly higher expense ratio of 0.06%. It has yielded a 1-year return of 37.1%, featuring a dividend yield of 1.2%. The ETF encompasses around 640 holdings primarily concentrated in financial services (16%), industrials (16%), and technology (15%). Key positions within the fund include Viavi Solutions (0.74%), Sanmina (0.71%), and Formfactor (0.66%).
Conversely, the iShares Morningstar Small-Cap ETF, with $270.6 million in assets, offers a more cost-effective option with an expense ratio of just 0.04% and a slightly higher 1.3% dividend yield. It tracks a broader index comprising 1,548 holdings, with a larger emphasis on industrials (18%) and healthcare (14%). Significant holdings include Lumentum Holdings (1.16%), Revolution Medicines (0.45%), and Sterling Infrastructure (0.40%).
Both ETFs exhibit higher growth potential compared to larger-cap stocks, although they come with higher volatility. For instance, the maximum drawdown over the past five years was 29.9% for ISCB, while IJR experienced a somewhat milder decline of 28.0%. When evaluating growth over five years, an initial investment of $1,000 would have grown to about $1,304 in ISCB, compared to $1,320 in IJR.
The decision between these funds primarily hinges on an investor’s priorities. IJR employs a quality filter that mandates positive earnings for included companies, contributing to its lower maximum drawdown and suggesting a greater resilience during unfavorable market conditions. Additionally, IJR’s higher asset base enhances liquidity, which may attract active traders.
On the other hand, ISCB’s extensive holdings allow for substantial diversification across the small-cap landscape, making it a compelling choice for investors seeking to lessen sector-specific risks. However, this broad exposure also includes unprofitable firms, leading to greater potential volatility as indicated by ISCB’s higher beta.
In summary, the choice between IJR and ISCB will largely depend on individual risk tolerance, investment goals, and a preference for either cost or liquidity. Investors aiming for a balanced portfolio with lower costs might gravitate towards ISCB, while those focused on managing risk through a quality filter may find IJR more appealing. Each ETF presents unique opportunities in the dynamic small-cap investment sector.
