Small Cap ETFs from iShares Offer Exciting Growth Opportunities. Is IWO or ISCG the Better Buy?

The iShares Russell 2000 Growth ETF (NYSEMKT:IWO) offers a larger asset base and stronger recent performance, while the iShares Morningstar Small-Cap Growth ETF (NYSEMKT:ISCG) provides a more cost-effective entry into small-cap growth stocks.

Both exchange-traded funds target the volatile but potentially rewarding small-cap growth sector, which focuses on smaller companies with high expansion potential. While they share similar investment objectives, they track different indexes, which results in distinct sector weights and risk profiles. This comparison evaluates whether IWO’s significantly larger asset base and stronger recent performance justify its higher cost, or whether ISCG’s lean efficiency is more attractive.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year monthly returns. The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield as of the closing price of June 18.

With an expense ratio of 0.06%, ISCG is considerably more affordable than IWO’s 0.24%. This 0.18 percentage point gap may seem small, but it can weigh on total returns over a long investment horizon. Additionally, ISCG provides a slightly higher payout for income-seeking investors, offering a trailing-12-month dividend yield of 0.60% compared to 0.40% for its counterpart.

Performance & risk comparison

What's inside

The iShares Russell 2000 Growth ETF concentrates its portfolio in technology (25.9%), industrials (23%), and healthcare (21.9%). Its largest positions include Bloom Energy Corp (NYSE:BE) at 3.5%, Credo Technology Group Holding Ltd (NASDAQ:CRDO) at 2.1%, and Sterling Infrastructure Inc (NASDAQ:STRL) at 1.4%. Overall, the fund has positions in 1,102 stocks. Launched in 2000, it has a trailing 12-month dividend of $1.64 per share.

In contrast, the iShares Morningstar Small-Cap Growth ETF leans slightly more toward industrials (24.3%) while maintaining significant exposure to technology (23.1%) and healthcare (15.5%). Its top holdings include Lumentum Holdings Inc (NASDAQ:LITE), Sterling Infrastructure Inc at 0.9%, and ATI Inc (NYSE:ATI) at 0.8%. The fund was launched in 2004, manages a smaller basket of 960 holdings, and has a trailing-12-month dividend of $0.37 per share.

Which fund is the better buy?

Both small-cap funds from iShares that we look at provide excellent exposure to an often-overlooked asset class. Diversified investors would be wise to hold some small-cap stocks in their portfolios, and both ISCG and IWO offer that exposure at low cost with good returns.

The iShares Morningstar Small-Cap Growth ETF has a lower expense ratio, which can matter over time, but its performance still generally lags that of its iShares brethren across multiple time frames. The iShares Russell 2000 Growth ETF, IWO, beats ISCG in year-to-date performance as well as the past 52 weeks (IWO 41.7% to 31.2% for ISCG), 3-year (20.1% to 18.5%), and 5-year (5.7% to 5.3%). IWO only lags ISCG over the 10-year look back, with ISCG returning 10.54% to IWO’s 11.48%. The latter performance may be a function of ISCG’s lower expense ratio, but it’s likely that IWO’s outperformance in other time frames is due to its larger number of small-cap holdings: more small caps in the portfolio means more opportunities for the fund to own big winners.

Expense ratios matter, but performance matters more. IWO, the iShares Russell 2000 Growth ETF, has a track record of enough time that investors should take notice. In this comparison of iShares small-cap funds, go with IWO.

For more guidance on ETF investing, check out the full guide at this link.

Brendan Coffey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bloom Energy, Lumentum, and Sterling Infrastructure. The Motley Fool recommends Ati. The Motley Fool has a disclosure policy.