Better Small-Cap ETF: State Street SPSM vs. JPMorgan BBSC

The State Street SPDR Portfolio S&P 600 Small Cap ETF (NYSEMKT:SPSM) offers a significantly lower expense ratio and higher yield than the JPMorgan BetaBuilders U.S. Small Cap Equity ETF (NYSEMKT:BBSC).

Investors seeking small-cap exposure often choose between broad market indices and more targeted strategies. While both funds target the smaller end of the market capitalization spectrum, they utilize different benchmarks and cost structures to provide that exposure to investors through diversified portfolios.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from monthly returns over the available fund history (up to five years). The 1-year return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

The State Street fund is noticeably more affordable, with an expense ratio of 0.03% compared to 0.09% for the JPMorgan fund. Additionally, the State Street fund offers a higher payout for income-oriented investors.

Performance & risk comparison

What's inside

The State Street SPDR Portfolio S&P 600 Small Cap ETF focuses on the S&P SmallCap 600 Index, providing a core component for broad diversification. Its sector exposure is led by Financial Services at 18%, Industrials at 15%, and Technology at 15%. The fund holds 607 securities, and its largest positions include Formfactor (NASDAQ:FORM) at 0.59%, Viasat (NASDAQ:VSAT) at 0.57%, and Qorvo (NASDAQ:QRVO) at 0.55%. It was launched in 2013, and has paid $0.82 per share over the trailing 12 months, which on its recent ~$53.38 share price works out to a 1.5% yield.

The JPMorgan BetaBuilders U.S. Small Cap Equity ETF follows a benchmark of companies in the 95th to 99th percentile of market capitalization. The fund is most heavily weighted in Technology at 19%, Healthcare at 18%, and Financial Services at 16%. It maintains a larger roster of 851 holdings, with top positions including Semtech (NASDAQ:SMTC) at 0.69%, Corcept Therapeutics (NASDAQ:CORT) at 0.46%, and Twist Bioscience (NASDAQ:TWST) at 0.45%. It was launched in 2020, and has paid $0.91 per share over the trailing 12 months, which on its recent ~$85.46 share price works out to a 1.1% yield.

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

Which looks like the better buy

Investing in small-cap stocks is a great way to capitalize on the high-growth potential of smaller businesses. The State Street SPDR Portfolio S&P 600 Small Cap ETF (SPSM) and JPMorgan BetaBuilders U.S. Small Cap Equity ETF (BBSC) offer the opportunity to do so in an efficient manner. They do the screening, so you don't have to wade through thousands of companies to find the winners.

Between the two, I think State Street's SPSM is the better choice. I like BBSC's larger tech sector exposure, because the artificial intelligence boom has delivered a massive tailwind to small-cap companies.

However, SPSM wins because the S&P SmallCap 600 Index it strives to replicate applies quality filters. For a business to be included, it must have positive earnings in its most recent quarter and the past four consecutive quarters combined.

This helps to make SPSM less volatile, as demonstrated by its lower beta and max drawdown. It also contributes to a larger dividend yield, since unprofitable companies shouldn't be making dividend payments. SPSM's combination of a higher dividend yield and far lower expense ratio make this ETF a solid, low-cost fund to hold for the long term.

Robert Izquierdo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Corcept Therapeutics, FormFactor, and Twist Bioscience. The Motley Fool recommends Qorvo. The Motley Fool has a disclosure policy.