The Yield vs. Weighting Dilemma: How to Choose Between SPSM and SCHA

The State Street SPDR Portfolio S&P 600 Small Cap ETF (NYSEMKT:SPSM) tracks a curated list of 608 small-cap stocks, while the Schwab U.S. Small-Cap ETF (NYSEMKT:SCHA) offers much broader diversification across nearly 1,750 holdings.

Both exchange-traded funds provide low-cost access to U.S. small-cap stocks, yet they follow different indexing philosophies. While one focuses on the established S&P 600 index, the other tracks the Dow Jones U.S. Small-Cap Total Stock Market Index, leading to differences in sector weights and risk profiles.

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-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

Both funds are exceptionally affordable with identical 0.03% expense ratios. However, the State Street fund currently provides a higher income stream, outperforming the Schwab fund in trailing-12-month distribution yield by a modest margin.

Performance & risk comparison

What's inside

Schwab U.S. Small-Cap ETF tracks a broad index of approximately 1,748 stocks, with its largest sectors including healthcare at 17%, financial services at 17%, and technology at 15%. Its largest positions include Halozyme Therapeutics (NASDAQ:HALO) at 0.36%, Glaukos (NYSE:GKOS) at 0.34%, and Wayfair (NYSE:W) at 0.32%. The fund was launched in 2009. Schwab U.S. Small-Cap ETF has paid $0.37 per share over the trailing 12 months, which, on its recent ~$33.05 share price, works out to a 1.1% yield.

State Street SPDR Portfolio S&P 600 Small Cap ETF holds 608 companies, leaning toward financial services at 18%, industrials at 17%, and consumer cyclical at 13%. Top holdings include Glaukos Corp at 0.81%, Viasat (NASDAQ:VSAT) at 0.61%, and Paycom Software (NYSE:PAYC) at 0.57%. The fund was launched in 2013. State Street SPDR Portfolio S&P 600 Small Cap ETF has paid $0.82 per share over the trailing 12 months, which, at its recent ~$54.98 share price, works out to a 1.5% yield.

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

Which looks like the better buy

When comparing the State Street SPDR Portfolio S&P 600 Small Cap ETF (SPSM) and the Schwab U.S. Small-Cap ETF (SCHA), investors should consider several key factors. Let's see what they tell us about each fund.

First, we should examine each fund's strategy. SPSM is focused on profitable small-cap companies. It holds about 600 stocks. SCHA, on the other hand, casts a wider net, holding about 1,700 small-cap stocks.

Two other important factors are historical performance and income potential. Since 2021, SPSM has generated a total return of 24%, equating to a compound annual growth rate (CAGR) of 4.4%. SCHA, by contrast, has delivered a total return of 26%, with a 4.8% CAGR. Neither fund has matched the S&P 500's performance over this stretch. As for income, SPSM has the higher yield, at 1.5%; SCHA's 1.1% still offers some cash flow to income-focused investors.

One final factor to weigh is cost. Here, both funds excel. They each offer a matching annual expense ratio of 0.03%, making both funds excellent choices for cost-conscious investors.

In summary, SPSM and SCHA are both small-cap index ETFs, yet they do exhibit some key differences. SPSM holds fewer stocks, but is actually less top-heavy. SCHA holds three times as many stocks as SPSM, but its weighting system means that its top 10 stocks contribute around 10% of its exposure. With historical performance and cost essentially a push, the head-to-head matchup largely comes down to income potential and investor preference. Many investors will favor SPSM for its higher dividend yield, yet SCHA is a fine choice for those who prefer its methodology.

Jake Lerch has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Paycom Software. The Motley Fool recommends Wayfair. The Motley Fool has a disclosure policy.