Better iShares Small-Cap Growth ETF: ISCG vs. IWO

The iShares Morningstar Small-Cap Growth ETF (NYSEMKT:ISCG) offers a more cost-efficient entry into small-cap growth stocks, while the iShares Russell 2000 Growth ETF (NYSEMKT:IWO) provides a massive liquidity profile for active traders.

Both funds target fast-growing small companies but follow different indices. While ISCG uses a Morningstar-derived benchmark, IWO tracks the well-known Russell 2000 Growth Index. This choice impacts everything from sector weightings to the total number of holdings in the portfolio.

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.

ISCG is notably more affordable with a 0.06% expense ratio compared to 0.24% for IWO. The iShares Morningstar Small-Cap Growth ETF also generates a higher payout, offering a 0.7% yield against 0.5% for its Russell-based counterpart.

Performance & risk comparison

What's inside

The iShares Russell 2000 Growth ETF focuses on healthcare at 30%, technology at 21%, and industrials at 14%. It holds 1,126 stocks, and its largest positions include Twist Bioscience (NASDAQ:TWST) at 0.80%, Moog (NYSE:MOGA) at 0.72%, and Jfrog (NASDAQ:FROG) at 0.68%. It was launched in 2000, and has paid $1.69 per share over the trailing 12 months, which on its recent ~$358.5 share price works out to a 0.5% yield.

The iShares Morningstar Small-Cap Growth ETF allocates more to technology at 24%, industrials at 21%, and healthcare at 19%. It maintains 924 holdings, with top positions such as Okta (NASDAQ:OKTA) at 1.15%, Atlassian (NASDAQ:TEAM) at 1.01%, and Guardant Health (NASDAQ:GH) at 0.74%. It was launched in 2004, and has paid $0.40 per share over the trailing 12 months, which on its recent ~$61.3 share price works out to a 0.7% yield.

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

Which looks like the better buy

Small-cap stocks are a great way for investors to gain exposure to fast-growing enterprises. However, the research involved to dig through the thousands of equities in the small-cap universe makes picking the winners a daunting task. That's where iShares steps in. It has two funds that help individuals invest in strong smaller companies, the iShares Russell 2000 Growth ETF (IWO) and the iShares Morningstar Small-Cap Growth ETF (ISCG).

While both offer exposure to growth businesses in the small-cap sector of the stock market, each uses different methodologies to select their holdings. Choosing between them comes down to which approach you prefer.

IWO gives you massive scale with its more than 1,000 holdings and $14.2 billion AUM. It tracks the most famous small-cap growth benchmark, used by institutional investors, the Russell 2000 Growth Index. This contributes to its significantly higher expense ratio, but its large AUM delivers far greater liquidity than ISCG, which is ideal for active traders. The fund uses metrics such as the rate of sales expansion and forecasted growth to pick the stocks to include.

ISCG uses Morningstar's multi-factor growth style parameters instead of Russell's rules, looking at factors such as above-average earnings, sales, and cash flow growth. It's much smaller, with an AUM of $956.2 million, but its ultra-low fee makes it a great fund to buy and hold for the long term.

Robert Izquierdo has positions in Atlassian, JFrog, and Okta. The Motley Fool has positions in and recommends Atlassian, Okta, and Twist Bioscience. The Motley Fool recommends Guardant Health, JFrog, and Moog. The Motley Fool has a disclosure policy.