IWM and IWO Provide Small-Cap Diversification, But One Offers More Growth Potential for Investors
Key Points
IWM comes with a lower expense ratio, broader diversification, and a higher dividend yield than IWO.
IWO is more concentrated in healthcare and technology stocks, while IWM tilts toward financials and holds almost twice as many companies.
Over the past five years, IWM saw a smaller maximum drawdown than IWO.
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The iShares Russell 2000 ETF (NYSEMKT:IWM) stands out for its lower costs, higher yield, and broader diversification, whereas the iShares Russell 2000 Growth ETF (NYSEMKT:IWO) focuses more heavily on growth-oriented small-cap stocks.
Both IWM and IWO track segments of the small-cap U.S. stock market, but IWM covers the full Russell 2000 Index, while IWO zeroes in on the growth subset. This comparison highlights where the two diverge on cost, performance, and risk.
Snapshot (cost & size)
| Metric | IWO | IWM |
|---|---|---|
| Issuer | iShares | iShares |
| Expense ratio | 0.24% | 0.19% |
| 1-yr return (as of Dec. 13, 2025) | 9.83% | 8.92% |
| Dividend yield | 0.65% | 0.97% |
| Beta (5Y monthly) | 1.40 | 1.30 |
| AUM | $13.2 billion | $72.5 billion |
Beta measures price volatility relative to the S&P 500. The 1-yr return represents total return over the trailing 12 months.
IWM is more affordable on fees with a lower expense ratio than IWO. It also offers a higher dividend yield, which may appeal to investors seeking additional income from their small-cap allocation.
Performance & risk comparison
| Metric | IWO | IWM |
|---|---|---|
| Max drawdown (5 y) | -42.02% | -31.91% |
| Growth of $1,000 over 5 years | $1,212 | $1,334 |
What's inside
IWM holds 1,951 stocks, spanning U.S. small-cap companies across all sectors. While it's highly diversified, it has notable tilts toward healthcare (18%), financials (18%), and industrials (17%).
Its top holdings are Bloom Energy, Credo Technology Group, and Fabrinet, each making up less than 1% of the fund’s total assets. With over 25 years on the market and no notable quirks or complex overlays, IWM aims for broad, representative exposure to the small-cap universe.
IWO, by contrast, focuses on the growth segment of the Russell 2000, resulting in a more concentrated portfolio. Its top sectors include healthcare (25%), industrials (22%), and technology (21%).
Its largest positions mirror IWM’s but at higher allocations, reflecting IWO's narrower focus. Investors seeking pure growth exposure may find IWO’s sector tilt and higher volatility notable, but it comes with fewer holdings and a more concentrated risk profile.
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What this means for investors
IWO and IWM both offer access to small-cap stocks, but they differ in their goals and portfolio allocations.
IWM is the more diversified of the two, providing exposure to the entire small-cap market. It's less focused on any particular industry or individual stock, which can help limit risk -- especially during periods of volatility.
IWO, on the other hand, offers a more targeted approach, only containing stocks that have shown greater potential for growth. Its portfolio is around half the size of IWM's, but it's more heavily tilted toward a handful of industries.
Diversification can be a double-edged sword in some cases. While more variety can help mitigate risk, it can also dilute returns -- with lower-performing stocks sometimes dragging down the entire fund's earning potential.
IWO has earned slightly higher returns over the past year compared to IWM. However, it's also seen a more significant max drawdown, indicating more severe price swings over the last few years.
Before making an investment decision, consider your primary goals and risk tolerance. Investors who are comfortable with slightly higher risk levels for the chance at earning higher returns may opt for the growth-focused IWO, while those seeking to mitigate risk with small-cap stocks may prefer the more diversified IWM.
Glossary
Expense ratio: The annual fee, as a percentage of assets, that an ETF or fund charges to cover operating costs.
Diversification: The practice of spreading investments across various assets or sectors to reduce risk.
Dividend yield: Annual dividends paid by an investment, expressed as a percentage of its current price.
Small-cap: Refers to companies with relatively small market capitalizations, typically between $300 million and $2 billion.
Growth stock: A stock expected to grow earnings or revenue faster than the overall market average.
Russell 2000 Index: A stock market index tracking 2,000 small-cap U.S. companies.
Drawdown: The peak-to-trough decline in an investment's value, usually expressed as a percentage.
Beta: A measure of an investment's volatility compared to the overall market, often using the S&P 500 as a benchmark.
AUM (Assets Under Management): The total market value of assets that an investment fund manages on behalf of investors.
Sector tilt: When a portfolio has a higher allocation to certain industries or sectors compared to a benchmark.
Concentrated risk profile: When an investment or portfolio is heavily weighted in a few holdings or sectors, increasing risk.
ETF (Exchange-Traded Fund): An investment fund traded on stock exchanges, holding a basket of assets like stocks or bonds.
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Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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