SPY vs. IWM: Is Large-Cap Stability or Small-Cap Growth the Better Choice for Investors Right Now?

Both the SPDR S&P 500 ETF Trust (NYSEMKT:SPY) and the iShares Russell 2000 ETF (NYSEMKT:IWM) rank among the most widely traded exchange-traded funds in the United States, but each serves a distinct purpose.

While SPY offers broad exposure to the S&P 500 Index, which is made up of large-cap U.S. companies, IWM tracks the Russell 2000 Index, representing small-cap domestic stocks. This comparison highlights how their cost, performance, and risk diverge as a result.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500. The 1-yr return represents total return over the trailing 12 months.

SPY offers the lower expense ratio of the two funds, and it also edges out IWM with a marginally higher dividend yield. For fee-conscious or income-focused investors, SPY has a slight advantage.

Performance & risk comparison

Over the past five years, SPY has delivered stronger cumulative growth and shallower losses during downturns. IWM’s higher beta and deeper drawdown reflect its greater exposure to small-cap volatility.

What's inside

SPY tracks the S&P 500 Index, holding 503 large-cap U.S. stocks with a sector tilt toward technology (35% of assets), financial services (13%), and communication services (11%). Its top three positions -- Nvidia, Apple, and Microsoft -- combined make up just over 20% of assets. With nearly 33 years in operation, SPY is the longest-running U.S. ETF, offering highly liquid, broad-based coverage of the American equity market.

IWM, in contrast, focuses on small-cap U.S. equities, spreading its assets across 1,961 holdings with healthcare, financial services, and technology as its largest sectors. No single stock dominates, as its top holdings -- Credo Technology Group, Bloom Energy, and Fabrinet -- combined represent less than 3% of total assets. IWM provides investors with diversified access to small-cap stocks, which have historically moved differently from large-cap stocks.

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

What this means for investors

Small-cap and large-cap stocks can both be fantastic investment choices, but they offer distinct advantages and disadvantages.

Large-caps, in general, tend to be more stable -- especially during periods of volatility. While they can be hit hard in the short term, large industry-leading companies are more likely to bounce back when the market recovers.

An S&P 500 ETF like SPY, then, can be a smart choice for investors looking to limit the impact of market volatility.

Small-cap stocks, on the other hand, can be more volatile in the short term. However, they can also be more lucrative, with greater potential for explosive growth compared to established companies.

The last few years have been interesting for the market, as many large companies -- like Nvidia, for example -- have managed to grow even larger, outpacing many small-cap stocks. SPY has outperformed IWM in both 12-month and five-year total returns, at least partly because its largest holdings have experienced record-shattering growth.

This doesn't mean, though, that small-cap stocks aren't a worthwhile investment. Investing in multiple segments of the market helps diversify your portfolio, and buying into small-cap stocks can make it easier to capitalize on future winners.

Just be aware that with its small-cap focus, IWM is more susceptible to price fluctuations. If you choose to invest in either of these funds, it's wise to keep a long-term outlook and be prepared to ride out any waves of market volatility.

Glossary

Exchange-traded fund (ETF): A fund that trades on stock exchanges like a stock, holding a basket of assets.
Index fund: A fund designed to track the performance of a specific market index, such as the S&P 500.
Large-cap: Companies with relatively large market values, typically more established and stable businesses.
Small-cap: Companies with relatively small market values, often younger and more volatile businesses.
Expense ratio: The annual fee a fund charges investors, expressed as a percentage of invested assets.
Dividend yield: Annual dividends paid by a fund or stock divided by its current price, shown as a percentage.
Beta: A measure of an investment’s volatility compared with the overall market, usually the S&P 500.
Assets under management (AUM): The total market value of all assets a fund or manager oversees.
Max drawdown: The largest peak-to-trough decline in an investment’s value over a specific period.
Total return: Investment performance including price changes plus all dividends and distributions, assuming they are reinvested.
Sector tilt: When a fund has relatively higher exposure to certain industries or sectors than the broader market.
Liquidity: How easily an investment can be bought or sold without significantly affecting its price.

Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Microsoft, and Nvidia. The Motley Fool recommends Bloom Energy and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.