SCHA vs. SPSM: Which Small-Cap ETF Is the Better Choice for Investors?

Both the State Street SPDR Portfolio S&P 600 Small Cap ETF (NYSEMKT:SPSM) and the Schwab U.S. Small-Cap ETF (NYSEMKT:SCHA) are designed to provide investors with broad exposure to U.S. small-cap stocks, but they employ slightly different approaches.

This comparison examines how their costs, performance, risk, and portfolio composition compare for those considering which small-cap ETF may be the best fit.

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.

SPSM is more affordable on fees, with a slightly lower expense ratio compared to SCHA. SPSM also offers a modestly higher dividend yield, which may appeal to those seeking income alongside growth.

Performance & risk comparison

What's inside

SCHA tracks the performance of small-cap U.S. stocks using the Dow Jones U.S. Small-Cap Total Stock Market Index. The fund holds 1,745 stocks, making it considerably more diversified than many peers.

Its sector mix is led by financial services, technology, and healthcare, and its top positions include Sandisk, Lumentum Holdings, and Rocket Companies. SCHA does not employ leverage, currency hedging, or ESG screens, so it is relatively straightforward for those seeking broad small-cap exposure.

SPSM, in contrast, tracks the S&P SmallCap 600 Index, containing 607 stocks. Its largest sector allocations are financial services, industrials, and technology, and the largest holdings are Arrowhead Pharmaceuticals, Armstrong World Industries, and InterDigital. Like SCHA, SPSM does not have any structural quirks or overlays.

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

What this means for investors

Investing in small-cap stocks can be a smart way to diversify your portfolio and gain exposure to smaller companies with greater growth potential.

Between these two funds, SCHA has historically experienced slightly higher levels of volatility, with a higher beta and a more severe max drawdown. While it's outperformed SPSM over the past 12 months, it's earned lower five-year total returns.

SCHA holds nearly three times as many stocks as SPSM, providing much broader exposure to the small-cap sector. The two funds also differ somewhat in their sector allocations. Both have financial services and technology within their top three sectors, but SCHA has more healthcare stocks while SPSM focuses more on industrials.

Finally, SPSM has the edge in terms of both fees and dividends, with a lower expense ratio and a higher yield.

Where you choose to invest will depend mostly on what you're looking to gain from a small-cap ETF. SCHA has been more volatile, historically, but it's also outperformed SPSM over the last year and is much broader. SPSM is marginally less expensive to own and also boasts a higher dividend yield, and its more targeted approach has helped it outperform SCHA over longer periods.

Glossary

ETF: Exchange-traded fund that holds a basket of securities and trades on an exchange like a stock.
Expense ratio: Annual fund fee, expressed as a percentage of assets, deducted to cover management and operating costs.
Dividend yield: Annual dividends paid by a fund or stock divided by its current share price.
Beta: Measure of an investment’s volatility compared with the overall market, typically the S&P 500.
AUM: Assets under management; the total market value of all assets a fund manages.
Max drawdown: Largest peak-to-trough decline in value over a specific period, showing worst historical loss.
Total return: Investment performance including price changes plus all dividends and distributions, assuming reinvestment.
Index: A rules-based basket of securities used to track or measure a specific segment of the market.
Small-cap: Refers to companies with relatively small market capitalizations, typically a few hundred million to a few billion dollars.
Leverage: Use of borrowed money or derivatives to amplify a fund’s exposure and potential returns or losses.
Currency hedging: Strategy used by funds to reduce the impact of exchange-rate movements on investment returns.
ESG screens: Filters that include or exclude investments based on environmental, social, and governance criteria.

Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Rocket Companies. The Motley Fool recommends Lumentum. The Motley Fool has a disclosure policy.