Small-Cap ETFs: ISCB Outperforms, but SPSM Yields More

Both the iShares Morningstar Small-Cap ETF (NYSEMKT:ISCB) and the State Street SPDR Portfolio S&P 600 Small Cap ETF (NYSEMKT:SPSM) aim to give investors access to U.S. small-cap stocks, but they differ in portfolio breadth, costs, and day-to-day usability. The iShares Morningstar Small-Cap ETF stands out for its broader portfolio and recent outperformance, while the State Street SPDR Portfolio S&P 600 Small Cap ETF offers lower costs, larger assets under management (AUM), and greater liquidity for investors.

This comparison highlights where each ETF may appeal, focusing on recent results, portfolio makeup, risk, and practical considerations for investors seeking small-cap exposure.

Snapshot (cost & size)

The 1-yr return represents total return over the trailing 12 months.

SPSM is more affordable with a slightly lower expense ratio and a marginally higher dividend yield, making it appealing for cost-conscious, income-focused investors. ISCB, while a bit pricier, offers broader diversification and stronger recent performance.

Performance & risk comparison

What's inside

ISCB tracks a broad basket of 1,578 small-cap U.S. stocks, with its largest sector weights in industrials (19%), financial services (17%), and healthcare (13.9%). The fund's top holdings -- Lumentum Holdings (NASDAQ:LITE), Albemarle Corp (NYSE:ALB), and Kratos Defense and Security Solutions (NASDAQ:KTOS) -- each account for less than half a percent of assets, supporting broad diversification. With a fund age of 21.5 yrs, ISCB brings long-term continuity and a tilt toward industrials and technology compared to peers.

SPSM, by contrast, holds 607 U.S. small-cap stocks and leans slightly more toward financial services (18%), followed by industrials (16%) and technology (15%). Its top positions -- Arrowhead Pharmaceuticals (NASDAQ:ARWR), Sanmina Corp. (NASDAQ:SANM), and Advanced Energy Industries (NASDAQ:AEIS) -- are also modest in size, reflecting broad market exposure. SPSM’s structure and sector mix make it a straightforward, low-cost option for small-cap exposure.

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

What this means for investors

Investing in small-cap index funds can be a solid way to diversify your portfolio and reduce risk, while potentially capitalizing on the larger growth possible with smaller, earlier-stage companies. Small-cap stocks can be more volatile, performing better in bull markets, but introducing more downside risk.

SPSM has a slightly lower expense ratio, which allows you to keep more of your money invested. It also offers a slightly higher dividend yield than ISCB. That combination may appeal to more cost-conscious investors. One of the biggest differences between the two funds is the total assets under management, a contest SPSM wins in a landslide. ISCB has performed slightly better over the last five years, with more growth and a smaller max drawdown. This is likely due to fund's overall holdings, which number more than 1,500, compared to SPSM's 607.

When deciding between the two ETFs, it may also be helpful to look at the funds' top holdings. ISCB's inclusion of healthcare among its top sectors may appeal to investors looking for opportunities in that dynamic yet defensive space, while SPSM's higher concentration in tech stocks may appeal to investors who want to ride the current uptrend in the sector.

Glossary

ETF: Exchange-traded fund that holds a basket of assets and trades like a stock.
Expense ratio: Annual fund operating costs expressed as a percentage of the fund's average assets.
Dividend yield: Annual dividends paid by a fund divided by its current share price, shown as a percentage.
AUM: Assets under management; the total market value of all assets held by the fund.
Small-cap: Companies with relatively low market values, typically a few hundred million to a few billion dollars.
Sector weight: Percentage of a fund's assets invested in a particular industry sector.
Holdings: The individual securities, such as stocks or bonds, that a fund owns.
Max drawdown: The largest peak-to-trough decline in value over a specific period, showing worst-case loss.
Growth of $1,000: Illustration showing how a $1,000 investment would have increased or decreased over time.
Beta: Measure of a fund's volatility relative to the overall market, typically compared to the S&P 500.
Total return: Investment performance including price changes plus all dividends and distributions, assuming reinvestment.
Liquidity: How easily and quickly an investment can be bought or sold without significantly affecting its price.

Sarah Sidlow has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Kratos Defense & Security Solutions. The Motley Fool recommends Lumentum. The Motley Fool has a disclosure policy.