VOO Has Delivered Higher Returns, But IWM Provides Broad Small Cap Exposure

Vanguard S&P 500 ETF (NYSEMKT:VOO) and iShares Russell 2000 ETF (NYSEMKT:IWM) target different segments of the U.S. stock market, with VOO tracking large-cap leaders at a much lower expense ratio, while IWM delivers small-cap exposure with higher volatility and a wider sector spread.

Both the Vanguard S&P 500 ETF (VOO) and iShares Russell 2000 ETF (IWM) are among the most popular U.S. equity ETFs, but their approaches diverge. VOO concentrates on the 500 largest U.S. companies, aiming to mirror the S&P 500, while IWM offers access to almost 2,000 small-cap stocks via the Russell 2000. This comparison explores costs, returns, risk, and portfolio tilt to help clarify which may appeal for different objectives.

Snapshot (Cost & Size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year weekly returns. The 1-yr return represents total return over the trailing 12 months.

VOO is significantly more affordable to own, charging 0.03% annually compared to IWM’s 0.19%. Both funds offer similar dividend yields just over 1%, so the cost gap could matter more for long-term compounding than for income-focused investors.

Performance & Risk Comparison

What's Inside

IWM provides broad exposure to nearly 1,945 small-cap U.S. stocks, with its largest sector weights in healthcare (19%), financial services (16%), and technology (16%). Top holdings are highly diversified, with Bloom Energy Class A Corp (NYSE:BE), Nextpower Inc Class A (NASDAQ:NXT), and Kratos Defense And Security Solutions (NASDAQ:KTOS) each representing less than 1.2% of assets. The fund’s long track record of 25.7 years and deep roster give it a unique lens on the small-cap space, though returns can be more volatile.

By contrast, VOO is built around the S&P 500, heavily tilted to technology (43%) and anchored by mega-cap companies such as NVIDIA Corp (NASDAQ:NVDA), Apple Inc (NASDAQ:AAPL), and Microsoft Corp (NASDAQ:MSFT). Its 505 holdings are more concentrated, with the top three positions alone accounting for over 20% of assets. This composition makes VOO more sensitive to moves in the tech sector and large-cap trends.

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What This Means For Investors

Both Vanguard S&P 500 ETF (VOO) and iShares Russell 2000 ETF (IWM) are compelling options for investors looking for an exchange traded fund (ETF) with broad exposure to the stock market. However, these two funds have some important differences that investors need to understand. Here’s what they are.

First off, let’s talk performance. Over the last five years, the performance gap between VOO and IWM has grown steadily wider. Indeed, VOO has delivered a total return of 90% during that time, equating to a compound annual growth rate (CAGR) of 13.7%. IWM, meanwhile, has advanced by only 24% overall, with a CAGR of 4.4%. In short, the S&P 500 — driven by big tech stocks — has trounced the small cap-led Russell 2000 for several years running. That’s not to say this trend will continue forever, but it is a notable pattern that investors should know exists.

Aside from performance, there are other key differences between these funds. Fees are one example. VOO boasts a rock-bottom expense ratio of 0.03%, while IWM’s expense ratio is 0.19%. Clearly, cost-conscious investors may favor VOO given its lower fees. As for income potential, there is little to separate the funds. VOO has a dividend yield of 1.0%, and IWM has a slightly higher dividend yield of 1.1%.

To sum up, VOO and IWM are both popular ETFs and would make a solid addition to most portfolios. That said, VOO has an edge thanks to its lower fees and better performance history. However, for investors seeking exposure to small cap stocks, IWM is a fine alternative.

Jake Lerch has positions in Nvidia and iShares Trust - iShares Russell 2000 ETF. The Motley Fool has positions in and recommends Apple, Bloom Energy, Kratos Defense & Security Solutions, Microsoft, Nextpower, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.