Should You Buy a Small Cap or Mid Cap ETF? We Take a Look at Two iShares ETFs

Investors seeking to diversify should hold some of their equities outside of the large-cap U.S. stocks that dominate investing headlines. The iShares Morningstar Small-Cap Value ETF (NYSEMKT:ISCV) offers lower costs and broader diversification, while the iShares S&P Mid-Cap 400 Value ETF (NYSEMKT:IJJ) provides exposure to larger, historically more stable mid-sized companies.

Both funds target undervalued segments of the U.S. market but focus on different size tiers, offering distinct risk-reward profiles. The iShares S&P Mid-Cap 400 Value ETF provides exposure to mid-sized companies that have matured past the small-cap phase, while the iShares Morningstar Small-Cap Value ETF captures smaller firms that may offer higher growth potential but come with increased volatility.

Snapshot (cost & size)

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

The iShares Morningstar Small-Cap Value ETF stands out as the more affordable option for value-oriented investors, carrying an expense ratio of only 0.06%. This is significantly lower than the 0.18% charged by the iShares S&P Mid-Cap 400 Value ETF. Additionally, the small-cap fund offers a slightly lower trailing-12-month dividend yield of 1.06%, at its recent price of $145 a share, compared to the mid-cap fund’s 1.60% at its recent price fo $76. Either may appeal to income-focused portfolios.

Performance & risk comparison

What's inside

Financial Services at 20.8%, Consumer Cyclical at 13.5%, and Industrials at 12.8%, lead the portfolio for the iShares Morningstar Small-Cap Value ETF. This fund is highly diversified with 1,075 holdings, and its largest positions include Akamai Technologies Inc (NASDAQ:AKAM) at 0.67%, Alcoa Corp (NYSE:AA) at 0.65%, and TD Synnex Corp (NYSE:SNX) at 0.65%. Launched in 2004, the fund has a trailing-12-month dividend of $1.41 per share and targets companies that Morningstar classifies as undervalued within the small-cap universe.

By contrast, the iShares S&P Mid-Cap 400 Value ETF leans more toward Industrials, with a sector breakdown of Financial Services at 21.4%, Industrials at 18.7%, and Consumer Cyclical at 13.9%. The fund is more concentrated with 306 holdings, including Alcoa Corp (NYSE:AA) 1.2%, Reliance Steel & Aluminum (NYSE:RS) at 1.2%, TD Synnex Corp (NYSE:SNX) at 1.2%. Launched in 2000, it has paid $2.34 per share over the trailing 12 months while tracking an index of mid-cap stocks that exhibit value characteristics.

Which is the better buy?

One of the benefits of buying a basket of stocks with a fund is that for small and mid caps, you do not have the worry of picking and choosing which company will win. You get the benefit of the small and mid cap companies that successfully grow and mitigate the risk of the ones that falter.

Both iShares funds examined here offer those benefits, as well as strong near- and long-term performance, making it hard to separate the iShares Morningstar Small-Cap Value ETF from the iShares S&P Mid-Cap Value ETF.

ISCV, the small-cap fund, bests IJJ, the mid-cap offering, in year-to-date performance, with a total return of about 10% to about 8%. It is also ahead on the one-year trailing returns at 19.7% to 12.64%

Stepping back further, the annualized three- and five-year return of the small-cap iShares ETF lags the mid-cap one, with ISCV returning 6% and 8% in the three- and five-year time frame, compared to nearly 11% and 7%, respectively, for the mid-cap fund.

Both funds offer low expense ratios and a highly diversified basket of stocks that provides strong exposure to the value sector of the U.S. stock market. For investors seeking to get some of their eggs out of the large-cap basket, either (or both) of the iShares Morningstar Small-Cap Value ETF or the iShares S&P Mid-Cap Value ETF is a solid choice.

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

Brendan Coffey has no position in any of the stocks mentioned. The Motley Fool recommends Akamai Technologies. The Motley Fool has a disclosure policy.