iShares Fund Face-off: Is the Russell 2000 Growth ETF or Morningstar Small-Cap Growth ETF the Better Buy?

The iShares Russell 2000 Growth ETF (NYSEMKT:IWO) offers massive scale and liquidity, while the iShares Morningstar Small-Cap Growth ETF (NYSEMKT:ISCG) provides a much cheaper fee structure for small-cap growth exposure.

Small-cap growth stocks are often sought for their potential to outperform broader markets during economic expansions, though they typically carry higher volatility. Both iShares’ Russell 2000 Growth ETF and Morningstar Small-Cap Growth ETF provide exposure to this aggressive equity segment, yet they differ significantly in their fee structures, liquidity, and the specific indexes they use to identify growth characteristics.

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 based on the June 26 closing price.

Cost is a major differentiator here, as the Morningstar-indexed fund is significantly more efficient for long-term holders. Its 0.06% expense ratio is one-fourth the cost of the Russell 2000-based alternative. While neither fund is primarily a dedicated income play, the Morningstar fund’s 0.6% yield slightly edges out the 0.4% payout of its larger counterpart.

Performance & risk comparison

What's inside

iShares Russell 2000 Growth ETF targets smaller companies with high growth potential, as measured by the Russell 2000 Growth Index. Its portfolio of 1,102 stocks currently has a heavy focus on technology (26%), industrials (23%), and healthcare (22%). Its largest positions include Bloom Energy Inc (NYSE:BE) at 3.5%, Credo Technology Group Holding (NASDAQ:CRDO) at 0.69%, and Sterling Infrastructure (NASDAQ:STRL) at 1.4%. The fund was launched in 2000. iShares Russell 2000 Growth ETF has paid $1.64 per share over the trailing 12 months, which, on its recent ~$388.31 share price, works out to a 0.4% yield.

The iShares Morningstar Small-Cap Growth ETF offers a slightly narrower porftolio with 950 positions, aiming to mirror a Morningstar benchmark of small-cap growth equities. The portfolio tilts toward industrials (24%), technology (23%), and healthcare (16%). Its largest holdings include Lumentum Holdings (NASDAQ:LITE) at 2%, Sterling Infrastructure at 0.85%, and ATI Inc (NYSE:ATI) at 0.8%. The fund was launched in 2004. iShares Morningstar Small-Cap Growth ETF has paid $0.37 per share over the trailing 12 months, which, on its recent ~$64.33 share price, works out to a 0.6% yield.

Which fund is the better buy?

These two iShares ETFs are similar in that they focus on small-cap growth stocks in the U.S. Each fund is diversified enough in its holdings that they offer legitimate exposure to a representative slice of U.S. small caps. It’s important to look under the hood and make sure a potential portfolio fund really provides access to what it implies.

But given that they track different indexes, they have distinct characteristics that investors may want to weigh before making an investment.

The largest difference is simply performance. iShares Russell 2000 Growth ETF lags its iShares sibling in the longer-term time frame, returning 1.55% over the 5-year lookback compared to 2.71% for the Morningstar Small-Cap Growth ETF, and 9.75% to 10.57%, respectively, over the past 10 years.

Given ISCG’s superior long-term performance and lower expense ratio, that should be the deciding factor when choosing an ETF to hold for the long term. The price-to-earnings ratio of the Russell-based fund is 28.13 compared to 27.77 for iShares’ Morningstar-based small-cap ETF. That means IWO is being more aggressive in its portfolio, which probably accounts for its superior returns over the past 52 weeks.

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 has positions in and recommends Ati, Bloom Energy, Lumentum, and Sterling Infrastructure. The Motley Fool has a disclosure policy.