Invesco (RZG) vs. iShares (IJT): Which Small Cap Growth ETF Is the Better Buy?

Investors comparing the iShares S&P Small-Cap 600 Growth ETF (NASDAQ:IJT) and the Invesco S&P SmallCap 600 Pure Growth ETF (NYSEMKT:RZG) must weigh the significantly lower ownership costs of the iShares fund against the Invesco fund's stronger recent 1-year total return.

Both funds target the small-cap segment of the U.S. market but use different selection criteria. IJT focuses on classic growth factors such as earnings momentum and sales growth, while RZG weights companies in the same small-company universe by its “growth score.” This technical nuance creates distinct risk-reward profiles for investors seeking small-company exposure.

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 fund is notably more affordable, with an expense ratio of 0.18% compared to 0.35% for the Invesco fund. Additionally, the iShares fund offers a higher yield, nearly doubling its competitor’s 0.41% payments.

Performance & risk comparison

What's inside

The iShares S&P Small-Cap 600 Growth ETF (IJT) aims to replicate the investment results of its chosen index by concentrating its holdings in smaller U.S. companies that display robust growth prospects. Its portfolio currently includes 376 holdings, with weightings in the technology (21%), industrials (19%), and healthcare (15%) sectors. Its largest individual positions include Viasat at 1.25%, Brightspring Health Services at 1.21%, and Argan at 1.09%. This iShares fund was launched in 2000. It has paid $1.21 per share over the trailing 12 months, which, at its recent ~$175.89 share price, yields 0.77%.

The Invesco S&P SmallCap 600 Pure Growth ETF (RZG) takes a different approach, weighting securities in the S&P SmallCap 600 Index by revenue rather than market capitalization. It holds a more concentrated portfolio of 125 names, with healthcare (23%), industrials (17%), and technology (17%) as the top sectors. Top holdings include ACM Research (3.29%), Powell Industries (2.13%), and StoneX Group (1.95%). The Invesco fund was launched in 2006. It has paid $0.30 per share over the trailing 12 months, which, at its recent ~$71.55 share price, yields 0.41%.

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Which small-cap growth ETF is the better buy?

Both ETFs have been in operation for 20 years or more, and they have delivered very similar annualized total returns over that time: RZG at 9.5% and IJT at 9.7%. However, there are a few reasons why I would lean toward buying IJT or RZG to gain exposure to small-cap stocks.

First -- and part of the reason the IJT has slightly better past returns -- is that the fund’s expense ratio is 0.17 percentage points lower, while its dividend yield is 0.36 percentage points higher. While these aren’t massive amounts, they create quite a bit of alpha for investors compounding over a decade or two.

Second, IJT has produced slightly superior returns with a much lower 5-year drawdown and lower overall volatility, as reflected in its lower beta. Receiving better returns, with a smoother ride, and at a lower cost is an alluring investment proposition.

Finally, I like that IJT holds roughly three times as many stocks and has a much larger asset base than RZG, which also makes it a slightly safer investment. That said, if an investor is only looking for a fund with stocks that have the highest “growth scores” under RZG’s strategy, it may be the better performer in growth-stock-friendly markets, as we’ve seen over the last year.

Overall, though, I could only look to buy IJT for my own portfolio thanks to its lower expenses, higher dividend yield, and strong historical returns, while also being a “smoother” ride.

Josh Kohn-Lindquist has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.