Which Is the Better Small-Cap ETF, Schwab's SCHA or iShares' IJR?

While the iShares Core S&P Small-Cap ETF (NYSEMKT:IJR) offers concentrated exposure to profitable small-caps, the Schwab U.S. Small-Cap ETF (NYSEMKT:SCHA) provides a broader, more tech-leaning portfolio with a lower expense ratio.

Small-cap stocks are often a source of long-term growth, and these two funds provide two distinct ways to capture that segment. While the iShares fund relies on a specific index that requires companies to meet established eligibility requirements, the Schwab fund casts a wider net across the small-cap universe.

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.

Cost-conscious investors may prefer the Schwab fund, as its 0.03% expense ratio is half that of the iShares fund. Given the yield gap is minimal, both ETFs are solid sources of consistent income alongside their primary focus on capital appreciation.

Performance & risk comparison

What's inside

The Schwab U.S. Small-Cap ETF tracks a broad index of 1,727 stocks, providing extensive diversification across the smaller tier of the market. Its portfolio leans towards industrials at 18%, technology and financials at 17% each, and healthcare at 15%. Its largest positions include Sandisk (NASDAQ:SNDK) at 5.30%, Lumentum Holdings (NASDAQ:LITE) at 1.14%, and Revolution Medicines (NASDAQ:RVMD) at 0.79%. It was launched in 2009. The Schwab fund has paid $0.36 per share over the trailing 12 months, which on its recent ~$34.31 share price works out to a 1.00% yield.

In contrast, the iShares Core S&P Small-Cap ETF uses a more selective approach, holding 652 positions that meet the S&P SmallCap 600 eligibility requirements. The portfolio is diversified across financial services at 19%, industrials at 17%, and technology at 13%. Top holdings include Molina Healthcare (NYSE:MOH) at 0.67%, Brightspring Health Services (NASDAQ:BTSG) at 0.61%, and Viasat (NASDAQ:VSAT) at 0.57%. It was launched in 2000. The iShares fund has paid $1.64 per share over the trailing 12 months, which on its recent ~$143.69 share price works out to a 1.10% yield.

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What this means for investors

Both the Schwab U.S. Small-Cap ETF (SCHA) and iShares Core S&P Small-Cap ETF (IJR) offer exposure to small-cap stocks, a great way to diversify a portfolio and gain exposure to high-growth companies. Deciding which to invest in depends on the fund’s approach that best aligns with your investment goals.

SCHA is the better choice if you want broad exposure to the small-cap universe. The fund’s large holdings deliver superior diversification but entails greater volatility, as illustrated by the ETF’s larger five-year max drawdown. Its ultra-low expense ratio of 0.03%, which Schwab reduced from 0.04% in June, is a compelling benefit. For investors with a “set-it-and-forget-it” mindset who want to hold for the long term, the low cost is an appealing consideration.

IJR may be more expensive, but its far larger AUM offers greater liquidity, providing tighter bid-ask spreads. Its screen for profitability helps to reduce the volatility that comes with unprofitable smaller companies, but that results in a reduced number of holdings. IJR is a good choice for active traders or those who want a fund with greater stability.

Robert Izquierdo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lumentum and iShares Core S&P Small-Cap ETF. The Motley Fool has a disclosure policy.