ISCG vs. RZG: Which Small-Cap Growth ETF Is the Better Buy for Investors?

The iShares Morningstar Small-Cap Growth ETF (NYSEMKT:ISCG) provides a low-cost, highly diversified approach to small-cap growth, while the Invesco S&P SmallCap 600 Pure Growth ETF (NYSEMKT:RZG) offers a more concentrated strategy.

Both funds target the small-cap growth segment but build their portfolios in different ways. ISCG follows a traditional market-cap-weighted index of small companies, while RZG screens the S&P SmallCap 600 for stocks with the strongest growth characteristics -- such as sales growth, earnings momentum, and price momentum -- and weights its holdings accordingly.

Snapshot (cost & size)

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

ISCG is significantly cheaper, with an expense ratio of 0.06%, compared to RZG’s 0.35%. ISCG also offers a slightly higher dividend yield of 0.57%, compared to RZG's 0.42% -- a modest edge for income-minded investors.

Performance & risk comparison

What's inside

Launched in 2004, ISCG tracks a broad index of small-cap growth stocks. The fund has heavy concentrations in industrials and technology at 23.9% and 22.5%, respectively, as well as healthcare at 17.9%. With 933 holdings, it offers extensive diversification, minimizing individual stock risk. Its largest positions include Sterling Infrastructure (NASDAQ:STRL) at 0.8%, Okta (NASDAQ:OKTA) at 0.7%, and Guardant Health (NASDAQ:GH) at 0.6%.

RZG provides a narrower portfolio of 125 stocks, built from the S&P SmallCap 600 index. This index uses a growth-score methodology that favors companies with strong sales growth, earnings momentum, and price momentum. Its top sector allocations are healthcare at 25.1%, technology at 17.3%, and industrials at 16.4%. RZG’s approach leads to higher concentration than ISCG's, with top holdings including ACM Research (NASDAQ:ACMR) at 3.7%, Powell Industries (NASDAQ:POWL) at 2.0%, and Argan (NYSE:AGX) at 2.0%. RZG fund was launched in 2006.

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What this means for investors

The choice between these two funds really comes down to how much an investor is willing to pay for the potential to outperform.

Cost is almost always a primary consideration when two funds target a similar corner of the market. ISCG's 0.06% expense ratio is about as cheap as small-cap investing gets -- on a $10,000 investment, ISCG charges roughly $6 a year, versus about $35 a year for RZG. Over long holding periods, that fee gap can compound meaningfully.

That said, RZG's recent outperformance isn't surprising given the type of stocks it holds. By concentrating on companies already showing strong sales and earnings momentum, growth-oriented funds like RZG tend to do well when those trends stay intact -- but that same concentration can cut both ways if momentum fades or a handful of its largest holdings stumble. ISCG's broader, market-cap-weighted approach spreads that risk across more than 900 companies, trading some upside potential for more diversified exposure to the small-cap growth space.

Investors who want the cheapest, most diversified way to own small-cap growth stocks may lean toward ISCG, while those comfortable with more concentrated bets on recent momentum, and willing to pay more for it, may find RZG's recent track record more appealing. As with any small-cap allocation, these funds are probably best used as a slice of a diversified portfolio rather than a core holding, given the added volatility that comes with smaller companies.

Andy Gould has positions in Sterling Infrastructure. The Motley Fool has positions in and recommends Guardant Health, Okta, and Sterling Infrastructure. The Motley Fool has a disclosure policy.