Summary
Investors looking to grow their money often turn to small-cap exchange-traded funds, or ETFs. These funds hold stocks in smaller companies that have the potential to grow much faster than famous, large corporations. Two of the most popular choices are the iShares Russell 2000 ETF (IWM) and the iShares Core S&P Small-Cap ETF (IJR). While they both focus on small companies, they use very different rules to pick which stocks to include, leading to different results for investors.
Main Impact
The biggest difference between these two funds is how they judge a company’s health. One fund accepts almost any small company, while the other only accepts companies that are actually making a profit. This "quality filter" has historically helped one fund perform better than the other over long periods. For an everyday investor, picking the wrong one could mean missing out on higher returns or taking on more risk than necessary.
Key Details
What Happened
The iShares Russell 2000 ETF, known by its ticker symbol IWM, is the older and more famous of the two. It tracks the Russell 2000 Index, which includes the smallest 2,000 companies from a larger list of 3,000 stocks. It is a broad look at the small-business world in the United States. Because it is so large, many professional traders use it to bet on the direction of the economy.
On the other side is the iShares Core S&P Small-Cap ETF, or IJR. This fund tracks the S&P SmallCap 600 Index. Instead of just taking the 600 smallest companies, the people who run this index have strict rules. A company must show that it has earned money over the last four quarters before it can be added. This simple rule keeps "zombie companies"—businesses that are losing money and staying alive only through debt—out of the fund.
Important Numbers and Facts
The size and cost of these funds are also quite different. IWM holds about 2,000 different stocks, giving it a very wide reach. However, it is more expensive to own, with an annual fee of around 0.19%. This means for every $10,000 you invest, you pay $19 a year. IJR is much smaller in terms of the number of stocks it holds, usually around 600. It is also much cheaper, with a fee of about 0.06%, or $6 a year for every $10,000 invested.
Trading volume is another area where they differ. IWM is traded much more often by big banks and hedge funds. This makes it very "liquid," meaning it is very easy to buy and sell millions of dollars worth of shares in seconds without changing the price. IJR is liquid enough for most regular people, but it is mostly used by long-term investors rather than fast-paced traders.
Background and Context
Small-cap stocks are companies that usually have a total value between $300 million and $2 billion. They are often seen as the "engine" of the American economy. When the economy is doing well, these companies can expand quickly. However, they are also riskier than big companies like Apple or Walmart. If the economy slows down, small companies often struggle more because they have less cash in the bank.
In recent years, the gap between profitable and unprofitable small companies has grown. Many companies in the Russell 2000 (IWM) do not make any money. When interest rates are high, these companies have to pay more to borrow money, which can lead to lower stock prices. This is why the rules used by IJR to pick only profitable companies have become so important to investors lately.
Public or Industry Reaction
Financial advisors often point to IJR as the better choice for people saving for retirement. They argue that there is no reason to own a piece of a company that is losing money if you can avoid it. Many experts call IJR a "quality" fund because of its strict entry requirements. However, some traders still prefer IWM because it has a more active options market, allowing them to make complex bets on the market's future.
What This Means Going Forward
As the market moves into 2024 and beyond, the performance of these two funds will likely depend on interest rates. If the Federal Reserve lowers rates, the struggling companies in IWM might see their stock prices jump as their borrowing costs go down. This could lead to a short-term period where IWM beats IJR. However, for those who plan to hold their investment for five or ten years, the lower fees and higher quality of IJR usually make it the more steady choice.
Final Take
Choosing between IWM and IJR comes down to what kind of investor you are. If you want to trade quickly or follow the most famous small-cap index, IWM is the standard. But for most people who want to build wealth over time, IJR offers a smarter way to own small companies. By focusing on businesses that actually turn a profit and charging lower fees, IJR provides a more efficient path to long-term growth.
Frequently Asked Questions
Which ETF is better for long-term investing?
Most experts suggest IJR for long-term investors because it only includes profitable companies and has much lower annual fees than IWM.
Why does IWM have so many more stocks?
IWM tracks the Russell 2000, which is designed to be a broad look at the entire small-cap market, whereas IJR only tracks 600 companies that meet specific financial health goals.
Do these funds pay dividends?
Yes, both funds pay dividends to investors, usually every three months. However, the amount can change based on how much the companies inside the funds earn.