Which Small Cap Growth ETF is the Best?

Over the last quarter, we’ve seen investor interest in small-caps come back, leading the Russell 2000 small cap index to outperform the S&P 500 by more than 2%.

However, investing in individual small-cap stocks can be risky because of their volatility. A more conservative way to gain exposure is through ETFs.

Typically, investors go with standard indexes like the Russell 2000.

However, we wanted to look at the iShares Russell 2000 Growth ETF (IWO). 

Although this ETF is a subset of the Russell 2000, it garnered nearly 50% more searches by financial pros in the last month.

That’s rather unusual considering the iShares Russell 2000 ETF (IWM) is the gold standard for small cap ETFs.

So what makes this growth ETF different?

iShares Russell 2000 Growth ETF (IWO) is designed to measure the performance of an index composed of small-cap growth stocks with 1,118 companies in the index.

Some important details the IWO portfolio included:

• Weighted Average Market Cap $2.8 billion
• Price/Earnings Ratio -4.8x
• Price/Book Ratio 3.9x
• Distribution yield 0.45x

Currently, the company with the highest weighting in the portfolio is Shockwave Medical (SWAV), at 0.83%. 

These are the top ten stocks in IWO:

IWO has exposure to many sectors, but the top ones are health care at 23.8%, information technology at 19.76%, and industrials at 17.4%.

If you invested $10K in IWO 5 years ago, it would be worth approximately $14,700 today, off its highs of Feb. 5, 2021, when it was up 108.99%, or $20,899.43. 

The 5-year returns of IWO lag the SPY at 69.1% and the QQQ at 121.88%. 

Trading IWO

IWO is actively traded. The average daily volume is approximately 720K shares, though that’s well below the IWM’s average of 23 million. While options are available, they are not very liquid, with low volume and open interest. 

Investing In IWO

Before you ever invest in an ETF, make sure to check what the costs are. You want to avoid ETFs that have high expense ratios. A good rule is to avoid buying ETFs with expense ratios above 1%. 

IWO has an expense ratio of 0.23%, making it a good investment product.

Other Choices.

There are many options for investors who want exposure to the Russell 2000 besides IWO. 

Here are some competitors:

Vanguard Small-Cap Growth Index ETF (VBK): It’s slightly cheaper than IWO. It has also performed better over the last 5 years, returning 56.87%. VBK has an expense ratio significantly smaller than IWO at 0.06%

Vanguard Russell 2000 Growth Index Fund ETF (VTWG): It’s significantly cheaper than IWO, trading at $174 per share. The returns over five years are similar, at 45%. Its expense ratio is similar at 0.24%

SPDR S&P 600 Small Cap Growth ETF (SLYG): Priced significantly less than IWO, at $79 per share. Over the last five years it has had a slightly better return, at 50%. It has a lower gross expense ratio, at 0.15%

Our Opinion 6/10

IWO is a solid ETF for anyone wanting exposure to small-cap growth stocks. The ETF has gotten clobbered this year, down 18.44% YTD. Which we believe is a buying opportunity. 

But IWO doesn’t have a higher rating because there are better options like SLYG and VBK. If you want to gain exposure to small-cap growth stocks, we’d choose one of those two instead of IWO. 

For more traditional small cap investing, we prefer the IWM ETF.