In the realm of small-cap growth investing, the iShares S&P Small-Cap 600 Growth ETF (IJT) and the Invesco S&P SmallCap 600 Pure Growth ETF (RZG) present two compelling, yet distinct, options for exposure to this market segment. Both funds focus on smaller companies exhibiting growth characteristics, but they diverge in their underlying construction methodology, expense structure, portfolio composition, and recent performance.
Cost Structures and Fund Size
The expense ratio constitutes an important factor in fund selection. IJT offers a more affordable expense ratio at 0.18%, less than half of RZG’s 0.35%. This cost difference can materially influence long-term net returns for investors. Additionally, IJT has a substantially larger asset base, managing approximately $6.29 billion, signaling greater liquidity and investor interest compared to RZG’s $104.83 million in assets under management.
Performance Records and Yields
Reviewing returns over a one-year horizon as of January 7, 2025, RZG has generated a stronger gain at 12.99%, outpacing IJT’s 5.75%. This may appeal to those targeting more recent momentum. However, the longer-term perspective reveals a contrasting picture. Over five years, IJT grew $1,000 to approximately $1,266, while RZG reached $1,199, indicating superior cumulative returns for the broader growth approach over time.
Dividend distributions further differentiate the funds. IJT affords investors a higher yield of 0.9%, more than double RZG’s 0.36%. Investors prioritizing income alongside growth might prefer IJT for this reason.
Volatility and Risk Metrics
When assessing volatility relative to the S&P 500 via five-year beta figures, IJT and RZG exhibit similar risk profiles, with betas of 1.18 and 1.15 respectively, reflecting moderately higher price fluctuations than the broader market. Nonetheless, examining maximum drawdown over five years provides more insight into risk tolerance. IJT’s peak-to-trough loss was 29.24%, notably less severe than RZG’s 38.33%. This suggests that the broad-based growth ETF has experienced less downside volatility during adverse market periods than the pure growth option.
Portfolio Composition and Strategy
IJT encompasses 342 individual small-cap growth stocks, thereby presenting broad diversification across multiple industries. Its leading sector exposures are technology (20%), industrials (19%), and healthcare (17%). The fund's top holdings—Arrowhead Pharmaceuticals, Armstrong World Industries, and InterDigital—each represent less than 1.4% of total assets, dispersing concentration risk. Notably, IJT boasts a 25-year track record, making it one of the oldest ETFs dedicated to small-cap growth companies.
Conversely, RZG employs a "pure growth" methodology based on the S&P SmallCap 600 Pure Growth Index. This index applies a growth scoring system that evaluates sales growth, the ratio of earnings change relative to price, and price momentum to identify companies exhibiting robust growth traits. Firms failing to meet these strict criteria are excluded, condensing RZG’s portfolio to only 135 stocks, fewer than one-third of IJT’s count.
RZG holds a more significant weighting in healthcare at 27%. Its largest holdings include Progyny, ACM Research, and ARMOUR Residential REIT, with the top stock alone comprising about 1.6% of assets. This concentrated approach reflects the fund’s focus on stocks with pronounced growth metrics but may expose investors to sector or company-specific risk inherent in a narrower portfolio.
Understanding Pure Growth and Investment Implications
The concept of "pure growth" ETFs is central to distinguishing RZG’s approach. By relying on quantitative growth scores derived from measuring sales increases, earnings momentum relative to price, and price momentum over time, RZG selects a subset of small-cap growth stocks presumed to exhibit stronger growth traits than those in broad growth indexes.
While pure growth ETFs theoretically aim to outperform traditional growth funds, actual results can vary. RZG’s recent one-year outperformance demonstrates its potential to capture momentum-driven gains, yet over a five-year span, IJT’s broader exposure delivered higher cumulative returns. This contrast underscores the importance of considering investment horizons and risk tolerance when choosing between these ETFs.
Investor Considerations
Investors seeking short-term capital appreciation and willing to accept higher portfolio concentration might find RZG’s pure growth focus attractive, especially given its recent one-year performance advantage. In contrast, those prioritizing lower expense ratios, broader diversification, higher dividend income, and a proven long-term track record may lean toward IJT.
Ultimately, understanding each fund’s strategy and risk-return profile is critical. The broader diversification of IJT may contribute to reduced drawdowns and may be more suitable for investors seeking stability alongside growth. Meanwhile, RZG’s curated portfolio might appeal to investors focused on aggressive growth signals within small caps despite elevated volatility.
Glossary of Key Terms
- Expense Ratio: The annual management fee as a percentage of assets charged by a fund to cover operating costs.
- Assets Under Management (AUM): Total market value of all investment assets held within a fund.
- Small-cap: Companies with relatively small market capitalizations, typically ranging between $300 million and $2 billion.
- ETF (Exchange-Traded Fund): A fund traded on stock exchanges, holding diversified assets such as stocks or bonds.
- Drawdown: The largest observed loss in value from a peak to a trough during a specific period.
- Dividend Yield: Annual dividend payments expressed as a percentage of the fund’s price.
- Beta: A statistical measure of a fund’s volatility relative to the broader market (S&P 500).
- Sector Weight: Percentage of fund assets allocated to a specific industry sector.
- Pure Growth Methodology: An index or fund construction technique selecting stocks with the strongest sales, earnings, and momentum-based growth metrics.