For investors looking to gain exposure to U.S. small-cap stocks, two notable exchange-traded funds (ETFs) often come under consideration: the iShares Morningstar Small-Cap ETF (ISCB) and the State Street SPDR Portfolio S&P 600 Small Cap ETF (SPSM). Both funds aim to represent the small-cap segment of the market but exhibit key distinctions in portfolio composition, associated costs, and practical usability that could influence investor decisions.
This analysis explores the characteristics of ISCB and SPSM in detail, focusing on their recent performance metrics, portfolio holdings, risk profiles, and investor-focused attributes. The goal is to provide a clear understanding of how each ETF caters to different investor priorities within the small-cap equity space.
Comparative Overview: Costs, Size, and Returns
| Metric | SPSM | ISCB |
|---|---|---|
| Issuer | SPDR | iShares |
| Expense Ratio | 0.03% | 0.04% |
| 1-Year Return (as of 2026-01-09) | 11.20% | 17.46% |
| Dividend Yield | 1.62% | 1.38% |
| Assets Under Management (AUM) | $13.08 billion | $253.45 million |
The expense ratio for SPSM stands at 0.03%, slightly lower than ISCB’s 0.04%, offering investors a marginally more cost-effective option. Additionally, SPSM provides a modestly higher dividend yield of 1.62% compared to 1.38% for ISCB, positioning it as a potentially favorable choice for income-focused investors attentive to costs.
On the other hand, ISCB has delivered stronger returns over the past year, posting a 17.46% total return compared to SPSM's 11.20%. However, ISCB manages a significantly smaller asset base, with just over $253 million in assets under management versus SPSM's $13.08 billion, indicating differences in market adoption and liquidity.
Performance and Risk Assessment
| Metric | SPSM | ISCB |
|---|---|---|
| Maximum Drawdown (5 years) | -34.83% | -32.26% |
| Growth of $1,000 over 5 years | $1,290 | $1,323 |
Over a five-year horizon, ISCB exhibits a slightly smaller maximum drawdown of approximately 32.26%, compared to 34.83% for SPSM, indicating somewhat better downside control during market downturns. Additionally, a hypothetical $1,000 investment in ISCB would have grown to $1,323 over five years, marginally outperforming the $1,290 growth from SPSM.
Portfolio Composition and Sector Exposure
The ISCB ETF tracks a broad portfolio of 1,578 U.S. small-cap stocks, with the largest sector allocations in industrials (19%), financial services (17%), and healthcare (13.9%). Notably, its top holdings, including Lumentum Holdings (LITE 5.53%), Albemarle Corp (ALB 6.18%), and Kratos Defense and Security Solutions (KTOS 4.95%), each constitute less than 0.5% of the fund's assets, underscoring significant diversification.
In contrast, SPSM holds 607 small-cap stocks, favoring financial services with an 18% weighting, followed by industrials at 16% and technology at 15%. Its largest holdings, such as Arrowhead Pharmaceuticals (ARWR 3.64%), Sanmina Corp. (SANM 1.74%), and Advanced Energy Industries (AEIS 1.33%), also reflect modest concentrations, allowing for a broad market representation. This structure makes SPSM an accessible and low-cost option for investors seeking straightforward small-cap exposure.
Practical Considerations for Investors
Investors prioritizing expense efficiency and liquidity may lean towards SPSM, benefiting from its larger asset base and slightly lower cost structure. Conversely, those seeking greater diversification, particularly with a tilt toward industrial and healthcare sectors, may find ISCB's broader portfolio alignment and higher recent returns attractive.
The varying sector emphases in each fund offer nuanced exposure differences as well. ISCB’s notable healthcare allocation can appeal to investors interested in a defensive yet dynamic sector, whereas SPSM’s higher concentration in technology stocks may attract those looking to capitalize on tech sector momentum within small caps.
Both ETFs embody characteristics typical of small-cap investments, including greater volatility relative to larger capitalization stocks. These funds often experience amplified swings during market cycles, with enhanced growth potential in upward markets but increased vulnerability during downturns, emphasizing the importance of investor risk tolerance assessment.
Summary and Investment Implications
Choosing between ISCB and SPSM hinges on balancing priorities between cost, diversification, liquidity, and sector exposure. SPSM offers affordability, substantial assets, and liquidity, making it suitable for investors with a cost-conscious approach seeking broad small-cap market exposure. Meanwhile, ISCB provides more extensive diversification and has outpaced SPSM in recent performance, albeit with a smaller asset base and marginally higher expenses, appealing to those valuing broader industry participation and historical continuity.
Both ETFs play critical roles in diversifying portfolios through small-cap exposure, with differing features allowing investors to tailor their investments based on individual financial goals and market outlooks.