iShares Russell 2000 ETF

Q: Why has IWM lagged the S&P 500 for so long?

The last decade's returns were driven by mega-cap tech and AI — exactly what IWM doesn't own. Small caps also suffered more from the 2022-2023 rate-hike cycle because they carry more floating-rate debt. That underperformance is why their valuation discount is historically wide; the bull case is mean reversion as rates fall, but the drought has already lasted longer than most expected.

Q: Should I pick IWM or VB for small caps?

VB is cheaper (0.05% vs 0.19%) and its CRSP index skews slightly larger and more profitable, which has helped returns. IWM's advantages are the purest exposure to the classic small-cap benchmark and unmatched trading liquidity. For a long-term buy-and-hold, VB's cost edge usually wins; for tactical trading, IWM.

The benchmark for US small caps: ~2,000 smaller companies in a single fund, with no single stock above ~1% of the portfolio.

Why This Week?

While the S&P 500 gets more concentrated in a handful of mega-caps, IWM is the opposite bet: ~2,000 small, mostly domestic US companies trading at a historically wide valuation discount to large caps. Small caps are also the most direct beneficiaries of rate cuts — they carry more floating-rate debt and depend more on domestic demand. IWM is the most liquid vehicle for that rotation. The catch: it's a high-beta, cyclical asset class where roughly 4 in 10 index members are unprofitable.

Key Metrics

Expense Ratio

0.19%

Holdings

~1,950

AUM

$65B+

Top-10 Weight

<5%

Top Holdings

5 holdings shown. Weights are approximate.

#NameWeight

FTAIFTAI Aviation

~0.6%

SFMSprouts Farmers Market

~0.5%

INSMInsmed

~0.5%

FNFabrinet

~0.4%

MLIMueller Industries

~0.4%

Pros & Cons

Strengths

Maximum diversification — no single company can sink the fund.
Direct beneficiary of rate-cut cycles and US domestic growth.
Deepest liquidity and options market of any small-cap vehicle.
Natural complement to mega-cap-heavy portfolios built on VOO or QQQ.

Risks & Weaknesses

~40% of Russell 2000 members are unprofitable — quality is uneven.
Higher volatility and deeper drawdowns than large-cap indices.
Has underperformed the S&P 500 for most of the past decade.
0.19% fee is pricier than broader small-cap rivals like VB (0.05%).

Alternatives Comparison

ETF	Name	TER	Focus
IWMThis Week	iShares Russell 2000 ETF	0.19%	The benchmark for US small caps: ~2,000 smaller companies in a single fund, with no single stock above ~1% of the portfolio.
VB	Vanguard Small-Cap ETF	0.05%	Cheaper, slightly larger 'small' companies via the CRSP index
AVUV	Avantis US Small Cap Value ETF	0.25%	Active factor screen that filters for profitable, cheap small caps

💬 Frequently Asked Questions

The last decade's returns were driven by mega-cap tech and AI — exactly what IWM doesn't own. Small caps also suffered more from the 2022-2023 rate-hike cycle because they carry more floating-rate debt. That underperformance is why their valuation discount is historically wide; the bull case is mean reversion as rates fall, but the drought has already lasted longer than most expected.

VB is cheaper (0.05% vs 0.19%) and its CRSP index skews slightly larger and more profitable, which has helped returns. IWM's advantages are the purest exposure to the classic small-cap benchmark and unmatched trading liquidity. For a long-term buy-and-hold, VB's cost edge usually wins; for tactical trading, IWM.

Want to Explore Further?

IWM launched recently, so try backtesting SMH or SOXX as semiconductor proxies, or explore our ETF database for alternatives.

Backtest SMH + SOXX ETF Explorer

Disclaimer: ETF of the Week is educational content only. It is not investment advice, a recommendation to buy or sell, or an endorsement of any fund. Past performance does not guarantee future results. Always do your own research and consult a financial advisor before investing.