ETF Battles: IWM vs. VXF - Small‑Cap Showdown!

Well, big returns don't always come from big names. Today, we're diving into the overlooked corner of the market, where innovation meets opportunity: small and midcap stocks. So, let's unpack why they might be your portfolio's secret weapon.

Today's ETF battle is an audience requested heavyweight bout between small cap ETFs from BlackRock and Vanguard. This is going to be good. Stick around. You're watching ETF Battles. I'm Ronda Lee and it's great to see you again. If it's your first time watching, we're glad you found us. Welcome aboard and be sure to hit that subscribe button to join our community.

If there's a certain ETF battle you'd like to see, send me your ETF ticker symbols and do that in the comment section below or on our X feed at ETF guide. Be sure also to check out our season 6 playlist which is in the description section below. Make sure your desired matchup has not already been done.

I'm excited to announce that we just launched two free online courses, Habits of the Investing Great and Retire Securely. So, both of those courses are available and totally free to all of our viewers. Just hit the enrollment link in the description section below. Let there be no doubt that we are committed to upgrading your investing skill set.

Also, in that same description section below, we've got links to our program sponsor Direction along with leveraged and inverse choices on broad market indexes. There's lots of choices to ETFs linked to industry sectors along with bag 7 and single stocks like Nvidia, PL, Palantir, Tesla, and many others. So, be sure to visit direction.com.

Today's ETF battle was suggested to us by a longtime viewer named Jay Dilks. He sent this to us on his X feed or our X feed at ETF guide and he specifically said that everyone needs exposure outside of S&P 500 and this particular matchup he suggested and I think it's a good one. It's between BlackRock and Vanguard, two familiar ETFs and they've been around a long time: IWM and VXF.

Judging today's ETF contest is an duo extraordinaire. We've got David Derkin, an independent ETF analyst, and Mike Aikens at ETF Action. Great to see both of you again. Welcome back.

It's great to be here, Ron. Thanks for having me.

Thank you. Good to be back.

So, our four battle categories are cost, exposure, strategy, performance, and then mystery. For mystery, that's where you, our judges, can decide on any factor or thing that you feel is crucial to today's contest. Of course, our judges can nominate wildcard ETFs if they feel there's better choices elsewhere or they can opt for split decisions. It's up to them. I've got the scorekeeping duties and at the end of the program, we will declare an overall winner. Keep in mind, none of the battle outcomes are ever predetermined or known in advance by myself or our judges.

So, let's kick things off with the first category, cost. Mike, please get us started.

Well, another one of these wonderful stories of cost with the Vanguard fund. You've basically got a clear winner out of the gates. VXF charges four basis points as a completion vehicle. IWM is the liquidity king. If you want to do large institutional trades, there's no question it has better spreads, but VXF is still tight, very low spread at three basis points. Whereas IWM is pretty much free to trade in terms of the spread, but the expense ratio being a 15 basis point difference from a buy and hold perspective, it's pretty clear winner for VXF.

That's a solid start. Thank you, Mike. Dave, you're up next. How do you see it when it comes to cost?

Yeah, I see it exactly the same way. I really don't have much to add. From what Mike just said, VXF has clearly the lowest expense ratio. Even though it's a smaller fund, it still trades really well. Spreads are tight. So, VXF is the clear winner here.

All right. Well, that takes us next to Exposure Strategy. And this is where we break down what the funds actually do, what they hold, and so forth. So, Dave, you're still up. Break it down for us. How do these two funds compare?

Yeah, IWM focuses on the Russell 2000, which is weighted by market cap. So, you're looking at stocks 1,000-3,000 roughly on the US stock market. VXF is tied to the S&P completion index, which basically invests in the entire US stock market outside of the S&P 500. So, you're going to be looking at stocks pretty much 501 through about 3,900 or 4,000.

So, because it starts right outside the S&P 500, VXF is going to have slightly larger company tilt, you're going to get midcap exposure, more midcap exposure. IWM is going to be a little more of a pure small cap play. I'm going to throw out a wild card here. I'm going to mention the Vanguard S&P 600 ETF, VIO.

As the name suggests, it's investing in stocks 900 through 1,500 in the S&P rankings. So, you've got kind of a balance between VXF and IWM as far as the stocks that it targets. The one thing I like about VIO though is that it puts a quality screen on there. Companies that make that index have to have a positive earnings. So, it screens out any of those zombie companies or any of those companies that are losing money.

And I think that's really important when you're investing in small caps. You want kind of a fundamental quality tilt there to screen out some of the garbage. So, I think that one's fundamentally better. Again, that's important when investing in small caps. So, I'm going to go with the wild card. VIO is my winner here.

Thank you, Dave. Mike, you're up next. How do you see it when it comes to exposure strategy?

Yeah, I mean I think Dave laid out the major points in terms of you know you have two really maybe not comparing apples and oranges, but we're certainly or apples to apples. We're not certainly not comparing apples to apples. We might be comparing apples to oranges. We might still be in the same food class here, but they're very different, right?

So just get to maybe to illustrate Dave's point a little bit more, the completion index means that you're holding every company that's not in the S&P 500. The S&P 500 is not like the Russell 1000 that just owns the largest 1000 stocks. It's a committee-based index. So, for example, as we know just recently, the S&P 500 did not add MicroStrategy.

MicroStrategy is a hundred billion dollar company. It's not small cap. It's not midcap. That is a big company. That's part of the completion index or Applovin $125 billion market cap. because it's market cap weighted. It then it's overall waiting angle, you know, looks more like almost large cap, right? It's weighted average market cap is 22 billion compared to IWM which has a weighted average market capitalization of 4 billion. Very very different portfolios.

You know, VXF basically owns every company in IWM, but when you compare them by an overlap perspective, there's only 34% overlap. That other 66% is coming from the 500 names basically that are that are in the Russell 1000 that aren't in the S&P 500. So just a very different concept, right? It's called the extended market index or a completion index for a reason. The idea is it's completing out the S&P series for those that want to own the S&P 500 and then also get access to the total market remaining.

That's it's a very fair option, but there I really don't think you can compare the two strategies. As far as which one I like better, if you're looking for beta exposure to small caps, IWM is a great play. If you're looking for strategic exposure to either midcap, small cap, I don't think either one of these is a great play.

I think the world has changed in small cap investing, midcap investing. I'll get into that a little bit more as we talk about performance, we talk about our mystery, but just in general, there's a lot of great options when it comes to investing in small and midcap, but the idea of owning the market has fundamentally changed because of the way companies come to market with their IPOs being much larger than they used to be. So, that whole idea of owning them and letting them grow is kind of lost. So, I don't really have a winner per se. I really just don't I'm not gonna call them both losers because they're both really good access vehicles, but I just don't think you can really classify one or the other as a winner.

All right, so I've got you down for a split decision and I don't think the dimensional small cap value cult is going to like you very much, Mike. That takes us next to performance. So, Mike, you're still up. Break it down for us. How do these two ETFs compare?

Well, just by be given the regimen of the market we've been in, VXF is your winner. It's because it's got a tilt to larger cap names. A larger cap has done better than small midcap over the last decade and therefore it's return structure is the winner. It's the clear winner across the board. You know, Russell is going to be a better beta play on small cap. So, if you're making a bet, it's really hard to beat a beta play like the Russell one, the Russell 2000, IWM. But performance, you know, is pretty clearly been to VXF because of that tilt to mid and large cap names away from small cap.

Dave, you're up next. How do you see it when it comes to performance?

Yeah, Mike pretty much said everything that I was going to say. That that midcap tilt is causing the pretty significant outperformance of VXF over the last last 3 years or so. It's about 4 to 5% annually over the Russell 2000, the IWM. So, that shouldn't be surprising. Longer term performance not quite so much of a gap, but yeah, clearly anything that has a large gap tilt has has performed better recently. So on performance, I'm going to have to agree with Mike and give it to VXF.