Schwab (SCHA) vs. iShares (IJR): Which Small Cap ETF Should Investors Buy?

Schwab U.S. Small-Cap ETF (NYSEMKT:SCHA) offers lower costs and broader diversification, while iShares Core S&P Small-Cap ETF (NYSEMKT:IJR) provides a more concentrated portfolio with slightly lower historical volatility.

Small-cap stocks can offer significant growth potential but often experience greater price swings than their large-cap counterparts. This comparison compares two popular low-cost options that track different small-cap indexes to help investors determine which best fits their risk profile and diversification needs.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year monthly returns. The one-year return represents total return over the trailing 12 months. Dividend yield is the trailing 12-month distribution yield.

The Schwab fund is the more affordable option with an expense ratio of 0.04%, slightly lower than the 0.06% fee for the iShares fund. Regarding income, IJR offers a marginally higher payout of 1.15% compared to SCHA’s 1.00%.

Performance & risk comparison

What's inside

The Schwab U.S. Small-Cap ETF (SCHA) was launched in 2009 and tracks a much broader set of 1,706 holdings. Its sector exposure tilts toward technology at 23.00%, financial services at 16.00%, and industrials at 16.00%. Its largest positions include Sandisk at 4.98%, Lumentum at 1.33%, and Revolution Medicines at 0.63%. Over the trailing 12 months, it paid $0.34 per share in dividends.

In contrast, the iShares Core S&P Small-Cap ETF (IJR) was launched in 2000 and follows a narrower index of 641 stocks. Its sector distribution is more balanced, with financial services, industrials, and technology each representing 16.00% of the fund. Its top holdings include Sanmina (0.79%), Viavi Solutions (0.75%), and Semtech (0.75%). Over the same trailing 12-month period, it paid $1.60 per share in dividends.

For more guidance on ETF investing, check out the full guide at this link.

Which ETF is the better buy?

Since late 2009, IJR and SCHA have delivered nearly identical annualized total returns of 12.6% and 12.3%, respectively. Not only are their total returns similar, but they both have uber-low expense ratios, comparable betas, and proximate dividend yields. However, there are a couple of reasons I might lean toward buying IJR over SCHA.

First, since IJR tracks an S&P Small Cap Index, the stocks it holds must meet a minimum level of profitability, whereas SCHA’s holdings do not. While the two ETFs’ returns have been largely similar over time, I just prefer the comfort of knowing IJR’s holdings are likely somewhat safer and more robust should we head into a recession or a similar pullback.

Second, since Sandisk has been a 39-bagger over just the last year, it has grown to become a somewhat uncomfortable 5% portion of SCHA’s holdings. While I’m all for letting stocks run as far as possible in my personal portfolio, that may not be the best approach for a small-cap ETF that’s supposed to be deeply diversified, and may not be suitable for certain investors.

Ultimately, I don’t think investors can go wrong with either of these ETFs, thanks to their low costs, steady returns, and exposure to a market niche most investors are probably chronically underinvested in. However, I’d lean ever-so-slightly to IJR for the two reasons mentioned.

Josh Kohn-Lindquist has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lumentum, Viavi Solutions, and iShares Core S&P Small-Cap ETF. The Motley Fool has a disclosure policy.