Love small cap stocks? IJT is a good alternative to the IWM ETF

Small cap stocks have continued to underperform the market this year. The closely-watched iShares Russell 2000 (IWM) ETF has jumped by just 0.7% this year while the SPDR S&P 500 ETF (SPY) has soared by over 10.4%. The same trend has happened in the past five years as the IWM rose by 36% while SPY has jumped by 90%.

The IWM ETF is one of the biggest funds that track small cap stocks. It has over $60 billion in assets, making it a bit smaller than the Vanguard Small-Cap (VB) ETF that has over $135 billon and the iShares Core S&P Small-Cap ETF (IJR) with its $78 billion. IWM is also one of the most active funds in the US with an average volume of over 30 million shares. 

However, I believe that the iShares S&P Small-Cap 600 Growth ETF (IJT) is a better alternative to IWM. As the name suggests, the IJT fund tracks small cap companies that have demonstrated that they are growing. 

It holds 364 companies across all sectors, with industrials, consumer discretionary, and information technology being the biggest constituents. Some of its biggest holdings are companies like Fabrinet, ATI, Inc, Abercrombie & Fitch, SPS Commerce, and Ensign Group. 

There are two main reasons why IJT is a good alternative to the IWM ETF. First, historic data shows that it does better than the IWM. Since 2001, the IJT ETF has lost money in just five years while the IWM has lost in seven of them. 

IWM vs IJT ETF

Second, the ETF tracks companies that have demonstrated strong growth in terms of revenue, earnings, and momentum. In most cases, growth stocks do better than broader ones, which explains why the Nasdaq 100 does better than the S&P 500. 

Third, the IJT ETF has a slightly lower costs than the IWM fund. It has an expense ratio of 0.18% while the IWM has a lower ratio of 0.18%. While the spread is small, it can add up over time, especially if IJT continues doing well over time. 

Still, as I have written before, the best ETFs to invest in are those that track the S&P 500 and Nasdaq 100. These funds have done well over the years and always bounce back after going through major downturns. They all bounced back after the dot com bubble, Global Financial Crisis, and the beginning of the Covid-19 pandemic.