Forget IWM: The Small-Cap Fund That Screens Out Money-Losers Charges 84% Less, and It’s Winning by 2.5 Points

David Beren

Sat, August 8, 2026 at 9:01 PM GMT+3 5 min read

Quick Read

SPSM charges 84% less than IWM in annual fees and has outperformed it by over 37 percentage points across the past decade.
The S&P 600's profitability screen bars money-losing companies from entry, removing the drag that pulls Russell 2000 returns lower across full market cycles.
In taxable accounts, stopping new IWM contributions and redirecting them to SPSM avoids triggering capital gains while still capturing the fee advantage.
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The iShares Russell 2000 ETF (NYSEARCA:IWM) is the default small-cap vehicle for most portfolios, holding roughly 2,000 US small companies in a single ticker. Investors reach for IWM to add domestic small-cap exposure, tilt toward companies most sensitive to US rate cuts, and diversify beyond a large-cap-heavy S&P 500 allocation. That is a reasonable goal. The question is whether IWM is the best tool to execute it. A quieter alternative from State Street, tracking a different small-cap index with stricter admission standards, has been doing the same job at a fraction of the cost.

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Why IWM Became the Small-Cap Default

The Russell 2000 is what IWM tracks, an index that ranks U.S. stocks by market value and takes the 2,000 companies sitting below the largest 1,000. That rules-based approach keeps the fund broad and cheap to operate. BlackRock charges 0.19% in annual expenses, and the fund's deep liquidity makes it a favorite among traders who use small caps to express short-term views on the domestic economy.

The tradeoff shows up in composition. Because the Russell 2000 admits companies purely on size, a meaningful share of its holdings do not earn money. That drag is visible over long stretches, and it is the specific gap the alternative is built to close.

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The Profitability Screen That Changes the Math

The SPDR Portfolio S&P 600 Small Cap ETF (NYSEARCA:SPSM) tracks the S&P SmallCap 600 instead. S&P requires index candidates to post positive earnings over the most recent quarter and the trailing four quarters combined before admission. Companies that fall below that bar are excluded, thereby cutting the unprofitable tail within the Russell 2000 by default.

The cost gap is the more immediate difference. SPSM's expense ratio runs at 0.03%, compared with IWM's 0.19%. That is roughly 84% less in ongoing fees. On a $50,000 position, the fee difference compounds into real money over a decade, and it does so before the index construction advantage even shows up.

What the Performance Gap Actually Looks Like

Year-to-date through August 6, SPSM has returned 23.57%, while IWM has returned 21.16%. That is a gap of roughly 2.4 percentage points in seven months, consistent with the outperformance the profitability screen is designed to produce. The lead widens over longer windows. Over the past five years, SPSM is up 44.07% compared with IWM's 33.51%. Over ten years, SPSM has returned 181.47% versus 143.99% for IWM.

Removing chronically unprofitable companies removes the worst-return tail from the index. That advantage is not guaranteed in every environment. In sharp risk-on rallies, when speculative money-losers rip higher, IWM can lead. Across full cycles that include drawdowns, the earnings screen has tended to reduce the basket's deepest losers.

Where the Swap Is Not a Clean Win

Smaller and less-traded than IWM is SPSM, and that distinction matters mainly for very large orders or short-dated options strategies, where IWM's liquidity is simply unmatched. For long-only investors who buy and hold, however, the spread cost at entry is negligible relative to the ongoing fee savings.

The other consideration is what the profitability screen filters out. Some biotech and early-stage growth names never appear in the S&P 600 because they are designed to lose money. An investor who specifically wants that speculative exposure gives something up when moving to SPSM.

Making the Move Without Creating a Tax Bill

In a retirement account, swapping IWM for SPSM is straightforward and creates no tax event. In a taxable brokerage account, selling a long-held IWM position could trigger capital gains, and the fee savings will take time to offset that bill. A common approach is to stop adding to IWM, direct new small-cap contributions to SPSM, and let the position rebalance gradually. Investors sitting on a loss in IWM may find tax-loss harvesting a cleaner path.

Reading the Swap Against Your Own Portfolio

For most long-term small-cap allocations, SPSM offers the same core exposure at a materially lower cost, with a rules-based advantage that has shown up in returns over one, five, and ten years. Traders who prize IWM's liquidity have a reason to keep it. Long-term holders have a specific reason to evaluate the switch in light of their own tax situation and time horizon.

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