ISCB vs SPSM: Which Small Cap ETF Delivers Better Returns for Your Portfolio?

When evaluating small cap etfs, investors often find themselves choosing between the iShares Morningstar Small-Cap ETF (ISCB) and the State Street SPDR Portfolio S&P 600 Small Cap ETF (SPSM). Both funds provide exposure to U.S. small-cap stocks, yet they differ significantly in performance track record, cost structure, portfolio composition, and suitability for different investor types. Understanding these differences is critical for building a diversified investment strategy within the small-cap space.

Performance Showdown: Returns, Risk, and Growth Potential

Over the past year (as of January 9, 2026), ISCB has outpaced SPSM notably. ISCB delivered a 17.46% return compared to SPSM’s 11.2%—a meaningful 6-point advantage for the iShares fund. Looking at longer time horizons, this pattern continues: a $1,000 investment in ISCB five years ago would have grown to approximately $1,323, versus $1,290 for SPSM.

However, the story on downside protection tells a different tale. During the worst periods, ISCB experienced a maximum drawdown of 32.26% over five years, while SPSM saw a steeper 34.83% decline. This suggests that while ISCB has captured more upside, it has also managed volatility somewhat better during market corrections—likely due to its broader diversification strategy.

For investors prioritizing recent performance and smoother ride through volatile markets, ISCB’s track record appears stronger. Yet this superior performance comes with a slight tradeoff in expenses and yield.

Cost & Income: Where SPSM Takes the Edge

SPSM operates with an expense ratio of 0.03%, barely undercutting ISCB’s 0.04%. While this 0.01% difference may seem negligible, over decades of investing it compounds meaningfully. On a $100,000 investment, that extra basis point costs roughly $10 annually—small, but worth considering for cost-conscious investors.

Additionally, SPSM yields 1.62% in annual dividends compared to ISCB’s 1.38%. This 24-basis-point advantage appeals to income-focused investors seeking regular distributions alongside growth.

The most striking difference emerges in assets under management. SPSM commands $13.08 billion in AUM, dwarfing ISCB’s $253.45 million. This massive disparity carries practical implications: SPSM typically offers better liquidity, tighter bid-ask spreads, and easier entry/exit execution for large positions. ISCB’s smaller size may result in slightly wider trading costs during busy market periods.

Portfolio Construction: Breadth vs. Concentration

The funds differ substantially in their approach to small-cap exposure. ISCB casts a wider net, holding 1,578 individual stocks. This extensive diversification minimizes idiosyncratic risk—no single position exceeds half a percent of assets. Its top three holdings are Lumentum Holdings (LITE), Albemarle Corp (ALB), and Kratos Defense and Security Solutions (KTOS), each representing tiny portfolio weights.

SPSM takes a more concentrated approach with 607 holdings. Its largest positions include Arrowhead Pharmaceuticals (ARWR), Sanmina Corp. (SANM), and Advanced Energy Industries (AEIS)—again, each modest in size but collectively representing a tighter stock universe.

Sector exposure reveals another divergence. ISCB tilts toward industrials (19%), financial services (17%), and healthcare (13.9%). SPSM emphasizes financial services (18%), industrials (16%), and technology (15%). Investors bullish on healthcare should consider ISCB, while those chasing technology momentum might favor SPSM’s tech weighting.

Which Small Cap ETF Matches Your Investor Profile?

Choose ISCB if you:

• Prioritize strong recent performance and want the fund with better 1-year and 5-year returns
• Value maximum diversification across 1,500+ stocks
• Seek exposure to the healthcare sector
• Can tolerate a slightly higher expense ratio for broader holdings

Choose SPSM if you:

• Want the lowest possible costs and highest dividend yield
• Prefer to minimize trading friction through superior liquidity
• Favor the simplicity of tracking the S&P 600 index directly
• Appreciate having $13 billion in AUM behind your fund

Both funds serve legitimate roles within small-cap allocations. ISCB rewards active performance-chasers seeking recent outperformance and extensive diversification. SPSM appeals to buy-and-hold investors prioritizing low expenses, income generation, and straightforward index tracking.

The ideal choice depends on your time horizon, tax situation, and whether you prioritize recent returns or long-term cost efficiency. Neither fund is objectively “better”—each excels for different investor needs within the small cap etfs landscape.