ETF Battles: IJR vs. IWM - Which Small Cap ETF is the Better Pick? - YouTube

Welcome to ETF Battles, I'm Ron DeLegge.

This is a program that is the antithesis of a judgment-free zone, why?

Because we deliberate and judge, we deliberate and judge, and when we're all done, we deliberate

and judge just a little bit more.

Yes, it's a hostile work environment, I get it!

But if it helps to make us better, more informed investors, who really cares?

Today's ETF Battle is between two ETFs that tracks US small cap stocks.

We've got the iShares S&P Small Cap 600 ETF, that's ticker symbol IJR, versus the iShares

Russell 2000 ETF, that's ticker IWM.

The definition of small cap stocks can vary, but generally speaking, we're talking about

companies with a market size between $500 million up to $5 billion.

Another way to think about today's tussle between IJR and IWM is a face-off between

two little sisters fighting for attention on their Instagram accounts.

If you're new to the program, what ETF Battles would you like to see?

Hit us up right here on our YouTube comment section or on Twitter, #ETFBattles, and we'll

get to it.

Helping us to judge today's matchup is none other than Todd Rosenbluth, head of ETF and

mutual fund research at CFRA, and John Davi, founder and CIO at Astoria Portfolio Advisors.

Judges, great to see you again.

- Good to be with you, Ron.

- Good to be with you guys.

- So the four battle categories are cost, diversification, performance, and then we've

got a mystery battle category.

Now, for our mystery category, that's where our judges get to choose one factor or maybe

several factors that they feel are important to supporting their analysis, and that mystery

category, by the way, could determine which of these two ETFs wins today's battle.

So my scorecard is blank.

As you can see there, it's ready to go, and so we're gonna go through each one of these

battle categories one at a time and our judges will have 30 seconds.

We're gonna start with Todd.

The first battle category is cost, you've got 30 seconds, go!

So iShares cut the fee for IJR to 6 basis points recently, probably ahead of this battle

just to make sure it was even cheaper than IWM, which is 19 basis points, so a much lower

expense ratio for the iShares S&P product, and the volume is still strong, not as strong

as IWM, but enough to offset the cost differential, so we think IJR is easily a much cheaper ETF

to consider.

- All right, that's a great start, and by the way, good timing with the fee cut on IJR.

Thank you for mentioning that.

How about you, John, what's your take on cost?

Who wins?

- You know, I hate agreeing with Todd, but in this case, I think he's right.

You know, the one thing I would say is that IWM is one of the most liquid securities in

the entire world, it's one of the most actively traded stocks in the NYSE Exchange, so it

trades at four billion a day, so if you were trading at a particular point in time of the

day, just be careful because I think IWM is much more liquid, so overall, your total cost

of trade-in and ownership may not be as much as the expense ratio would indicate between

the 6 BPS for IJR or the 19 BPS for IWM, so just be mindful if you're trading 'cause IWM

is significantly more liquid than IJR.

- All right, our next battle category is diversification.

Who wins the battle between IJR and IWM?

Todd, go ahead.

- So this we would consider a tie.

I mean, when you're dealing with 600 stocks for IJR or it's roughly 2000 stocks for IWM,

the Russell 2000, and these are market cap weighted-oriented ETFs, you're really well-diversified

at the small cap level.

I think the big thing to be notable is its sector differences.

Even though they have a roughly similar in the hundreds and thousands number of stocks,

healthcare is a much larger weighting.

For IWM, it's 21% of the portfolio whereas it's only 14% for IJR.

So you're getting diversification, but at different sectors, and that's certainly something

to be mindful of, but I'm curious to hear what John has to say.

- John, you're up next.

Diversification, who wins the battle?

So IJR, we like the index methodology much more than IWM.

I think IWM is one of the worst indices ever created, all it does every year, it looks

at the bottom 2000 stocks in the Russell 3000 index, so there's no sort of quality filter

in it.

And then every year, basically, all the best performing stocks leave the Russell 2000 to

go to the Russell 1000, and then all the worst performing stocks in the Russell 1 go down

to the Russell 2, so I just think that even though it may be more diversified 'cause there's

a lot more stocks, you know, you're basically selling your winners and buying the losers

and it's very counterintuitive to my head and how my brain thinks as a capital allocator.

I would give my edge to IJR that it's a much more better constructed ETF, which I think

is pretty important when you're picking ETFs.

- All right, that's excellent analysis.

Our next battle category is performance.

Who wins the battle?

Let's stick with you, John.

- IWM year-to-date has outperformed IJR by about 500 basis points, but it has had better

three-year annualized returns.

Long-dated five, 10 years, they're basically even.

You know, what we're seeing in the market now is a cyclical upswing, so all the value,

the junkiest names are outperforming pretty hard since the March 24th lows, so you know,

IWM, I expect it to trade better and to perform better in the interim, but as I said before,

I do like the methodology of IJR a little bit better, there's a quality filter that

you have to have in order for you to get added to index so I'm still gonna stick with IJR

just from a ownership perspective, but the edge goes to IWM from short-term performance.

- All right, so let's move to Todd.

Performance between these two ETF, what's your take?

Yeah, IWM has certainly been the outperformer.

John touched on the year-to-date performance, but on a one-year and a three-year basis,

which is what we at CFRA are paying attention to also, IWM is outperforming, so it's hands

down.

If you look in the rear view mirror, it's been the right fund to be investing in.

I think John is in agreement with us at CFRA, investors shouldn't just buy the best performer,

they should dig deeper than that, but I know we'll get to that index quality.

- So IWM, IJR, who wins in performance, Todd?

I'm sorry, IWM is the hands-down past performer of success.

- All right, well, look at that, you guys agreed on one thing!

In how many episodes has it been?

So congratulations, guys, you're doing great.

So this is the final battle category, it's one of my favorites because we never know

what it's gonna be that our judges pick, it's the mystery category, and this is the one

factor or maybe several factors that our judges can pick that they feel are important to this

particular battle.

So let's stick with you, Todd.

The mystery category, what is it and who wins it?

- So we consider reward potential as we at CFRA look forward based on the underlying

holdings and based on that performance record, what we've seen from that performance, and

IJR, it rates higher based on CFRA's rating methodology, looking at the holdings, looking

at performance.

We think it's positioned to outperform IWM and the broader category of US equity ETFs

over the next nine months.

- Okay, very good.

Mystery category, let's shift to you, John, who's your battle winner and what is your

mystery category in this category?

- I like fundamentals, and as much as I hate to agree with Todd, I do think that he's right

in the sense that IJR is the more intuitive vehicle to use.

You know, basically S&P says you have to have like four quarters of net-positive earnings

in order for you to be included into the index, whereas the IWM, as I said, there's no sort

of filter, it's like the junkiest of the junkiest companies wanting to be added to the index

and then all the best performing stocks leave.

It goes everything against what a portfolio manager thinks about, so you know, I think

that the valuation difference is only one valuation point between IJR and IWM, IWM is

slightly cheaper than IJR.

IWM's earnings were degraded a lot greater, and you'll see this chart that I have that

I'll share with you, but basically, I think you want to go IJR, it's 600 names, higher

quality than IWM, and at Astoria Portfolio Advisors, we generally have a quality bias

when picking our stocks, so I give the edge to IJR.

- All right, very good, and let's now shift to our final overall recap of your battle

winner between IWM and IJR, let's stick with you, John.

You've got 30 seconds, go.

- Yeah, it's tempting to pick IWM because it's had better performance, it's more liquid,

it's one of the most actively traded stocks in the entire world, but as a capital allocator,

I'm thinking about buying stocks that have higher quality attributes to it, so even though

it's had worse performance and worse, you know, liquidity, I do think it makes more

sense to have it in the portfolio, so I'm gonna give the overall edge to IJR.

All right, very good, and Todd, this is your final chance to weigh in.

Who's your overall battle winner between these two small cap ETFs?

Yeah, IJR, it's the cheaper product, it's the one that has the best reward potential,

and as we at CFRA look forward, the only thing that's not against it is its historical performance

is weaker.

That's to be explained, I think, based on what John said, you know, from a quality perspective.

We think IJR is the more suitable product for all investors regardless of whether they're

trading a lot or not.

- All right, well, that does it for today's ETF Battles and our judges have done an outstanding

job providing their analysis, and so we've arrived at the moment of truth, and according

to my battle scorecard, today's winner between IJR and IWM is IJR.

Again, that's the iShares S&P Small Cap 600 ETF.

Again, IJR, and if you're looking for a small cap ETF with exposure, obviously, we're focusing

on the smallest part of the equity marketplace in the US, this would be definitely a good

place to start and at least what we've given you on today's program is a starting point

for further research that you can dig in and do a little bit more studying, but I think

our judges have given us some excellent analysis and we appreciate their insight and outlook,

as always.

Before signing off, which ETF Battles would you like to see in our next upcoming episodes?

Post your comments in our YouTube comments section.

Be sure to #ETFBattles, you could do the same on our Twitter feed, @ETFguide.

I'm Ron DeLegge, thanks for watching ETFguide TV and until next time, watch the battle before

you invest.