Forget IWM: SPSM Has Quietly Beaten It by 12.68 Points Over 10 Years
IWM is the default small-cap trade, liquid and familiar, but a quieter alternative has been compounding ahead of it for years thanks to two structural advantages most investors overlook completely.
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If you own iShares Russell 2000 ETF (NYSEARCA:IWM) as your small-cap allocation, 2026 has finally rewarded you. Small caps are running well ahead of large caps this year, and IWM is the reflexive choice for that exposure because it holds 2,000 names and trades billions of shares a day. The case for owning IWM is liquidity, breadth, and simplicity, and none of that has changed. What has changed is that a cheaper, higher-quality small-cap wrapper has quietly out-earned IWM over almost every meaningful window, and the gap traces to two things most IWM holders never think about: a fee and an index rule.
The Rotation Is Real, and It Favors Small Caps
Through July 24, 2026, the SPDR Portfolio S&P 600 Small Cap ETF (NYSEARCA:SPSM) is up 21.04% year to date, while SPDR S&P 500 ETF Trust (NYSEARCA:SPY) has returned 8.36%. IWM has kept pace with the broader small-cap tape at 18.28% YTD, but it is trailing SPSM by nearly three points in a year when every basis point of small-cap beta matters. Franklin Templeton’s 2026 outlook argues small-cap profitability should rise as the Fed trims rates and debt-servicing costs fall, which is exactly the setup driving the current move.
Where IWM Falls Short
The Russell 2000 is what this fund tracks, which admits any company that fits the market-cap band. There is no earnings test. Roughly a third of Russell 2000 constituents post negative net income in any given quarter, and those money-losers drag on the index during regime shifts because they are the most rate-sensitive and most dilution-prone names in the market. IWM also charges 0.19% in expenses, which is not high in absolute terms but is more than six times what the alternative charges.
The Alternative: SPSM and the Profitability Screen
The S&P SmallCap 600 is the benchmark this fund tracks, and the index committee requires four consecutive quarters of positive earnings before a company is added. That single rule strips out the persistent money-losers and biases the index toward companies that actually generate cash. It is a plain vanilla small-cap fund with a stricter admissions policy.
The expense ratio here is 0.03%, one of the lowest in the entire ETF market and a fraction of IWM’s. On a $50,000 position, that fee gap works out to roughly $80 saved per year, compounding quietly for as long as you hold.
Over five years, SPSM has returned 45.3% versus IWM’s 32.62%. Over ten years, it is 178.39% for SPSM against 141.03% for IWM. SPSM also pays a slightly higher trailing yield, at roughly 1.54%, funded by dividends from more consistently profitable holdings. AUM sits at $16.98 billion, deep enough that liquidity is a non-issue for individual investors, and the top ten positions represent just 4.95% of assets.
The Tradeoffs
In shorter windows, IWM can win. Over the trailing twelve months, SPSM is up 30.76%, and IWM is up 30.25%, essentially a tie, and there have been stretches when the speculative, unprofitable end of the Russell led sharp rallies. If you specifically want that beta, IWM delivers it. SPSM will also feel duller in a junk rally. And both funds are volatile small-cap vehicles; the 2026 rotation can reverse.
Making the Switch
In a tax-advantaged account, the swap is mechanical: sell IWM, buy SPSM, done. In a taxable account, check your cost basis first. If you bought IWM in 2020 or 2021, you may be sitting on meaningful long-term gains, and paying tax to save 16 basis points a year rarely pencils. A cleaner path there is to direct new small-cap contributions to SPSM and let the IWM position run, or to harvest during a drawdown when the gain is smaller.
What This Means for Your Position
The same asset class as IWM is offered here at a lower cost, with a rule that quietly removes the weakest 20% to 30% of the small-cap universe. If your reason for owning IWM is small-cap exposure rather than a specific bet on unprofitable names catching fire, SPSM captures the intent more efficiently. The rotation may or may not continue, but the fee gap and the profitability screen will, and those are the parts of the return you actually control.
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David Beren has been a Flywheel Publishing contributor since 2022. Writing for 24/7 Wall St. since 2023, David loves to write about topics of all shapes and sizes. As a technology expert, David focuses heavily on consumer electronics brands, automobiles, and general technology. He has previously written for LifeWire, formerly About.com. As a part-time freelance writer, David’s “day job” has been working on and leading social media for multiple Fortune 100 brands. David loves the flexibility of this field and its ability to reach customers exactly where they like to spend their time. Additionally, David previously published his own blog, TmoNews.com, which reached 3 million readers in its first year. In addition to freelance and social media work, David loves to spend time with his family and children and relive the glory days of video game consoles by playing any retro game console he can get his hands on.
