Small caps have been having a year. The iShares Russell 2000 ETF (NYSEARCA:IWM) is up 18.3% year-to-date and 32.73% over one year, finally outperforming the S&P 500 after years of lagging. IWM is the default vehicle for that trade: a 0.19% expense ratio, deep liquidity, and 2,000 names tracking the Russell 2000. For anyone who wants pure small-cap beta, IWM provides that exposure. The question is whether investors who care about income or the quality of that small-cap exposure are giving up returns or income by holding it.
What IWM Actually Delivers
A passive market-cap-weighted index tracker is what IWM amounts to. It captures the full breadth of U.S. small caps, including roughly 40% of Russell 2000 constituents that are unprofitable, while dividend yields remain minimal. The real value in this fund lies in its cost and coverage, not in its payout or any particular stock selection. Owners who bought IWM for growth exposure got exactly what they paid for this cycle. Those who bought it hoping for meaningful cash flow, or who assumed the index quality would filter out weak balance sheets, came away with a different outcome.
The Income Alternative: IWMI
The NEOS Russell 2000 High Income ETF (CBOE:IWMI) holds the Russell 2000 basket and sells call options against it to convert price volatility into monthly cash. The trailing twelve-month distribution total is $7.161197 per share, and the forward annualized estimate is $7.50. Against a share price of $51.76, that puts the forward distribution rate near 14%.
The usual objection to covered-call ETFs is that they trade principal for income. IWMI has largely avoided that outcome in the current environment. The fund is up 15.59% year-to-date and 30.55% over one year on a total-return basis, roughly in line with IWM itself once distributions are added back. That is unusual. Most option-income funds cap their upside so tightly that they underperform their underlying index over any strong rally. IWMI’s strategy has kept enough of the Russell 2000’s advance to make the yield additive rather than extractive during this specific stretch.
Cost is the visible tradeoff. IWMI has a net expense ratio of 0.68% (0.76% gross), roughly triple IWM’s fee. For an investor who needs the income and would otherwise sell IWM shares to generate it, the fee is a fair price for a systematic monthly payout. For an investor who does not need the cash and reinvests every distribution, the fee is a drag on returns, and the tax drag from distributions in a taxable account compounds against the position.
The Total-Return Alternative: AVUV
For a reader whose real goal is to beat the S&P with small caps rather than to harvest yield, the Avantis U.S. Small Cap Value ETF (NYSEARCA:AVUV) has delivered stronger returns. AVUV is up 23.62% year-to-date and 37.54% over one year, well ahead of IWM. Over five years, AVUV has returned 85.62%, compared with IWM’s 31.73%.
The mechanism is stock selection. AVUV screens for profitability and valuation within the small-cap universe, holding names such as Abercrombie & Fitch, Academy Sports & Outdoors, and Dana, alongside a heavy weighting toward regional banks and energy producers. Assets under management sit at roughly $27.1 billion. The fund is active, so it will not track the Russell 2000 in either direction, and the value tilt can underperform during growth-led rallies, though it has not in the current cycle.
Tradeoffs Worth Naming
Distributions from IWMI are largely a mix of return of capital and options premium, which reduces cost basis and creates some paperwork burden at tax time. IWM, on the other hand, when sold in a taxable account after a strong run, may realize capital gains, though the swap carries different tax implications inside an IRA or 401(k) where the tax event does not apply. AVUV’s value screen means it will lag when speculative small caps take the lead, as they did in parts of 2020 and 2021.
Where This Leaves the IWM Holder
The case for staying in IWM is the cheapest possible small-cap beta with no active bets. The case for IWMI is to turn the current rally into $7.50 of forward annual income per share without sacrificing total return so far. The case for AVUV is that a screened, profitable slice of small caps has outperformed the full index by a wide margin. Which one wins depends on whether the reader wants cash, growth, or the cheapest passive exposure available.
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