Forget IWM: This Screened Small-Cap Fund Beat It Year to Date, Over One Year and Over Five Years

Most investors who own small caps own them through the iShares Russell 2000 ETF (NYSEARCA:IWM). The appeal is simplicity. The fund buys the entire Russell 2000 at a low cost and accepts whatever the index contains, including companies with heavy debt and no earnings. A screened alternative, the Avantis U.S. Small Cap Value ETF (NYSEARCA:AVUV), filters that universe toward cheaper and more profitable businesses, and it has outpaced IWM year-to-date, over one year, and over five years. The figures below are based on quotes from September 30, 2026.

What the Screen Strips Out of Your Small-Cap Portfolio

The Russell 2000 is market-cap weighted with no profitability or valuation screen. Any company that meets the size rules gets in, so IWM owners hold unprofitable and heavily indebted small companies alongside durable ones. Small firms fail more often than large ones, and an index that owns everything carries that drag by design.

AVUV starts from the same broad universe and tilts it. Its actively managed, systematic process favors smaller, cheaper, and more profitable companies. Expensive, money-losing stocks get cut or reduced. The result is a much tighter portfolio of approximately 795 stocks, while IWM remains far broader. For an IWM holder, the mechanism is plain. Profitable companies bought at low valuations have more earnings cushion when conditions turn, and the five-year window shows the widest difference between the two funds.

AVUV Charges More and Must Keep Earning It

IWM’s expense ratio is 0.19%, per its prospectus dated July 31, 2026. AVUV’s is 0.25%. AVUV is the more expensive fund, and that fee comes out every year regardless of results. The screen has to keep beating the index by enough to cover the higher cost, and nothing guarantees it will. Value tilts can lag for long periods, particularly in growth-led rallies when fast-growing, unprofitable small caps lead.

September’s Selloff Hit Both Funds Almost Equally

Small caps have come under pressure, with CNBC reporting on September 24 that a bond liquidation was hammering the group. AVUV fell 2.79% over the past week and 5.54% over the past month. IWM dropped 2.84% and 5.64% over the same windows. Those declines are nearly identical. When the whole asset class derates, a value and profitability screen offers little shelter, and AVUV holders should expect to absorb broad small-cap selloffs in full.

Tax Consequences of Moving From IWM to AVUV

Inside an IRA or 401(k), trading IWM for AVUV creates no immediate tax bill, so the decision rests on strategy alone. In a taxable account, selling IWM at a gain triggers capital gains tax, and long-held shares likely carry healthy gains after a 124.67% ten-year price rise. An easier path is directing new contributions to AVUV while leaving existing IWM shares alone, or selling the lots with the smallest gains first. Holders sitting on losses can harvest them and move into AVUV, since the funds follow different strategies, though a tax professional should confirm wash-sale treatment.

Which Small-Cap Fund Fits Different Investor Goals

Those who want the small-cap asset class with no opinion attached have a sound reason to keep IWM and pay less for it. Investors who believe the value and profitability tilt is durable have a sound reason to pay more for AVUV, and the performance record supports that view. For long-horizon investors who can tolerate periods of underperformance, AVUV’s record makes it worth researching as a core small-cap holding. Individual tax situations and time horizons shape how that research applies. A sustained return of growth-led small-cap leadership would likely change that assessment.

Contact [email protected] for any questions or corrections.