The SPSM small-cap ETF has outperformed the iShares Russell 2000 ETF (IWM) by utilizing stricter stock screening and lower fees [1].

This performance gap highlights a potential inefficiency in how many investors access small-cap equities, as the industry standard often includes companies that lose money.

For years, the iShares Russell 2000 ETF has served as the default vehicle for investors seeking small-cap exposure [3]. Launched on May 22, 2000 [3], IWM is highly liquid and familiar to traders. However, a rival fund is gaining attention for its structural advantages in both cost and selection [2].

SPSM maintains an expense ratio that is roughly 84% lower than that of IWM [1]. This cost reduction allows more capital to remain invested, contributing to a long-term compounding advantage [2].

Beyond fees, the two funds differ in their approach to the Russell 2000 index universe. While IWM tracks the index broadly, SPSM screens out "money-losers," companies that do not meet specific profitability or performance standards [1].

This screening process has led to significant performance gains across various time horizons. In the short term, SPSM has led IWM by 2.5 points [1]. Over a five-year period, the fund outperformed the Russell 2000 by 36% [3]. For long-term holders, the advantage is even more pronounced, with SPSM beating IWM by 12.68 points over the last 10 years [2].

Analysts said that IWM often dominates portfolios by sheer habit [1]. Despite this, the data suggests that a quieter alternative has been compounding ahead of the industry leader due to these two structural advantages [2].

“SPSM screens out 'money-losers,' companies that do not meet specific profitability or performance standards.”

The divergence between SPSM and IWM suggests that passive indexing—which includes every company in an index regardless of profitability—may be less effective than 'smart beta' or screened strategies in the small-cap sector. By removing non-profitable companies and lowering the cost of entry, SPSM demonstrates that quality control can significantly impact total returns over a decade.