This ETF Weeds Out Small-Cap Underperformers

Key Points

• This year, small-cap stocks have made their case for inclusion in a well-diversified portfolio.  
• Index funds that track the Russell 2000 provide broad exposure but can limit upside potential with excessive holdings. 
• Alternatively, the IJR limits its positions to established U.S. small-caps stocks that demonstrate a recent track record of sound earnings performance.

Earlier this year, when President Trump’s tariff-induced market volatility spurred the “sell America” trade, investors vacated large-cap U.S. equities and sought out alternative trades that could minimize the fallout. But it turns out that not all of those outflows ended up overseas. 

U.S. small caps, as measured by the Russell 2000 index, saw massive inflows as uncertainty gripped the market. With an average daily trading volume of 5.1 million, small caps saw inflows between 7.2 million and 9.5 million every day between April 3 and April 9. As a result, the Russell 2000—and its often overlooked basket of small-cap stocks—saw a dramatic price reversal. From its year-to-date (YTD) low on April 8 to the time of writing, the index is up more than 38%. For context, that leads the S&P 500’s recovery over the same period by five percentage points.   

However, like any asset class, not all small caps are the same. The iShares Russell 2000 ETF NYSEARCA: IWM, for example, mirrors the Russell 2000 and has approximately 2,000 holdings. Another, the Vanguard Small-Cap ETF NYSEARCA: VB, is more selective with 1,100 positions, but that broad exposure can still come at a cost. 

So in order to harness the most potential upside small caps offer, one ETF is embracing a strategy that weeds out the underperformers, thereby limiting its holdings to the most financially viable companies operating in the index. 

This ETF’s Small-Cap Strategy Picks Winners  

The iShares Core S&P Small-Cap ETF NYSEARCA: IJR does things a little differently, and the result is that the ETF has far narrower holdings than its small-cap index fund counterparts. The IJR’s 637 holdings focus on established U.S.-based, financially viable companies with strict criteria. 

Stocks in the fund must be at least one year removed from their IPOs. The fund requires companies to have a positive track record of recent earnings. Specifically, the sum of the most recent four consecutive quarters of earnings must be positive, as well as the companies demonstrating positive earnings in the most recent quarter.  

The result: Since its inception on June 2, 2000, the ETF has only seen downturns exceeding 20% on five occasions, including the Great Recession, the 2018 market correction, the 2022 bear market, 2020’s pandemic crash, and most recently in April when the market plunged in response to Trump’s Liberation Day tariff announcements.

But each time, the IJR recovered swiftly, and since its debut has posted a nearly 579% gain while paying shareholders a dividend that currently yields 1.93%, or $2.29 per share annually. Meanwhile, the fund features a low-cost expense ratio of just 0.06%. 

The IJR’s Basket of Best in Class Holdings

Importantly, the IJR is composed of stocks with market caps between $300 million and $1 billion. So to the average retail investor, the names in its holdings are as familiar as the headline-grabbing behemoths atop S&P 500 or NASDAQ-100 index funds. 

Nonetheless, these companies are the premier performers in the world of U.S. small-cap stocks. Its top-five holdings include: 

• Non-bank mortgage servicer Mr. Cooper Group Stock NASDAQ: COOP
• National security and government/military defense solutions provider Kratos Defense & Security Solutions NASDAQ: KTOS
• Data storage solutions provider Sandisk NASDAQ: SNDK
• Automotive supplier BorgWarner Stock NYSE: BWA
• Industrial, municipal, energy, and utilities engineered products provider SPX Technologies NYSE: SPXC

By sector, the fund currently leans heavily into financials, which accounts for nearly 25% of its holdings and aligns well with the sector's bullish forecast, with the Federal Reserve beginning another rate-cutting cycle. Consumer discretionary stocks make up the second largest allocation, at more than 16%, with industrials, health care, and technology rounding out the top five sectors, respectively. 

The IJR’s holdings prove its ability to provide investors with strong small-cap diversification without the need to expand its portfolio to the thousands of stocks tracked by the Russell 2000. 

Here’s What Wall Street Thinks About the IJR

Following the smart money is never a bad strategy to include in your analysis. And when it comes to the IJR, Wall Street seems to be on board. Short interest currently stands at just 0.52% of the ETF’s 726.7 million shares outstanding. And while that figure marks a 26% increase over the month prior, it also shows that fewer than 1% of the bears believe the fund is due for near-term downward price action. 

At the same time, institutional ownership—which stands at nearly 67%—has seen buying outweigh selling by a sizable margin of $15.23 billion in inflows versus $4.73 billion in outflows over the past 12 months.

The IJR receives a consensus Moderate Buy rating from the 23 analysts covering it, none of which have assigned the ETF as a Sell or Strong Sell.