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Written by Katie Brockman for The Motley Fool->
IWO targets smaller companies with aggressive growth potential, while VOO focuses on the 500 largest U.S. companies.
VOO offers a significantly lower expense ratio and higher dividend yield than IWO.
IWO has experienced higher volatility and a deeper maximum drawdown compared to VOO over the last five years.
The iShares Russell 2000 Growth ETF (NYSEMKT:IWO) and the Vanguard S&P 500 ETF (NYSEMKT:VOO) both provide access to a large swath of the U.S. equities market, but they take distinct approaches that may appeal to different investor priorities.
While IWO targets aggressive growth in smaller companies, VOO represents the core of the U.S. economy by tracking the S&P 500. This comparison highlights how these two distinct segments of the market have behaved over time.
Beta measures price volatility relative to the S&P 500; beta is calculated from five-year monthly returns. The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.
Cost is a primary differentiator, as the Vanguard fund is significantly more affordable for long-term investors. Additionally, those seeking passive income may prefer VOO’s higher dividend yield, reflecting the cash-flow-positive nature of large-cap companies.
IWO provides exposure to roughly 1,100 holdings, with industrials, technology, and healthcare making up its top three sectors. Its largest positions include Bloom Energy, Credo Technology Group, and Sterling Infrastructure. This fund, which was launched in 2000, has a trailing-12-month dividend of $1.51 per share.
In contrast, VOO tracks the S&P 500 and holds just over 500 stocks, leaning heavily into technology, financial services, and communication services. Its largest positions include Nvidia, Apple, and Microsoft. VOO was launched in 2010 and paid $7.13 per share in dividends over the trailing 12 months.
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VOO and IWO take different approaches to U.S. stocks: VOO targets the largest industry leaders, while IWO focuses on smaller, up-and-coming stocks.
VOO offers three major advantages over IWO: greater stability, lower fees, and higher dividend income. Because this ETF holds stocks from 500 of the largest and strongest U.S. companies, it’s more likely to survive periods of volatility. It offers a substantially lower beta and max drawdown than IWO, suggesting smaller price fluctuations over the last five years.
With a lower expense ratio and higher dividend yield, investors can also expect to pay less in fees while earning more passive income alongside investment growth with VOO. It charges an expense ratio of 0.03% compared to IWO’s 0.24%, meaning investors will pay $3 or $24 in annual fees, respectively, for every $10,000 invested in each fund.
Where IWO shines, however, is its growth potential. The last few years have been unique, as advancements in artificial intelligence have caused large-cap tech stocks to skyrocket. Generally, though, smaller stocks often have more room for growth than their more established peers. If any of the stocks in IWO take off, this ETF could deliver lucrative returns.
Both IWO and VOO can be smart investments, and the right one for you will depend on your priorities and goals. VOO offers the stability of large-cap stocks with an emphasis on tech leaders, while IWO provides exposure to fast-growing small-cap stocks with plenty of long-term potential.
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Katie Brockman has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Apple, Bloom Energy, Microsoft, Nvidia, Sterling Infrastructure, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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