Historical Patterns in Small-Cap ETF Choice: SCHA vs. IJR

The choice between SCHA and IJR isn't just about expense ratios or yield. It's a bet on which structural approach will hold up best when the next market cycle turns. The small-cap asset class itself has a history of powerful, cyclical leadership, making its past stress tests a critical comparator for today's ETFs.

Historically, small caps have outperformed large caps by an average of 2.85% a year since 1927. Yet, the last 15 years have been a stark anomaly, with large caps leading for the longest recorded era. This streak is now widely seen as unsustainable, with many analysts forecasting a return to the historical norm in 2026. The key question is how each ETF will weather the inevitable volatility that comes with such a shift.

The benchmark for IJR, the S&P SmallCap 600, has delivered an average annual gain of 8.05% since its 2000 inception. That figure is impressive, but it includes severe stress like the 2008 crisis. For all that long-term growth, the recent 15-year period of underperformance has been a drag. This context frames the current debate: will the next cycle see a sharp rebound that rewards a concentrated, index-driven approach, or will it be a prolonged grind where broader diversification provides a smoother ride?

The fundamental difference in index construction is the core of this test. IJR follows the S SmallCap 600, a more concentrated index. SCHA, by contrast, tracks the Dow Jones U.S. Small-Cap Total Stock Market Index, which aims to capture the entire small-cap universe. This structural choice means SCHA offers broader diversification, while IJR's portfolio is inherently more focused. In a market that has punished small caps for years, this difference in concentration could become a defining factor when the cycle eventually reverses.

Structural Trade-Offs: Breadth vs. Concentration

The design of each ETF's underlying index dictates its portfolio makeup and investor implications. SCHA's approach is built on breadth, tracking an index that aims to capture the entire small-cap universe. This results in a portfolio of over 1,000 stocks, offering significant diversification. By contrast, IJR follows the more concentrated S&P SmallCap 600, which holds approximately 800 stocks. This structural choice means IJR's portfolio is inherently more focused, with a higher weighting in its largest holdings.

This difference in breadth translates directly to scale and liquidity. IJR is a market leader, with net assets of $92.5 billion compared to SCHA's $20.4 billion. That massive size advantage provides IJR with superior liquidity and makes it the default choice for large institutional flows. For a small-cap rally, this could mean IJR captures more of the initial momentum as capital pours in. SCHA, while still substantial, operates on a smaller scale, which may limit its ability to absorb massive inflows without impacting its trading price.

Cost is another clear trade-off. SCHA holds a slight edge with a 0.04% expense ratio, beating IJR's 0.06% fee. In a low-margin environment, this small difference can compound over time. Yet, IJR offers a higher yield, with a 5.3% dividend yield versus SCHA's 5.9%. This yield gap is a tangible benefit for income-focused investors, even if it comes with a slightly higher cost.

The bottom line is a classic diversification versus concentration debate. SCHA's broader footprint may smooth out idiosyncratic risks, while IJR's focus could amplify returns in a strong small-cap rally. The liquidity and scale of IJR remain formidable, but SCHA's lower cost and higher yield provide compelling alternatives. The choice hinges on whether an investor values the potential for a smoother ride or is willing to accept more concentration for a higher income stream.

Performance Under Stress: Lessons from Recent Cycles

The recent past offers a clear test of the diversification thesis. Over the trailing year, SCHA delivered a 19.50% total return, outperforming IJR's 13.13%. Yet, the story of resilience is more nuanced. During the same period, IJR experienced a milder drawdown than SCHA. This apparent contradiction is key: it suggests that while SCHA's broader index captured more upside, IJR's more concentrated portfolio may have been less volatile during recent stress.

Risk-adjusted metrics confirm this tension. SCHA's Sortino ratio of 1.35 significantly outpaces IJR's 0.98. This ratio measures return per unit of downside risk, indicating SCHA generated better returns for each percentage point of negative volatility. In other words, SCHA's diversification provided a cushion, smoothing the ride through downturns. IJR's higher beta and larger maximum drawdown highlight its concentration risk.

The dividend yield difference adds another layer. IJR offers a 5.29% yield, slightly above SCHA's 5.9%. This gap suggests IJR's index may have included more established, income-generating small-cap firms. For income-focused investors, this could translate to more consistent cash flow, even if it comes with a higher volatility profile. SCHA's higher yield, combined with its superior risk-adjusted returns, points to a portfolio that balances income with smoother performance.

The bottom line is that broad diversification and concentration each have their place in a downturn. SCHA's structure appears to have provided a better risk-adjusted outcome, while IJR's focus may have offered a steadier income stream. For an investor betting on a small-cap rebound, this recent cycle shows that the path to recovery can be smoother with a broader basket.

Catalysts and What to Watch

The forward path for these two ETFs hinges on a few key catalysts. The first is a test of SCHA's risk-adjusted appeal. Its superior Sortino ratio suggests its broader diversification has provided a cushion in recent cycles. The critical question is whether this structural advantage continues to smooth returns during the next market downturn, or if the concentrated nature of IJR's index proves more resilient in a sector-led rally.

That leads to the second catalyst: sector leadership within the small-cap universe. IJR's more concentrated portfolio means its performance will be heavily influenced by the specific stocks and sectors that lead the next small-cap recovery. If the rally is driven by a few high-conviction small-cap sectors, IJR's focused approach could allow it to outperform SCHA's broader basket. The ETF's slightly lower drawdown in recent years hints at this potential, but it remains a bet on sector timing.

Finally, the massive size gap between the funds is a structural force that cannot be ignored. With net assets of $92.5 billion versus SCHA's $20.4 billion, IJR commands a liquidity and scale advantage that will shape future flows. In a strong small-cap rally, this could enable IJR to capture more momentum as capital pours in. SCHA, while still substantial, may see its trading price more impacted by large inflows. This dynamic will be a key factor in determining which ETF leads in the next phase of the cycle.