Why IJR May Be a Better Bet Than Russell 2000 for Small-Cap Exposure

When it comes to accessing the small-cap equity market, investors often default to the Russell 2000, the most popular U.S. small-cap index. But in today's environment—where liquidity, quality, and cost efficiency matter more than ever—the iShares Core S&P Small-Cap ETF (IJR) deserves a closer look. According to Morningstar's analysis, IJR's index construction and performance efficiency give it a clear edge over the Russell 2000, making it a superior vehicle for capturing the small-cap premium[Imperfect Indexes – Choosing A Better Index ETF]^[1].

The Index Construction Edge: Quality Over Quantity

The S&P SmallCap 600 Index, which IJR tracks, is not just a smaller version of the Russell 2000. It's a more disciplined benchmark. For starters, the S&P index requires constituents to be profitable over the past four quarters, a filter the Russell 2000 lacks[Imperfect Indexes – Choosing A Better Index ETF]^[1]. This profitability screen ensures that IJR avoids the “junk” stocks that often plague the Russell 2000, which includes companies with negative earnings or thin trading volumes. Morningstar notes that this quality bias translates into higher exposure to the “quality factor,” a key driver of long-term risk-adjusted returns[The Morningstar Factor Profile: A New Way to Better Understand Funds]^[2].

Moreover, the S&P SmallCap 600 employs buffering rules to reduce unnecessary turnover. Unlike the Russell 2000's rigid, mechanical reconstitution process—which triggers concentrated trading activity on a single date—IJR's index methodology smooths out transitions, minimizing price distortions and transaction costs[Imperfect Indexes – Choosing A Better Index ETF]^[1]. This is critical in small-cap markets, where liquidity is often scarce. As a result, IJR's portfolio efficiency outshines the Russell 2000's, particularly at the lower end of the market-cap spectrum[A Small-Cap ETF With a Leg Up]^[3].

Performance Efficiency: Lower Costs, Higher Returns

Costs matter. Over time, even small differences in expense ratios can erode returns. IJR's 0.06% expense ratio is significantly lower than the iShares Russell 2000 ETF's (IWM) 0.19%[Should Invesco Russell 2000 Dynamic Multifactor ETF (OMFS) ...]^[4]. Data from Yahoo Finance shows that IJR has outperformed IWM in recent periods, with a 7.08% return year-to-date as of July 2025 compared to IWM's 1.15%[Should iShares Core S&P Small-Cap ETF (IJR) Be on Your ...]^[5]. While past performance isn't a guarantee of future results, the combination of lower fees and a higher-quality portfolio gives IJR a structural advantage.

The Russell 2000's popularity also works against it. Its rules-based construction attracts heavy inflows and outflows during reconstitution, creating liquidity challenges. For example, when a stock is added to the index, sudden demand can inflate its price, while removals can lead to sharp declines. IJR's more curated approach avoids these extremes, offering a smoother ride for investors[Imperfect Indexes – Choosing A Better Index ETF]^[1].

Risk-Adjusted Returns: A Gold Standard

Morningstar's Analyst Rating of Gold for IJR underscores its ability to deliver superior risk-adjusted returns over a full market cycle[The Morningstar Factor Profile: A New Way to Better Understand Funds]^[2]. The S&P SmallCap 600's focus on profitability and liquidity reduces exposure to volatile, unprofitable names—a common issue in the Russell 2000. This is reflected in IJR's lower standard deviation (21.69%) compared to IWM's 22.98%[Should iShares Core S&P Small-Cap ETF (IJR) Be on Your ...]^[5]. While both ETFs have similar betas, IJR's tighter risk control makes it a more attractive option for investors seeking small-cap growth without unnecessary volatility[Should iShares Core S&P Small-Cap ETF (IJR) Be on Your ...]^[5].

Conclusion: A Smarter Small-Cap Play

The Russell 2000 may be the default choice for small-cap exposure, but IJR's index construction and performance efficiency make it a better bet for most investors. By prioritizing quality, reducing turnover, and keeping costs low, IJR offers a more refined way to access the small-cap premium. In a market where every basis point counts, this edge could mean the difference between outperforming and underperforming.