IWN vs. SLYV: Why Sector Allocation Trumps Cost in Small-Cap Value ETF Selection

When it comes to small-cap value ETFs, investors often fixate on expense ratios, assuming that lower fees automatically translate to superior outcomes. But in the volatile, niche world of small-cap value investing, sector allocation can be a far more powerful determinant of performance than cost savings. Take the case of the iShares Russell 2000 Value ETF (IWN) and the SPDR S&P 600 Small Cap Value ETF (SLYV). While SLYV's 0.15% expense ratio edges out IWN's 0.24%, the real story lies in how their sector tilts-particularly IWN's healthcare exposure and SLYV's consumer discretionary and technology focus-have shaped risk-adjusted returns and macroeconomic alignment over the past decade.

The Cost Illusion: SLYV's Fee Edge vs. Sector-Driven Returns

At first glance, SLYV's lower expense ratio appears to give it a clear advantage. But when we dig into risk-adjusted metrics, the narrative shifts. As of August 2025, SLYV boasted a Sharpe ratio of 0.42, outpacing IWN's 0.32 over the same period. This suggests that SLYV's portfolio construction-despite its slightly higher cost-has delivered better returns per unit of risk. Over five years, SLYV's 57.77% total return narrowly outperformed IWN's 56.58%, a gap that widens when considering drawdown resilience. For instance, SLYV's maximum drawdown of -55.37% took 45 months to recover, but its sector diversification cushioned the blow compared to IWN's more concentrated risks.

Sector Tilts: Healthcare vs. Tech and Consumer Discretionary

The key differentiator between these ETFs lies in their sector allocations. IWN's 10.33% weighting in healthcare has proven critical in recent years. As of December 2025, Schwab's Sector Views upgraded healthcare to "Outperform", citing strong fundamentals and AI-driven innovation. Meanwhile, the healthcare sector's 10.07% annualized return in 2025 contrasted sharply with consumer discretionary's 7.28% gain, which Schwab downgraded to "Underperform" due to consumer stress and economic uncertainty.

SLYV, on the other hand, has leaned into financials (22% allocation) and technology (11.47%). While tech's long-term annualized return of 22.02% over 10 years is impressive, its recent volatility-marked by a -4.81% monthly drop in November 2025 due to AI monetization concerns-exposes SLYV to sharper downside risks. This highlights a critical trade-off: SLYV's tech tilt may amplify gains in bull markets but exacerbate losses during corrections, whereas IWN's healthcare exposure offers more stable, defensive returns.

Macro Alignment: Why Sector Strategy Matters More

Small-cap value ETFs are inherently sensitive to macroeconomic shifts. For example, healthcare's "Outperform" rating in late 2025 was driven by AI adoption and regulatory tailwinds, while consumer discretionary's struggles reflected broader economic fragmentation. Investors who aligned their portfolios with these trends-by favoring IWN's healthcare tilt-were better positioned to capitalize on sector-specific catalysts.

Conversely, SLYV's heavy financials allocation (22%) made it more vulnerable to interest rate fluctuations. While financials historically thrive in rising rate environments, the 2020–2025 period saw mixed performance, with the sector underperforming healthcare and technology in key stretches. This underscores the importance of sector alignment with prevailing macro themes rather than relying solely on cost efficiency.

The Bottom Line: Prioritize Strategic Exposure Over Penny-Saving

While SLYV's 0.09% fee advantage may seem appealing, the data shows that sector allocation and risk-adjusted returns are far more consequential for long-term outcomes. IWN's healthcare tilt has delivered consistent outperformance in a volatile market, while SLYV's tech and financials exposure has introduced unnecessary volatility. For investors, the lesson is clear: in small-cap value ETFs, strategic alignment with macro trends and sector-specific fundamentals can outweigh the marginal benefits of lower fees.

As the market navigates AI-driven disruptions and economic fragmentation, the ETF that best mirrors these shifts-whether through healthcare's resilience or technology's growth potential-will ultimately deliver superior results. And in that equation, cost is the least of your worries.