IWP vs. VOT: Unlocking Alpha in Mid-Cap Growth ETFs

The mid-cap growth ETF space has long been a battleground for investors seeking a balance between growth potential and cost efficiency. Two prominent contenders, the iShares Russell Mid-Cap Growth ETF (IWP) and the Vanguard Mid-Cap Growth ETF (VOT), offer distinct approaches to this niche. By dissecting their performance efficiency, risk-adjusted returns, and thematic exposure, we uncover which ETF better aligns with alpha generation in today’s market.

Performance Efficiency: Cost vs. Returns

VOT has outperformed IWP in the year-to-date period, delivering a 14.32% return compared to IWP’s 12.95% [1]. However, over longer horizons, IWP edges ahead: its 10-year annualized return of 13.08% surpasses VOT’s 12.17% [1]. This divergence highlights a critical trade-off: VOT’s lower expense ratio of 0.07% versus IWP’s 0.24% [1] makes it more cost-efficient, yet IWP’s historical performance suggests it may better capitalize on compounding growth. Investors must weigh these factors against their time horizon and cost sensitivity.

Risk-Adjusted Returns: Balancing Volatility and Drawdowns

Both ETFs exhibit comparable risk-adjusted metrics, but subtle differences emerge. IWP’s Sharpe Ratio (1.11) slightly outperforms VOT’s (1.09) [1], while VOT’s Sortino Ratio (1.59) edges ahead of IWP’s (1.58) [1]. However, VOT’s maximum drawdown (-60.17%) is more severe than IWP’s (-56.92%) [1], and its Ulcer Index (5.96%) is lower than IWP’s (7.51%) [1]. These metrics suggest VOT’s returns come with higher downside risk, even as its cost advantage persists. For risk-averse investors, IWP’s slightly better drawdown management may justify its higher fees.

Thematic Exposure: Sector Allocations and Diversification

Both ETFs target mid-cap growth stocks but diverge in sector emphasis. IWP is heavily concentrated in Technology Services (23.07%) and Consumer Services (15.03%) [1], while VOT allocates more to Electronic Technology (15.89%) and Finance (12.72%) [1]. This divergence reflects differing index methodologies: IWP tracks the Russell Midcap Growth Index, whereas VOT follows the CRSP US Mid Growth Index [1].

A closer look at top holdings reveals further distinctions. IWP’s portfolio includes companies like Apollo Global Management and DexCom, emphasizing software and healthcare innovation [2]. VOT, by contrast, holds Amphenol Corporation and TransDigm Group, signaling a stronger tilt toward industrials and defense [3]. These allocations could make VOT more resilient in sectors with stable cash flows, while IWP’s tech-heavy exposure may amplify volatility during market corrections.

Strategic Implications for Investors

The high correlation (0.98) between IWP and VOT [1] means holding both offers minimal diversification. Instead, investors should prioritize the ETF that aligns with their risk tolerance and market outlook. For those prioritizing cost efficiency and moderate risk, VOT’s lower expense ratio and diversified sector exposure make it a compelling choice. Conversely, IWP’s superior long-term performance and tighter drawdowns may appeal to growth-focused investors willing to pay a premium for historical alpha.

Conclusion

The IWP-VOT debate underscores the nuanced trade-offs inherent in mid-cap growth investing. While VOT excels in cost efficiency and sector diversification, IWP’s historical performance and risk management offer a counterpoint for those prioritizing growth. As market conditions evolve, investors must align their choices with their strategic objectives, ensuring their selections reflect both quantitative metrics and qualitative sector insights.

Source:
[1] IWP vs. VOT — ETF Comparison Tool [https://portfolioslab.com/tools/stock-comparison/IWP/VOT]
[2] iShares Russell Mid-Cap Growth ETF | IWP [https://www.ishares.com/us/products/239717/ishares-russell-midcap-growth-etf]
[3] VOT – Portfolio – Vanguard Mid-Cap Growth ETF [https://www.morningstar.com/etfs/arcx/vot/portfolio]