SPSM vs. SCHA: A Historical Lens on Small-Cap ETF Choice

The choice between the SPDR Portfolio S&P 600 Small Cap ETF (SPSM) and the Schwab U.S. Small-Cap ETF (SCHA) crystallizes the central investment question for small-cap exposure: do you prioritize a cheaper, more targeted approach, or accept a higher fee for broader diversification and recent outperformance? The numbers reveal a clear trade-off.

On cost and income, SPSM holds a distinct edge. It carries an expense ratio of 0.03%, undercutting SCHA's 0.04%. More significantly, SPSM offers a dividend yield of 1.70%, a full 32 basis points higher than SCHA's 1.38%. For a buy-and-hold investor, these differences compound over time, making SPSM the more efficient vehicle for capturing small-cap growth.

The divergence becomes stark when examining portfolio size and recent results. SCHA provides vastly broader diversification, holding 1,745 stocks compared to SPSM's 607. This sweep of the small-cap universe has paid off recently, with SCHA posting an 11.33% one-year return versus SPSM's 5.32%. Yet, over the longer five-year horizon, the story flips. SPSM's more concentrated portfolio has delivered a growth of $1,322 for every $1,000 invested, outperforming SCHA's $1,294.

This performance split frames the core trade-off. SCHA's recent strength suggests its broader diversification captured a wider market rally, while SPSM's lower cost and targeted exposure have historically delivered slightly better long-term wealth accumulation. The choice depends on the investor's view of the small-cap market's future. If the next phase favors breadth and momentum, SCHA's recent outperformance is compelling. If the focus is on efficiency and a longer-term compounding edge, SPSM's lower cost and higher yield provide a clearer path.

Risk and Return: A Historical Comparison

The choice between these two small-cap ETFs comes down to a classic trade-off between volatility and return. Historically, the Schwab U.S. Small-Cap ETF (SCHA) has been the more volatile option, with a beta of 1.29 compared to the SPDR Portfolio S&P 600 Small Cap ETF (SPSM)'s 1.21. This higher sensitivity to market swings is reflected in its deeper historical troughs, with a maximum drawdown of -30.79% over the past five years versus SPSM's -27.95%. For investors, this means SCHA has carried a higher risk of significant short-term losses.

Yet recent performance tells a different story. Over the past year, SCHA has delivered superior risk-adjusted returns. Its Sharpe ratio of 0.57 significantly outpaces SPSM's 0.32. This metric, which measures return per unit of risk, shows that SCHA earned its higher volatility with proportionally better results in the near term. The contrast is stark: while SPSM's Sharpe ratio suggests its returns barely compensated for its risk, SCHA's indicates a more efficient payoff.

The divergence in performance can be traced to their underlying indexes. SPSM tracks the S&P SmallCap 600, which includes a profitability screen that excludes unprofitable companies. This filter likely contributes to its slightly better long-term performance and lower volatility by weeding out weaker, more speculative small-caps. SCHA, by contrast, uses a broader Total Stock Market index that includes all small-cap stocks, capturing more of the sector's growth but also its inherent instability. The bottom line is that SPSM offers a more defensive, earnings-focused approach, while SCHA provides a pure, high-beta play on the entire small-cap universe.

Catalysts and What to Watch

The path for small-cap stocks is now being defined by a powerful, forward-looking trend: global electrification. As AI data centers, semiconductors, and electric vehicles drive a surge in electricity demand, smaller, more nimble companies are poised to benefit disproportionately. These firms often concentrate on specific areas like battery technology or supply chain management, meaning a surge in demand for their niche can significantly boost earnings. This dynamic could reverse the category's complicated 2025 performance and create a new catalyst for outperformance.

Yet this potential rally faces a critical vulnerability: interest rates. Small-cap stocks are structurally more sensitive to higher borrowing costs. They carry a larger share of debt, particularly short-term and floating-rate debt, with a significant portion maturing between 2026 and 2030. This makes them more vulnerable to a Fed policy shift than their large-cap peers. The central watchpoint, therefore, is whether the electrification-driven growth story can overcome this heightened rate sensitivity.

Against this backdrop, two popular ETFs offer divergent paths for capturing any small-cap rebound. The Schwab U.S. Small-Cap ETF (SCHA) has delivered strong recent performance, with a 1-year return of 11.33%. Its strength lies in broad diversification, holding nearly 1,750 stocks across a wide sector mix. In contrast, the State Street SPDR Portfolio S&P 600 Small Cap ETF (SPSM) has lagged, with a 1-year return of 5.32%. It offers a more targeted approach, tracking a smaller index of 607 profitable firms with a lower expense ratio. The choice between them hinges on the nature of the rally: SCHA's breadth may capture widespread gains, while SPSM's focus on profitable small caps could provide a more resilient core if the market favors quality over quantity.