S&P 500 vs. Russell 2000 ETF: What’s the Difference?

S&P 500 vs. Russell 2000 ETFs: An Overview

If you find yourself on the conservative end of the active vs. passive spectrum, then investing in exchange-traded funds (ETFs) may be one way to go. You may not beat the market, but you will certainly come close to matching it. Here, we’ll focus on ETFs that track two of the more popular indexes, the S&P 500 and the Russell 2000.

S&P 500 ETFs

The Standard & Poor’s 500 (S&P 500) is a market-capitalization-weighted index of some of the largest publicly-traded U.S. corporations. Market capitalization—or market cap for short—is determined by multiplying the number of outstanding shares of stock by the current stock price. For example, a company with 10 million shares outstanding and a $100 stock price would have a $1 billion market cap.

Most analysts see the S&P 500 as the best indicator of the U.S. equity market. The index is a commonly used benchmark for many portfolio managers, mutual funds, and exchange-traded funds.

The three most commonly traded ETFs that track the performance of the S&P 500 index include:

1. State Street’s SPDR S&P 500 ETF Trust (SPY)
2. BlackRock’s iShares Core S&P 500 ETF (IVV)
3. Vanguard’s S&P 500 ETF (VOO)

The common theme between all three funds is, of course, the index they track—the S&P 500. Many investors consider this index to be the pulse of the U.S. equity market. It is calculated using the market capitalizations of the 500+ largest U.S. companies with stocks listed on the New York Stock Exchange (NYSE) or the Nasdaq Stock Market. Index constituents are selected by a committee, which takes into account criteria such as market capitalization, liquidity, financial viability, length of trading, and other factors.

Expense Ratio

The SPY’s expense ratio is 0.0945%, which is low in a broader asset management context. An expense ratio represents the percentage of expenses associated with managing the fund as a percentage of the total assets under management (AUM). Although relatively low, the SPY’s expense ratio is higher than the .03% expense ratio for both BlackRock’s (IVV) and Vanguard’s (VOO) as of January 2022.

Daily Trading Volume

Despite the higher expense ratio, the SPY has superior liquidity with an average daily trading volume of 11.8 million shares. Liquidity represents the amount or volume of shares being exchanged. Higher liquidity is ideal since it means investors can easily buy and sell shares of the fund. However, as of January 2022, Blackrock’s IVV and Vanguard’s VOO are catching up with 9.6 million shares and 8.6 million shares, respectively.

Performance

The performance of the three funds is often compared to the S&P 500 index—represented by net asset value (NAV) returns. The S&P 500’s three-year performance was 26.03% and 18.41% for the past five years as of December 2021. The table below shows the performance of the three S&P ETFs over the same period.

Sources: State Street Global Advisors, Blackrock, and Vanguard.

The SPY returned the lowest of the three funds. The lowered return is to be expected since it has the highest expense ratio among the three ETFs.

SPY is also structurally different from IVV and VOO in that it is set up as a unit investment trust (UIT) with restrictions on lending the underlying shares to other firms. Additionally, any dividends from SPY constituents for the period are collected and held in cash until quarterly distribution. Also called the Trust, SPY does not provide a dividend reinvestment service but allows them through a broker-dealer. VOO also has a quarterly distribution while IVV issues dividends once a year. Like SPY, neither offers dividend reinvestment services but both allow for broker-dealers to handle the transactions.

Russell 2000 ETFs

While the S&P 500 index typically contains larger, well-established companies, the Russell 2000 Index follows the performance of around 2,000 U.S. small-cap companies. Like the S&P 500, the index is weighted and regularly serves as a benchmark index.

As the name suggests, Russell 2000 ETFs closely track the Russell 2000 Index, which combines 2,000 of the small-cap companies in the Russell universe of 3,000 stocks. The Russell 3000 tracks nearly 97% of all publicly traded U.S. stocks.

Both the S&P 500 and Russell 2000 indexes are market-cap-weighted. However, unlike the S&P 500 index, the securities in the Russell 2000 index are not selected by a committee. Instead, the holdings are determined through a formula based on their market cap and current index membership.

Three notable ETFs tracking the Russell 2000 index include:

1. BlackRock’s iShares Russell 2000 ETF (IWM)
2. Vanguard’s Russell 2000 ETF (VTWO)
3. Direxion Daily Small Cap Bull 3x Shares (TNA)

Please note that the Direxion Daily Small Cap Bull 3x Shares (TNA) is a leveraged fund that can provide investors with enhanced leverage. The fund is designed to achieve a daily investment performance—before expenses—of 300% of the daily performance of the Russell 2000.

However, there’s no guarantee that the fund will achieve that performance. The fund’s daily objective doesn’t apply to long-term results, and just as leverage can magnify gains, it can also magnify losses during volatile markets. Please consult a financial advisor to determine if leveraged ETFs are right for you.

Expense Ratio

Blackrock’s IWM has an expense ratio of .19%, and Vanguard’s VTWO has an expense ratio of .10% as of December 2021. Direxion’s TNA has the highest at 1.11% as of January 2022. Compared to the S&P 500 ETFs, these funds tracking the Russell 2000 index tend to command higher fees since they may have more active portfolio management, meaning they’re periodically balancing a larger number of securities versus the S&P ETFs.

Daily Trading Volume

Direxion’s TNA has an average daily trading volume of 7.5 million shares while Vanguard’s VTWO moves 1.5 million shares daily. Comparatively, Blackrock’s IWM trades a whopping 49.5 million shares of daily volume.

Performance

The performance of the three funds is often compared to the Russell 2000 index—represented by net asset value (NAV) returns. The Russell 2000’s three-year performance was 13.65% and 10.46% for the past five years as of January 2022. The table below shows the performance of the three Russell 2000 ETFs over the same period.

Sources: BlackRock, Vanguard, and Direxion.

Russell 2000 ETFs may look more attractive than S&P 500 ETFs at the start of a bull market. The Russell 2000 constituents, on average, may outperform their S&P 500 index counterparts during an uptrend.

However, a challenge includes the volatility or fluctuations in those returns. As a result, investors must consider their risk tolerance when owning a small-cap ETF to determine whether it’s appropriate for their overall investment strategy and financial goals.

Special Considerations

ETFs can be an attractive investment for those who are content with matching the return in a broader market at a fraction of an active management cost. Investors have many ETFs to choose from based on the size, geographical location, or sector affiliation of companies in the index.

Two of the more popular choices are the S&P 500 ETFs and Russell 2000 ETFs. Key distinctions between them are driven by the size of the companies in the index they track—large-cap for the S&P 500 and small-cap for the Russell 2000—the volatility of the underlying index, the method of constituent selection, and the fees charged.

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