Forget the Russell 2000. This Small-Cap Value Fund Beat It by 36% Over 5 Years

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The iShares Russell 2000 ETF (NYSEARCA:IWM) is the default way most investors get small-cap exposure. It tracks the Russell 2000 Index, holds roughly 2,000 U.S. small caps, and has anchored most small-cap portfolios since its May 22, 2000 launch. The appeal is obvious: one ticker, broad coverage, an expense ratio of just 0.19%, and enough liquidity to trade in size. The structure handles broad exposure well, but IWM owns the whole small-cap pond, including the parts that have quietly cost holders real money over the past five years. The Avantis U.S. Small Cap Value ETF (NYSEARCA:AVUV) screens out the worst of that universe, and over the past five years it has more than doubled IWM’s return.

Where the Russell 2000 leaks returns

The Russell 2000 weights by market cap and includes roughly the 2,000 smallest names in the Russell 3000. Many of those companies lose money, burn cash, or trade at premium multiples on hopes that have not paid off. Academic work going back decades shows that the cheaper, profitable slice of the universe has historically driven small-cap returns, not the speculative tail. IWM holds both in proportion to market cap, so the index drags the winners down with the losers. The numbers show the result: over the five years through June 15, 2026, IWM returned 34.93% on a price basis. A small-cap fund that screens out the worst of that universe more than doubled it.

The alternative: Avantis U.S. Small Cap Value

Avantis, a subsidiary of American Century Investments, staffs its desk largely with former Dimensional Fund Advisors researchers. They run systematic, rules-based portfolios rather than stock-picking strategies, sitting between pure indexing and traditional active management. AVUV starts with the small-cap universe and tilts it toward two characteristics: lower price-to-book valuations (the value factor) and higher profitability (cash flow and earnings relative to book equity). Companies that score poorly on both draw smaller weights, or the fund excludes them outright. AVUV holds roughly 775 positions with $23.5 billion in net assets as of February 28, 2026, concentrated in regional banks, energy producers, industrials, and consumer cyclicals that trade at modest multiples.

What the five-year gap looks like

Over the same five-year window ending June 15, 2026, AVUV returned 71.36%, beating IWM by 36.43 percentage points. On a $25,000 starting position, the IWM holder finished around $32,000, while the AVUV holder finished around $43,000. Same asset class, same five years, very different outcomes. The gap reflects more than one window: year-to-date, AVUV has gained 20.78% against IWM’s 19.15%. Over the trailing year, the two essentially tie, with IWM at 41.05% and AVUV at 40.75% — a useful reminder that the value tilt does not win every quarter.

What you give up

The tradeoffs line up in three places. Fees come first. AVUV charges 0.25% versus IWM’s 0.19%, a 6-basis-point premium for the active screen. Against a five-year performance gap, that difference amounts to a rounding error, but it still costs you something real.

Factor exposure comes next. When mega-cap growth leads the market, as it did throughout much of 2024 and 2025, small-cap value tends to lag. AVUV will lag IWM during those stretches, sometimes by wide margins, because the strategy assumes the investor stays put long enough for cheap, profitable small caps to mean-revert. That assumption drives value factor timing and profitability screens. Concentration rounds out the list. AVUV leans heavily into regional banks, energy, and cyclical industrials. That mix tracks the real economy more closely than IWM’s broader sweep, which means it absorbs deeper drawdowns in recessions tied to credit stress or commodity shocks. It captures the classic tension between broad beta and targeted factor tilts, each with its own rhythm.

Mechanics of the swap

In a tax-advantaged account, the trade stays simple: sell IWM, buy AVUV, no tax consequence. In a taxable account, embedded gains on IWM matter. A holder sitting on multi-year appreciation should weigh the capital gains hit against the expected forward edge, or phase in by directing new contributions to AVUV while leaving the IWM position alone.

How to think about it from here

AVUV makes a higher-conviction bet that value and profitability will continue to matter inside the small-cap segment, and it carries the corresponding factor risk. The five-year record supports that bet, the methodology stays transparent, and the fee looks reasonable for what the fund does. An investor who owns IWM purely for small-cap exposure and holds a multi-year horizon should evaluate AVUV against a personal tax and risk situation. For someone who specifically wants the full Russell 2000, unfiltered, IWM still does exactly what it was designed to do.

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