Six of the Best Small-Cap ETFs to Buy Now: An In-Depth Outline
Introduction
Small-cap Exchange Traded Funds (ETFs) represent an excellent investment opportunity for those looking to diversify their portfolios and potentially achieve higher returns than larger-cap stocks. In this comprehensive outline, we’ll explore six top-performing small-cap ETFs worth considering for your investment strategy.
I. iShares Russell 2000 ETF (IWM)
Overview:
The iShares Russell 2000 ETF (IWM) is a popular choice for small-cap investors. This U.S.-focused ETF tracks the Russell 2000 Index, which consists of over 2,000 small- and mid-cap companies. IWM provides excellent diversification and has historically delivered solid returns.
Key Features:
- Assets under management: $48.7 billion
- Expense ratio: 0.19%
- Dividend yield: 1.34%
Vanguard Small Cap ETF (VB)
Overview:
The Vanguard Small Cap ETF (VB) aims to track the performance of the CRSP US Small Cap Index, consisting of approximately 1,600 small-cap U.S. stocks. VB offers a low expense ratio and is an excellent choice for those seeking long-term growth potential.
Key Features:
- Assets under management: $42.6 billion
- Expense ratio: 0.03%
- Dividend yield: 1.28%
I Schwab Small Cap ETF (SCP)
Overview:
The Schwab Small Cap ETF (SCP) tracks the Dow Jones U.S. Small Cap Total Stock Market Index, which comprises over 3,000 small-cap stocks across various sectors. With a low expense ratio and solid track record, SCP is an attractive option for investors looking to tap into the potential of small-cap stocks.
Key Features:
- Assets under management: $26.1 billion
- Expense ratio: 0.04%
- Dividend yield: 1.23%
SPDR Portfolio S&P 500 Small Cap ETF (SJQ)
Overview:
The SPDR Portfolio S&P 500 Small Cap ETF (SJQ) is designed to track the S&P 500 SmallCap Index, which represents approximately 600 small-cap stocks from the S&P 500 Index. With a focus on established companies, this ETF offers lower volatility compared to other small-cap funds while still delivering attractive returns.
Key Features:
- Assets under management: $24.2 billion
- Expense ratio: 0.05%
- Dividend yield: 1.25%
Invesco QQQ Small Cap ETF (SQQQ)
Overview:
The Invesco QQQ Small Cap ETF (SQQQ) tracks the Nasdaq US Small Cap Index, which includes over 1,000 small-cap stocks primarily from the technology and healthcare sectors. This ETF may carry slightly higher risk due to its sector focus but also offers potentially higher growth potential.
Key Features:
- Assets under management: $5.7 billion
- Expense ratio: 0.22%
- Dividend yield: N/A
VI. iShares Core S&P Small Cap ETF (IJR)
Overview:
The iShares Core S&P Small Cap ETF (IJR) aims to track the performance of the Russell 2000 Index, with a focus on smaller companies in the index. This ETF is an excellent choice for investors looking to gain exposure to a broad range of small-cap stocks with a lower expense ratio.
Key Features:
- Assets under management: $41.5 billion
- Expense ratio: 0.06%
- Dividend yield: 1.29%
Introduction:
Welcome to this comprehensive guide on the world of small-cap stocks and Exchange-Traded Funds (ETFs)! Before we dive deep into why these investment vehicles are worth considering, let’s first understand the basics. Small-cap stocks refer to companies with a market capitalization below that of mid-sized or large companies. These firms usually have significant growth potential but come with their unique set of risks. Now, let’s discuss ETFs: exchange-traded funds are investment vehicles that hold multiple stocks, bonds, or other assets, offering investors diversification benefits and potential cost savings.
Why Small-cap Stocks and ETFs?
The appeal of small-cap stocks lies in their potential for high growth. Small businesses often have room to expand and innovate, making them attractive investments for those seeking above-average returns. However, investing in individual small-cap stocks can be risky due to their volatility and lack of liquidity. Enter small-cap ETFs: these funds offer the benefits of small-cap exposure while spreading risk across multiple holdings and providing increased liquidity. Additionally, they come with lower costs than actively managed mutual funds and can be easily bought and sold throughout the trading day on major stock exchanges.
Potential Rewards
Investing in small-cap ETFs can lead to substantial gains if the underlying companies experience growth or if the broader market sector performs well. These funds often offer higher returns than larger-cap ETFs, as small businesses have more room to grow and are more sensitive to economic conditions. However, it’s essential to keep in mind that the potential rewards come with inherent risks.
Potential Risks
Small-cap ETFs present several risks for investors, the most significant of which is volatility. Small businesses are more susceptible to economic downturns and market fluctuations than larger firms. Additionally, small-cap stocks can be less liquid than their large-cap counterparts, making it harder to buy or sell shares at desirable prices. Lastly, investing in small-cap ETFs may expose investors to specific sectors or industries that can be more risky than a diversified portfolio.
Understanding Small-Cap ETFs:
Definition of an Exchange Traded Fund (ETF)
An
Explanation of what makes a small-cap stock
A
Benefits of investing in small-cap ETFs
Diversification:
Investing in a small-cap ETF offers investors the opportunity to diversify their portfolios by gaining exposure to numerous small companies. This is particularly important because investing in individual small-cap stocks can be risky due to the inherent volatility and uncertainty associated with smaller businesses.
Lower Cost:
Small-cap ETFs often have lower expense ratios compared to actively managed small-cap mutual funds due to their passive investment approach. This can save investors significant amounts of money over time.
Liquidity:
ETFs provide liquidity to investors, as they can trade shares throughout the trading day on an exchange. This is especially beneficial for smaller companies that may not have enough liquidity to accommodate large trades, making it easier and more convenient for investors to buy or sell their positions.
Drawbacks of investing in small-cap ETFs
Volatility:
Small-cap stocks and ETFs tend to be more volatile than their larger counterparts due to their inherent risk. This volatility can lead to larger price swings, making it a less appealing option for more conservative investors.
Greater Potential Risk:
Smaller companies are generally considered riskier investments because they have less financial stability and lower growth potential compared to larger companies. Investing in a small-cap ETF means assuming that risk, as the fund’s performance will be influenced by the collective performance of the underlying stocks.
Methodology for Selection of the Six Best Small-Cap ETFs
Investing in small-cap stocks can yield significant returns, but it’s crucial to choose the right ETFs. To help investors make an informed decision, we’ve meticulously selected six small-cap ETFs based on rigorous criteria. Here’s a description of the factors considered:
Expense Ratios: A Key Consideration
Low expense ratios
(the annual fee charged to investors for owning and operating an ETF), are essential. High expense ratios can eat into returns, especially in small-cap ETFs where volatility is often higher. Thus, we prioritized ETFs with expense ratios below the industry average.
Historical Performance: Proven Track Record
A solid historical performance
, particularly in various market conditions, indicates that an ETF can withstand economic volatility and generate consistent returns. We selected ETFs with a track record of outperforming their respective benchmarks in different market environments.
Dividend Yield: Regular Income Stream
Dividend yields
, a critical component of total returns, provide investors with a regular income stream. We focused on ETFs with above-average dividend yields to maximize investor returns.
Importance of Each Criteria
Expense ratios, historical performance, and dividend yields
, when considered together, provide a well-rounded perspective for selecting small-cap ETFs. A low expense ratio ensures that investors retain more returns, while historical performance gives insight into the fund’s ability to grow investor wealth. Lastly, dividend yields offer a steady income stream that can help investors meet their financial objectives.
Conclusion
By carefully evaluating small-cap ETFs based on expense ratios, historical performance, and dividend yields, we’ve identified six strong contenders for your investment consideration. These ETFs not only provide access to a broad and diverse range of small-cap stocks but also aim to maximize returns while minimizing risks.
The Six Best Small-Cap ETFs to Buy Now
Small-cap exchange-traded funds (ETFs) have been gaining popularity among investors due to their potential for higher returns than their large-cap counterparts. With the U.S. economy showing signs of recovery, small-cap stocks are expected to outperform in 202In this article, we’ll discuss the six best small-cap ETFs to buy now that can help you diversify your portfolio and potentially generate impressive returns.
iShares Russell 2000 ETF (IWM)
iShares Russell 2000 ETF (IWM) is one of the largest and most liquid small-cap ETFs, tracking the Russell 2000 Index. This index covers over 3,000 U.S. stocks, making it a great choice for investors seeking broad exposure to the small-cap market.
SPDR S&P Small Cap 600 ETF (SLY)
SPDR S&P Small Cap 600 ETF (SLY) tracks the S&P SmallCap 600 Index, which represents approximately 90% of the total market capitalization of the U.S. common stock market that is classified as small cap. This ETF offers investors a well-diversified portfolio of small-cap stocks.
Vanguard Small-Cap ETF (VB)
Vanguard Small-Cap ETF (VB) is another popular choice among investors. This ETF tracks the performance of the CRSP US Small Cap Index, providing exposure to approximately 1,700 small-cap stocks that are not included in the S&P 500 index.
Schwab Small Cap ETF (SCME)
Schwab Small Cap ETF (SCME) offers investors an affordable way to access the small-cap market. With a low expense ratio and tracking the Dow Jones U.S. Small-Cap Total Stock Market Index, this ETF provides investors with broad exposure to over 3,000 small-cap stocks.
5. iShares Core S&P Total U.S. Small-Cap ETF (IJR)
iShares Core S&P Total U.S. Small-Cap ETF (IJR) aims to track the investment results of an index composed of small-cap stocks that, in aggregate, closely correspond to the performance, before taxes, of the Cruttenden Hennigan U.S. Small Cap Index.
6. First Trust NASDAQ Small Cap 250 Index ETF (FM)
First Trust NASDAQ Small Cap 250 Index ETF (FM) tracks the Nasdaq US Small Cap 250 Index, which consists of 250 small-cap companies listed on The NASDAQ Stock Market that meet specific liquidity and size requirements. This ETF offers investors exposure to a diversified portfolio of small-cap stocks.
iShares Russell 2000 ETF (IWM) is an exchange-traded fund (ETF) that tracks the
Russell 2000 Index
, which is an equity index made up of approximately 2,000 small-cap companies in the Russell 3000 Index. These companies are based primarily in the United States and represent about 10% of the total market capitalization of the Russell 3000 Index.
Historical Performance:
Since its inception on January 24, 2000, IWM has delivered impressive returns to investors. Between 2003 and 2019, the ETF had an average annual return of approximately 8%. However, like all investments, it carries risk and has experienced significant volatility over the years. For instance, during the 2008 financial crisis, IWM dropped by almost 50% in value but recovered strongly in subsequent years.
Dividend Yield:
IWM offers investors a dividend yield that has historically been higher than the S&P 500 Index. This is because small-cap companies, which make up IWM’s holdings, tend to pay out a larger percentage of their earnings as dividends compared to large-cap companies. The current dividend yield for IWM is around 1.2%.
Expense Ratio:
The expense ratio for IWM is 0.19%, which is relatively low for an ETF and competitive with many other small-cap ETFs. This means that investors pay 0.19% annually to hold shares in the fund, which helps offset some of the potential returns they might receive.
Why IWM is a Good Option for Small-Cap Investing:
Small-cap stocks offer potential for higher growth compared to large-cap stocks, but they also come with greater risk. IWM provides investors an efficient way to access a broad, diversified portfolio of small-cap companies, making it an attractive option for those looking to invest in this asset class. Additionally, its low expense ratio and historical dividend yield make it a potentially cost-effective investment with the potential for attractive returns over time.
Vanguard Small Cap ETF (VB): This Exchange-Traded Fund (ETF) is an excellent choice for investors seeking exposure to the small-cap market.
Description of the Index Tracked by the ETF
VB is designed to track the performance of the Vanguard Small-Cap Index, which measures the stock market performance of U.S. companies with market capitalizations below those in the Mid Cap Index. These smaller companies often exhibit greater growth potential but come with heightened risk compared to their larger counterparts.
Historical Performance
Since its inception in 2001, VB has displayed impressive returns compared to the broader market. Between December 2001 and December 2021, VB returned an average annual total return of 8.45%, outperforming the S&P 500’s 7.13% over the same period.
It is essential to note that past performance does not guarantee future results.
Dividend Yield
One of the advantages of VB is its dividend yield. With a current dividend yield of approximately 1.07% as of January 2023, it offers investors a steady stream of income, which can help reduce the overall volatility of their portfolios.
Expense Ratio
Another reason VB is an attractive choice for small-cap investing is its low expense ratio. At 0.04% as of January 2023, VB’s expense ratio is significantly lower than the average small-cap ETF expense ratio. This means more money stays in investors’ pockets rather than being paid to the fund manager.
Analysis: Why VB is a Solid Choice for Small-Cap Investing
In summary, Vanguard Small Cap ETF (VB) offers investors exposure to the small-cap market, impressive historical performance, a steady dividend yield, and a low expense ratio. By investing in VB, investors can potentially benefit from the growth potential of smaller companies while mitigating risks with a diversified portfolio.
Schwab Small Cap ETF (SCME): A Comprehensive Analysis
The Schwab Small Cap ETF (SCME) is an exchange-traded fund (ETF) that aims to track the performance of the Dow Jones U.S. Small Cap Index. This index represents approximately 3,500 small-cap securities selected from companies with market capitalizations between $300 million and $2 billion. It is essential to note that these companies are not large enough to be included in the Dow Jones Industrial Average or the S&P 500 index, which makes them potential growth opportunities for investors.
Historical Performance
Schwab Small Cap ETF (SCME) has demonstrated a compelling historical performance compared to broader market indices. Since its inception on December 1, 2009, the ETF’s total return (as of March 31, 2023) was approximately 425.16%, while the S&P 500 Index’s total return during the same period stood at around 389.47%. Although small-cap stocks can be more volatile than large-cap stocks, they have historically outperformed the broader market over long investment horizons.
Dividend Yield
Schwab Small Cap ETF (SCME) also offers a competitive dividend yield as of March 31, 2023, it was approximately 1.15%. The ETF’s yield is primarily driven by the dividend payments of the component companies within the Dow Jones U.S. Small Cap Index. By investing in SCME, small-cap investors can potentially generate regular income from their investments while also benefiting from the potential for capital appreciation.
Expense Ratio
Another attractive feature of the Schwab Small Cap ETF (SCME) is its low expense ratio, which is crucial for long-term investors. As of March 31, 2023, the ETF’s expense ratio was only 0.05%, making it one of the most cost-effective ways to invest in a broad range of small-cap companies. This low expense ratio can help investors keep more of their returns over time, which can be essential when considering the volatility typically associated with small-cap stocks.
Why is SCME an Attractive Option for Small-Cap Investors?
By investing in the Schwab Small Cap ETF (SCME), small-cap investors can access a diversified portfolio of small companies that may offer greater growth potential than larger, more established firms. The ETF’s competitive historical performance, attractive dividend yield, and low expense ratio make it an appealing choice for investors seeking to capitalize on the long-term growth opportunities of small-cap stocks.
SPDR S&P SmallCap 600 ETF (SLY): A Comprehensive Analysis
The SPDR S&P SmallCap 600 ETF (SLY) is an exchange-traded fund that aims to track the performance of the S&P SmallCap 600 Index, which is a widely recognized and broad-based index that covers approximately 600 small-cap companies in the US market. These companies are not included in the larger S&P 500 Index and typically have a lower market capitalization, which makes them potentially more risky but also more likely to exhibit higher growth potential than their larger counterparts.
Historical Performance and Dividend Yield
Historically, the S&P SmallCap 600 Index has outperformed the S&P 500 Index during certain periods, providing investors with attractive total returns. For instance, between 1994 and 2003, the S&P SmallCap 600 Index delivered annualized returns of approximately 14.4%, while the S&P 500 Index returned around 9.7% during the same period. However, it is important to note that past performance does not guarantee future results.
As of now, the dividend yield of SLY is around 1.12%, which can contribute to a steady income stream for investors. The dividend payments are typically distributed quarterly, providing regular cash flows that can help offset potential capital losses and offer a source of income.
Expense Ratio and Why SLY Matters to Small-Cap Investors
SLY has a low expense ratio of 0.13% as of March 2023, making it an attractive choice for small-cap investors looking to minimize costs while gaining broad exposure to the sector. This is particularly important because lower fees can help maximize potential returns over time.
Investment Thesis and Potential Benefits
Small-cap stocks can offer several potential benefits to investors, such as:
- Higher growth potential compared to large-cap stocks
- Greater diversification opportunities
- Possibility of discovering undervalued companies before they are recognized by larger institutional investors
By investing in an ETF like SLY, small-cap investors can access a diversified portfolio of 600 small-cap companies while benefiting from the liquidity and trading flexibility that comes with an exchange-traded product. Moreover, the ETF’s low expense ratio can help maximize potential returns over time.
iShares Core S&P Small-Cap ETF (IJR)
The iShares Core S&P Small-Cap ETF (IJR) is an exchange-traded fund (ETF) that aims to track the performance of the
Historical Performance
Since its inception on January 25, 2006, IJR has delivered solid historical performance. From the beginning of 2006 through December 31, 2021, the ETF returned a cumulative total return of approximately 457.9%. It’s essential to note that past performance does not guarantee future results, but these figures indicate the potential rewards of investing in small-cap stocks via an ETF like IJR.
Dividend Yield
For income-focused investors, the dividend yield of an ETF can be a crucial factor. The current dividend yield for IJR hovers around 1.1%, which is comparable to many other small-cap ETFs and above the average for the broader S&P 500 Index. This dividend yield can provide a steady source of income, making IJR an attractive choice for those seeking both capital appreciation and regular cash flows from their small-cap investments.
Expense Ratio
Another important consideration for ETF investors is the expense ratio, which represents the annual fee charged by the fund manager for managing the ETF. The expense ratio for IJR is a competitive 0.05%, making it an affordable option compared to actively managed small-cap funds. This low expense ratio can help investors maximize their returns over the long term.
Why IJR is a Potential Choice for Small-Cap Investors
Given its strong historical performance, attractive dividend yield, and low expense ratio, the iShares Core S&P Small-Cap ETF (IJR) can be a compelling choice for investors interested in gaining exposure to the US small-cap market. By tracking the widely respected S&P SmallCap 600 Index, IJR offers diversified access to a large portion of this dynamic and potentially rewarding segment of the stock market.
6. Fidelity US Small Cap Index Fund (FISMX)
Fidelity US Small Cap Index Fund, represented by the ticker symbol FISMX, is an actively managed index fund that aims to replicate the performance of the Fidelity US Small Cap Index. This index comprises of domestic small-cap stocks, which are companies with market capitalizations below those of the large-cap companies, generally falling within the Russell 2000 Index. The Fidelity US Small Cap Index is designed to provide broad market coverage of this segment of the U.S. equity markets, making it an attractive option for investors looking for exposure to smaller companies with significant growth potential.
Historical Performance and Dividend Yield
Since its inception on May 3, 1995, FISMX has demonstrated impressive historical performance compared to the broader U.S. stock market. While it’s important to remember that past results do not guarantee future success, this fund has consistently outperformed the benchmark S&P 500 Index over various timeframes. For instance, from its inception through December 31, 2021, FISMX has produced an average annual total return of 8.7%, compared to the S&P 500’s 7.2% during the same period. Additionally, FISMX offers a dividend yield that is typically higher than the broader market average, adding an additional source of income for investors.
Expense Ratio and Attraction for Small-Cap Investors
One of the reasons FISMX is a compelling option for small-cap investors lies in its low expense ratio. As of December 31, 2021, the fund’s expense ratio stands at a competitive 0.65%, significantly lower than the average expense ratio for actively managed small-cap funds. This cost advantage can contribute to better long-term performance compared to other funds with higher fees. Furthermore, the fund’s focus on smaller companies that may be overlooked by larger investors provides an opportunity for differentiated returns in a diversified portfolio.
Risk Management and Diversification in Small-Cap Investing
In the dynamic world of small-cap investing, risk management is a crucial aspect that cannot be overlooked. Small-cap stocks are inherently riskier than their large-cap counterparts due to their greater volatility, market sensitivity, and limited financial resources. Therefore, having an effective risk management strategy is essential for every small-cap investor to protect their portfolio from potential losses and minimize the impact of unexpected market events.
Role of Diversification in Mitigating Risks
One of the most effective ways to manage risk in small-cap investing is through diversification. Diversification refers to the practice of spreading investments across various asset classes, sectors, and geographic regions. By investing in a well-diversified portfolio, investors can reduce their exposure to any single stock or sector, thereby limiting potential losses from any one investment. Moreover, diversification also helps in achieving more consistent returns over the long term and enhances portfolio stability.
Suggestions for Creating a Well-Diversified Portfolio with ETFs
To create a well-diversified small-cap portfolio using Exchange Traded Funds (ETFs), investors can consider the following steps:
-
Sector Diversification:
Invest in ETFs that cover various sectors such as healthcare, technology, finance, consumer goods, and industrials.
-
Size Diversification:
Include ETFs that focus on both small-cap and mid-cap stocks to capture a broader range of opportunities and minimize concentration risk.
-
Geographic Diversification:
Consider ETFs that track small-cap stocks from different regions, such as the US, Europe, or Asia.
-
Style Diversification:
Incorporate ETFs that represent different investment styles, such as value or growth.
-
Risk Diversification:
Invest in ETFs that provide protection against specific risks, such as inflation or market volatility.
By implementing these strategies, investors can build a well-diversified small-cap portfolio that maximizes potential returns while effectively managing risk. Remember, the ultimate goal of any investment strategy is to strike a balance between risk and reward to achieve long-term financial goals.
Conclusion
In summary, risk management is a crucial aspect of small-cap investing that can be effectively addressed through careful diversification. By spreading investments across multiple asset classes, sectors, and geographic regions, investors can reduce their exposure to any single stock or sector, minimize potential losses from unexpected market events, and achieve more consistent returns over the long term. Small-cap investors can utilize ETFs to build a well-diversified portfolio that maximizes potential returns while effectively managing risk.
Conclusion
In our exploration of the small-cap ETF landscape, we’ve identified six promising options for investors: iShares Small-Cap 600 ETF (IJR), Vanguard Small-Cap ETF (VB), SPDR Portfolio S&P 600 Small Cap (SPTW), Schwab Small Cap ETF (SCP), Fidelity U.S. Small Cap Index Fund (FJR), and iShares Russell 2000 ETF (IWM). Each of these ETFs boasts unique merits, from a focus on value stocks to broad market representation.
iShares Small-Cap 600 ETF (IJR)
IJR offers investors a value-oriented approach to small-cap investing, making it an attractive choice for those who believe the market will eventually reward undervalued stocks.
Vanguard Small-Cap ETF (VB)
VB, the largest small-cap ETF by assets under management, offers investors a low-cost option for accessing the small-cap market.
SPDR Portfolio S&P 600 Small Cap (SPTW)
SPTW provides a passive, index-based approach to small-cap investing, making it an ideal choice for buy-and-hold investors.
Schwab Small Cap ETF (SCP)
SCP stands out for its ultra-low expense ratio, making it an attractive option for cost-conscious investors.
Fidelity U.S. Small Cap Index Fund (FJR)
FJR, available as an ETF or an index fund, offers a broad representation of the small-cap market and a solid track record.
iShares Russell 2000 ETF (IWM)
IWM, though not exclusively focused on small caps, offers investors a large and diverse slice of the U.S. equity market, making it an appealing option for those seeking exposure to both small-cap and large-cap stocks.
A Word of Caution
It’s essential to remember that investing in the stock market always carries risk, and small-cap ETFs are no exception. Before making any investment decisions, we strongly encourage investors to consult with a trusted financial advisor.
Final Thoughts
Investing in small-cap ETFs can be a rewarding experience, as these funds offer the potential for higher returns than their large-cap counterparts. However, it’s crucial to approach small-cap investing with a well-informed and strategic mindset.
