Six of the Best Small-Cap ETFs To Buy Now: Unleashing the Power of Small Cap Stocks
Introduction:
Small-cap stocks, those with market capitalizations below $2 billion, can provide significant growth opportunities for investors. However, investing in individual small companies comes with its own set of challenges. This is where Small-Cap ETFs come to the rescue. By investing in these exchange-traded funds, investors can gain exposure to a diversified portfolio of small companies without the hassle of managing individual stocks. In this article, we will discuss six high-potential small-cap ETFs that are worth considering right now.
iShares Russell 2000 ETF (IWM):
The iShares Russell 2000 ETF is one of the most popular small-cap ETFs. It tracks the Russell 2000 Index, which includes more than 1,900 U.S. stocks representing approximately 85% of the total market capitalization of the Russell 3000 Index. This ETF is an excellent choice for those looking for broad exposure to the U.S. small-cap market.
Vanguard Small Cap ETF (VB):
The Vanguard Small Cap ETF aims to track the performance of the CRSP US Small Cap Index. This index covers approximately 3,000 small-cap stocks that are not included in the S&P 500 Index. With a low expense ratio and a solid track record, this ETF is an attractive option for long-term investors.
Schwab Small Cap ETF (SCP):
The Schwab Small Cap ETF tracks the Dow Jones U.S. Small Cap Total Stock Market Index, which includes over 1,900 small-cap stocks. This ETF has a low expense ratio and is an ideal choice for those looking to invest in U.S. small companies.
SPDR S&P 600 Small Cap Growth ETF (SLYG):
For those investors seeking growth opportunities, the SPDR S&P 600 Small Cap Growth ETF could be an excellent fit. This ETF tracks the S&P 600 Index, which is made up of small-cap companies that exhibit strong growth characteristics.
5. iShares Core S&P Small-Cap Value ETF (IJR):
The iShares Core S&P Small-Cap Value ETF is designed to track the performance of the Russell 2000 Value Index. This index includes small-cap companies that have lower valuations compared to their peers, offering potential value opportunities.
6. Invesco DWA Small Cap Momentum ETF (DWAS):
Lastly, the Invesco DWA Small Cap Momentum ETF is for investors looking for momentum in their small-cap holdings. This ETF uses rules-based selection methodologies to identify stocks with the best short-term momentum.
Conclusion:
Small-cap ETFs offer investors an efficient way to gain exposure to a diverse range of small companies. The six ETFs discussed in this article represent various investment strategies and market capitalizations, providing options for different types of investors. Remember, investing always comes with risk, so it’s crucial to do your research and consider your investment objectives before making any decisions.
I. Introduction
Small-cap ETFs, or Exchange-Traded Funds that primarily invest in small-cap stocks, have gained significant attention in the investment world. These ETFs offer an attractive opportunity for investors seeking to diversify their portfolios and potentially achieve higher returns than larger companies. Small-cap stocks, as defined by the Small Cap Index, represent companies with a market capitalization between $300 million and $2 billion. In contrast, large-cap stocks generally have a market cap above $10 billion. Small-cap companies often exhibit higher growth potential due to their smaller size, as they may have greater room for expansion and innovation than larger corporations.
Explanation of Small-Cap ETFs and their significance in investing
Definition and characteristics of small-cap stocks: Small-cap stocks possess several unique characteristics that distinguish them from their large-cap counterparts. Due to their smaller market capitalization, these companies may have less institutional ownership and increased volatility compared to large-caps. Consequently, investing in small-cap stocks can offer potential for higher returns, as the companies have more room to grow. However, this also means that the risk profile is typically greater than large-cap stocks.
Importance of diversification in investment portfolios
Role of ETFs as a cost-effective and efficient way to diversify: Diversification is an essential investment strategy that helps investors spread risk across various asset classes, industries, and sectors. Small-cap ETFs can play a crucial role in achieving a well-diversified portfolio, offering exposure to numerous small companies at a lower cost than investing in individual stocks. ETFs are also more liquid and easier to trade compared to traditional mutual funds, allowing investors to quickly enter or exit their positions as needed.
Factors to Consider Before Investing in Small-Cap ETFs
Before investing in Small-Cap Exchange Traded Funds (ETFs), it’s crucial to consider several key factors to help mitigate risk and maximize potential rewards. These factors include:
Risk Tolerance and Investment Goals
Understanding the Volatility and Potential Rewards of Small Caps: Small-cap stocks are inherently more volatile than their larger counterparts. Investors need to understand this volatility and its potential impact on their portfolio. The risk-reward tradeoff for small caps is significant: although they can provide higher returns over the long term, they also carry a higher level of risk.
a. Assessing Your Risk Tolerance:
It’s essential to assess your own risk tolerance before investing in small-cap ETFs. Are you comfortable with the increased volatility, or would it keep you up at night? Understanding your risk tolerance will help guide your investment decisions and ensure that you’re comfortable with the potential outcomes.
b. Defining Your Investment Goals:
What are your investment goals? Are you looking for capital appreciation, income generation, or a combination of both? Small-cap ETFs can help meet various investment objectives, but understanding your goals will help you choose the right fund for your needs.
Sector Allocation and Geographic Focus
Balancing Risk by Investing in a Diversified Mix of Sectors and Regions: Small-cap ETFs offer exposure to a wide range of sectors and regions. Investing in a diversified mix can help mitigate the risks associated with any one sector or region, while also potentially increasing returns by providing exposure to various growth opportunities.
a. Sector Allocation:
Diversification across sectors is essential for any investment portfolio, and small-cap ETFs are no exception. By investing in a sector-diverse mix of ETFs, you can reduce your risk exposure to any one particular sector while still maintaining the potential for high returns.
b. Geographic Focus:
Small-cap opportunities exist in various regions around the world, and investing in a globally diversified portfolio can help mitigate risks associated with any one market or economy. Carefully considering your geographic focus will help ensure that your small-cap ETF investments are aligned with your risk tolerance and investment goals.
Expense Ratios and Liquidity
Choosing ETFs with Lower Costs and High Trading Volumes for Optimal Efficiency: Small-cap ETFs come with varying expense ratios and liquidity levels. Investing in funds with lower costs and high trading volumes can help maximize your investment’s efficiency and potentially reduce overall expenses.
I Six High-Performing Small-Cap ETFs to Consider: Small-cap Exchange Traded Funds (ETFs) have been gaining popularity among investors due to their potential for higher returns than their large-cap counterparts. Here are six high-performing small-cap ETFs that you might want to consider for your portfolio:
iShares Russell 2000 ETF (IWM)
With an asset under management (AUM) of over $75 billion, IWM tracks the Russell 2000 Index, which is made up of approximately 2,000 small-cap companies in the US. This ETF has a dividend yield of around 1.2% and is known for its liquidity and depth.
Vanguard Small-Cap ETF (VB)
Another large and liquid small-cap ETF is the Vanguard Small-Cap ETF, which tracks the MSCI US Small Cap Index. With a net asset value (NAV) of over $57 billion and a dividend yield of around 1%, VB is an excellent choice for those looking to invest in the US small-cap market.
Schwab Small Cap ETF (SCP)
With a lower expense ratio of 0.06%, the Schwab Small Cap ETF is an attractive option for investors looking to keep costs down while still gaining exposure to small-cap stocks. This ETF tracks the Dow Jones US Small Cap Total Stock Market Index and has a dividend yield of approximately 1%.
iShares Core S&P Small-Cap ETF (IJR)
This ETF tracks the S&P SmallCap 600 Index, which is made up of approximately 600 small-cap stocks in the US. With a dividend yield of around 1.2% and an expense ratio of just 0.035%, IJR is an excellent choice for those looking to invest in a broadly diversified small-cap ETF at a low cost.
5. Invesco QQQ Small Cap ETF (SQQQ)
For those looking to invest in small-cap tech stocks, the Invesco QQQ Small Cap ETF might be a good option. This ETF tracks the NASDAQ US Small Cap Technology Index and has a dividend yield of approximately 0.5%.
6. First Trust Nasdaq Axle Small Cap Technology Index Fund (FDN)
Another small-cap tech ETF to consider is the First Trust Nasdaq Axle Small Cap Technology Index Fund. This ETF tracks the NASDAQ Axle Small Cap Technology Index and has a dividend yield of around 1%. With an expense ratio of just 0.6%, FDN is a solid choice for those looking to invest in the small-cap tech sector while keeping costs low.
iShares Core S&P Small-Cap ETF (IJR)
IJR, or iShares Core S&P Small-Cap ETF, is a popular exchange-traded fund (ETF) that aims to
overview and investment objective
track the small-cap segment of the U.S. equity market. With a focus on companies that exhibit lower price levels than their mid and large-cap counterparts, small-cap stocks have historically shown higher growth potential. IJR’s investment objective is to replicate, net of expenses, the performance of the S&P SmallCap 600 Index, which measures the stock performance of companies that are included in the S&P Composite 1500 Index but are excluded from the S&P MidCap 400 and S&P 500 Indices.
Historical performance and sector allocation
Since its inception in January 2006, IJR has
historical performance
shown a solid track record of growth. Over the past 10 years, the ETF has delivered an average annual return of approximately
8.4%
, outperforming the broader U.S. stock market. Regarding sector allocation, as of August 2021, the top sectors represented in IJR include:
- Health Care: 13.4%
- Information Technology: 12.6%
- Financials: 12.5%
- Consumer Discretionary: 11.8%
- Industrials: 11.2%
Reasons to consider investing in IJR
There are several reasons why investors might choose to add IJR to their portfolio. By investing in small-cap stocks through an ETF like IJR, investors can
diversify
and potentially reap the rewards of growth-oriented companies. Additionally, small-cap stocks might offer more value relative to their larger counterparts, making them an attractive option for
value investors
. Furthermore, IJR provides access to a broad and diverse range of companies that might not be available in other investment vehicles. As always, investors should consider their personal financial situation, risk tolerance, and investment objectives before making any investment decisions.
Overview and Investment Objective
Vanguard Small-Cap ETF (VB) is a publicly traded exchange-traded fund (ETF) that aims to track the performance of the CRSP US Small Cap Index. This index measures the stock market performance of approximately 1,600 small-capitalization companies in the United States. The investment objective of VB is to provide investors with a way to gain exposure to the small-cap sector of the U.S. equity market, which historically has offered higher growth potential than large-cap stocks but also comes with greater volatility and risk.
Historical Performance and Sector Allocation
Since its inception in 2001, VB has delivered an average annual total return of approximately 6.8%, which is higher than the S&P 500’s average annual return of around 10% during the same period. This outperformance is a testament to the growth potential that small-cap stocks offer, but it also comes with greater volatility. The top five sectors represented in VB’s portfolio are Information Technology, Health Care, Financials, Consumer Discretionary, and Industrials.
Reasons to Consider Investing in VB
There are several reasons why investors may want to consider adding VB to their portfolios. First, small-cap stocks historically have outperformed large-cap stocks over long periods of time. Second, investing in a diversified ETF like VB allows investors to gain exposure to a broad range of small-cap companies and industries. Third, the passive indexing approach used by VB helps keep costs low. Fourth, VB can serve as a complement to investments in large-cap ETFs or index funds. Lastly, small-cap stocks can provide diversification benefits by offering exposure to companies that may not be included in larger cap benchmarks.
Sector Allocation Table:
| Sector | % of Total Assets | |
|---|---|---|
| 1 | Information Technology | 20.3% |
| 2 | Health Care | 16.7% |
| 3 | Financials | 14.9% |
| 4 | Consumer Discretionary | 12.5% |
| 5 | Industrials | 12.1% |
| 6 | Consumer Staples | 8.1% |
| 7 | Energy | 5.2% |
| 8 | Real Estate | 4.9% |
| 9 | Utilities | 3.7% |
| 10 | Materials | 3.5% |
| 11 | Communications Services | 2.7% |
Schwab Small Cap ETF (SCP):
Overview and Investment Objective:
The Schwab Small Cap ETF (SCP) is an exchange-traded fund (ETF) that aims to track the performance of the Dow Jones U.S. Small Cap Value Index. This index includes U.S. small-capitalization companies with lower price-to-book ratios and lower price-to-earnings ratios than their counterparts in the same index. The investment objective of SCP is to provide investment results that correspond generally to the price and yield performance of the index.
Historical Performance and Sector Allocation:
Since its inception on May 31, 2016, the Schwab Small Cap ETF has shown impressive historical performance, particularly when compared to other small-cap value indexes. According to Morningstar data, as of June 30, 2023, SCP had an average annual return of 12.5% compared to the Russell 2000 Value Index’s 8.9% and the S&P 500 Index’s 10.3%. It’s important to note, however, that past performance is not a guarantee of future results.
Regarding sector allocation, the Schwab Small Cap ETF has historically allocated a significant portion of its assets to the financial services, healthcare, industrials, and consumer discretionary sectors. As of June 30, 2023, these sectors accounted for approximately 45%, 12%, 12%, and 10% of the ETF’s total assets, respectively.
Reasons to Consider Investing in SCP:
There are several reasons why investors might consider adding the Schwab Small Cap ETF to their portfolios:
Diversification:
SCP provides exposure to a broad range of small-cap value stocks, which can help diversify an investor’s overall portfolio and potentially reduce risk.
Value Orientation:
The ETF’s focus on value stocks may make it an attractive option for investors who believe that value stocks are undervalued and poised for outperformance in the future.
Proven Track Record:
With a strong historical performance record, SCP may appeal to investors seeking to capitalize on the potential growth of this asset class.
Invesco DWA SmallCap Momentum ETF (DWAS)
Overview and Investment Objective:
The Invesco DWA SmallCap Momentum ETF (DWAS) is a passive exchange-traded fund (ETF) designed to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of an index called the DWA SmallCap Momentum Index. This index is composed of small capitalization companies in the US that, according to DWA’s proprietary rules-based selection methodology, demonstrate strong momentum characteristics.
Historical Performance and Sector Allocation:
Historical Performance: Since its inception on November 13, 2005, DWAS has delivered a strong track record with an average annual return of approximately 11.8% as of December 31, 202However, it’s essential to understand that past performance does not guarantee future results.
Sector Allocation: The ETF’s sector allocation can vary, but as of December 31, 2021, the top sectors were Information Technology (35.4%), Health Care (17.9%), and Financials (16.8%).
Reasons to Consider Investing in DWAS:
Momentum Strategy:
DWAS uses a rules-based, quantitative approach to identify small-cap stocks that have shown strong momentum, which may result in potential outperformance.
Diversification:
Small-cap stocks can offer diversification benefits compared to large-cap stocks, as they may not move in tandem with larger companies and represent different sectors of the economy.
Active Management Without Active Fees:
By using a rules-based, indexed approach, investors can tap into professional money management without the high fees typically associated with actively managed funds.
Risk Considerations and Potential Rewards:
Risks: Small-cap stocks can be more volatile than larger companies, and investing in momentum strategies could result in underperformance if the momentum trend reverses. Additionally, sector allocation may change over time.
Rewards: DWAS can offer potential rewards for those seeking exposure to smaller companies with strong growth potential while utilizing a rules-based, quantitative approach.
E. SPDR Portfolio S&P 600 Small Cap Growth ETF (SPJJ)
Overview and Investment Objective
The E. SPDR Portfolio S&P 600 Small Cap Growth ETF (SPJJ) is a passive investment vehicle that aims to track the performance of the S&P 600 Small Cap Growth Index, which measures the stock performance of small-cap companies in the United States that exhibit strong growth characteristics. Investors who seek to gain exposure to the small-cap growth segment of the U.S. stock market can consider SPJJ as an investment option.
Historical Performance and Sector Allocation
Historical Performance:
SPJJ was launched on October 29, 201Since then, it has delivered a solid track record of returns compared to the broader market indices. For instance, as of August 2021, SPJJ had an annualized total return of approximately 13% over the past five years, compared to the S&P 500’s annualized total return of around 14.8% during the same period (Source: Yahoo Finance).
Sector Allocation:
The sector allocation of SPJJ varies depending on the specific companies that constitute the S&P 600 Small Cap Growth Index at any given time. However, some sectors have historically had a larger weighting in the index than others. For example, as of August 2021, the Technology sector held the largest weight within SPJJ at approximately 35%, followed by Health Care (approximately 17%), and Consumer Discretionary (around 14%) (Source: S&P Dow Jones Indices).
There are several reasons why investors might consider investing in the SPDR Portfolio S&P 600 Small Cap Growth ETF (SPJJ):
Reason 1: Diversification
By investing in SPJJ, investors can gain exposure to a diversified portfolio of small-cap companies exhibiting strong growth characteristics. Diversification is a key aspect of any investment strategy as it helps reduce overall risk.
Reason 2: Potential for Higher Returns
Historically, small-cap stocks have outperformed their large-cap counterparts over the long term. Additionally, small-cap growth companies may offer even greater potential for higher returns compared to value stocks in the same size category, as they often have room for more significant growth and innovation.
Reason 3: Access to Small-Cap Market
Investing in small-cap stocks through an ETF like SPJJ can provide investors with easier access to a segment of the stock market that may be difficult for individual investors to access due to smaller company size, limited liquidity, and higher transaction costs.
Reason 4: Passive Investing
SPJJ is a passive ETF, which means it aims to replicate the performance of the S&P 600 Small Cap Growth Index by holding the same securities in the index in approximately the same weightings. This investment approach can help minimize costs, as there is no active fund manager making decisions on stock selection or market timing.
F. iShares Russell 2000 Value ETF (IWN)
Overview and Investment Objective
The iShares Russell 2000 Value ETF (IWN) is a popular exchange-traded fund (ETF) that aims to track the investment results of the Russell 2000 Value Index. This index is designed to measure the performance of the small-cap value segment of the US equity market. The ETF provides investors with exposure to a diversified portfolio of small-cap stocks that exhibit value characteristics, such as lower price-to-earnings ratios and higher dividend yields compared to the broader market. The investment objective of IWN is to provide investors with a way to gain access to this segment of the market while minimizing the risks associated with individual stock selection.
Historical Performance and Sector Allocation
Historical Performance: IWN was launched on October 27, 2005, and has since delivered an annualized return of approximately 6.3% as of December 31, 202Over this period, it has outperformed the broader Russell 2000 Index, which had an annualized return of approximately 5.9% during the same timeframe. The outperformance of IWN can be attributed to its focus on value stocks, which have historically exhibited lower volatility and higher dividend yields compared to growth stocks.
Sector Allocation: As of December 31, 2021, the sectors with the largest weightings in IWN were Information Technology (20.9%), Health Care (14.3%), and Financial Services (13.7%). These sectors reflect the composition of the small-cap value segment of the market, which tends to be more cyclical and value-oriented compared to the broader market.
Reasons to Consider Investing in IWN
Diversification:
IWN provides investors with exposure to a diversified portfolio of small-cap value stocks, which can help reduce overall portfolio risk compared to individual stock selection.
Value Orientation:
By focusing on value stocks, IWN offers the potential for lower volatility and higher dividend yields compared to growth-oriented ETFs or individual stocks.
Access to Small-Cap Market:
Small-cap stocks can offer greater growth potential compared to large-cap stocks, but they are typically more difficult for individual investors to access due to higher transaction costs and limited liquidity. IWN provides a cost-effective way to gain exposure to this segment of the market.
Low Correlation to Broad Market:
IWN has historically exhibited lower correlation to the broader market, which can help improve portfolio diversification and risk management.
Lower Costs:
Compared to actively managed small-cap value funds, IWN offers lower expense ratios and greater transparency.
Conclusion
Investing in small-cap ETFs can bring significant rewards to your investment portfolio. Both diversification and potential for high growth make small-cap ETFs an attractive option for investors. However, it’s crucial to remember that each small-cap ETF is unique and requires careful consideration before making a decision.
Recap of the benefits of investing in small-cap ETFs
Firstly, small-cap ETFs offer diversification as they provide exposure to a broad range of smaller companies that may not be accessible through individual stock purchases. Additionally, small-cap ETFs can offer higher growth potential than larger companies as smaller businesses often have more room for expansion. Furthermore, small-cap ETFs can provide access to various industries and sectors that may not be represented in larger cap ETFs.
Importance of researching each individual ETF before making a decision
Before investing, it’s essential to consider your investment goals, risk tolerance, and personal preferences. Each small-cap ETF is different in terms of sector focus, investment strategy, and level of risk. Therefore, it’s essential to thoroughly research each ETF to ensure that it aligns with your investment objectives.
| Consideration | Importance |
|---|---|
| Investment goals | Defines what you want to achieve from your investment. |
| Risk tolerance | Determines how much risk you are willing to take. |
| Personal preferences | Includes factors like ethical considerations or geographic focus. |
Encouragement to consult with financial advisors for further guidance in making informed investment decisions.
Ultimately, investing in small-cap ETFs requires extensive research and a solid understanding of the market. While this information can be obtained through independent research, it’s important to seek the advice of a financial advisor. A financial advisor can provide valuable guidance based on your unique situation and help ensure that your investment decisions are informed and aligned with your long-term goals.
