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By Will Ashworth
last updated
Exchange-traded funds (ETF) continue to gain in popularity among both individual and institutional investors alike, with ETF trading activity in 2022 hitting a record. Overall, the U.S. equity ETF market hit $5 trillion last year. However, just a fraction of those several trillion dollars were put into small-cap ETFs.
That's unfortunate because exchange-traded funds are the perfect way to capture the potential of the small-cap stocks while diversifying your portfolio beyond large-cap stocks.
Small-cap stocks, like the broader global market, had a rough 2022, with the Russell 2000 Index ending the year down 21.6%. In addition to geopolitical concerns, investors were worried that the Federal Reserve's rate-hiking would slow the U.S. economy and put a dent in their future earnings.
However, small caps have stabilized in 2023, and are up 17% for the year-to-date through late December. And small-cap stocks have put in a solid outperformance over the long term too. Over the past 10 years, smaller capitalization stocks were the second-best performing asset, up 10.8% annually through 2022, trailing only large caps. This is a good sign for small-cap funds.
That said, here are eight small-cap ETFs that should be on your radar. If you want to build a well-constructed portfolio, it would be wise to seek out the best ETFs that invest in U.S. small-cap stocks, as well as ones that hold foreign small caps.
Disclaimer
Data is as of December 26. Dividend yields represent the trailing 12-month yield, which is a standard measure for equity funds.
Topics
The Vanguard Group
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Vanguard Small-Cap Value ETF
- Type: Domestic small-cap value
- Assets under management: $27.2 billion
- Dividend yield: 2.3%
- Expenses: 0.07%, or $7 annually for every $10,000 invested
The Vanguard Small-Cap Value ETF (VBR, $181.71) is the largest of the small-cap ETFs featured here by total net assets. It also has reasonable management fees, charging $7 per year for every $10,000 invested in VBR.
The ETF tracks the performance of the CRSP US Small Cap Value Index, a collection of domestic small-cap stocks exhibiting value tendencies based on various financial metrics, including the price-to-book (P/B), forward price-to-earnings (P/E), historic price-to-earnings, dividend-to-price and price-to-sales (P/S) ratios.
The Vanguard Small-Cap Value ETF aims to replicate its underlying benchmark by investing in all or nearly all of the stocks that make up the CRSP US Small Cap Value Index. And each asset is given approximately the same weighting as in the underlying index.
VBR currently has 835 holdings compared to 829 for the index. The median market cap is $5.6 billion. The fund's $27billion in total net assets are entirely invested in U.S. companies.
The average stock in the ETF has a P/E of 11.5, a P/B of 1.6 and an average annual earnings growth rate of 11.8% over the past five years. The top three sectors by weight are industrial stocks (24.2%), financials (21.2%) and consumer discretionary (15.8%).
The ETF's top 10 holdings account for just 6% of the portfolio. The three largest positions at present are building materials manufacturer Builders FirstSource (BLDR), agribusiness company Bunge Global (BG) and technology consulting firm Booz Allen Hamilton (BAH).
Since its inception in January 2004, VBR has had an annual total return of 7.9% through October 31.
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Dimensional U.S. Small Cap ETF
- Type: Domestic small-cap blend
- Assets under management: $7.3 billion
- Dividend yield: 1.1%
- Expenses: 0.26%
The Dimensional U.S. Small Cap ETF (DFAS, $60.48) is one of the ETFs from Dimensional Fund Advisors (DFA) that used to be a mutual fund but was converted to an ETF structure in June 2021. DFAX was one of six actively managed ETFs that the company converted in 2021. Today, DFA has 30 ETFs available.
So, while DFAS has only been an ETF for under three years, it's been an actively managed fund since December 1998.
The ETF's goal "is to achieve long-term capital appreciation while minimizing federal income taxes on returns." Not only does it seek to minimize taxes, but it also manages to keep the fees low despite active fund management.
Although the ETF is actively managed, it seeks to outperform its benchmark, the Russell 2000, which represents 2,000 smaller U.S. companies.
Since the fund's inception in late 1998, DFAS has had an annualized total return of 8.9% through November 30, 111 basis points higher than the Russell 2000. (A basis point = 0.01%.)
The top three sectors by weight are industrials (21%), financials (19%) and consumer discretionary stocks (14%). The portfolio comprises roughly 2,040 companies with a weighted average market cap of $3.6 billion. Its top 10 holdings account for just under 3% of its $7.3 billion net assets and its turnover is low, at 9%.
Regarding valuation, DFAS has below-category average P/E, P/B, and P/S of 12.4, 1.6, and 0.9, respectively.
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WisdomTree Emerging Markets SmallCap Dividend Fund
- Type: Foreign diversified emerging markets
- Assets under management: $3.0 billion
- Dividend yield: 4.5%
- Expenses: 0.58%
The WisdomTree Emerging Markets SmallCap Dividend Fund (DGS, $49.39) is the first of three international small-cap ETFs featured here. DGS aims to provide investors exposure to dividend-paying small-cap stocks included in the WisdomTree Emerging Markets SmallCap Dividend Index.
The index includes companies that are in the bottom 10% of the total market cap of the WisdomTree Emerging Markets Dividend Index. The companies included in the index are weighted based on their annual cash dividends.
The minimum market cap for inclusion is $200 million, with median daily dollar volumes of $200,000 for each of the six months before the screening. In addition, the exposure to any country or sector should not exceed 25% of the portfolio. The index is reconstituted annually in October.
DGS has a total of 973 holdings at present. The top three countries by weight are Taiwan (26.6%), South Korea (12.3%) and India (9.6%). The top three sectors are technology (18.7%), financials (14.5%) and industrials (13.9%).
The portfolio's top 10 holdings account for just 8% of its total net assets, with its largest position – Taiwanese electronic parts maker Chicony Electronics – making up 1.1% of the portfolio. DGS has had a high turnover rate of 53% over the last 12 months.
Small-cap stocks make up roughly 56% of the fund's portfolio, and the average market cap is $1.5 billion. Meanwhile, the fund boasts below-category P/E and P/S ratios of 9.2 and 1.0, respectively. The WisdomTree Emerging Markets SmallCap Dividend Fund also has an above-market dividend yield of 4.5%.
A $10,000 investment in DGS three years ago is worth $15,400 today.
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Schwab U.S. Small-Cap ETF
- Type: Domestic small-cap blend
- Assets under management: $16.0 billion
- Dividend yield: 1.5%
- Expenses: 0.04%
The Schwab U.S. Small-Cap ETF (SCHA, $47.91) tracks the performance of the Dow Jones U.S. Small-Cap Total Stock Market Index. The index comprises stocks ranked between 751 to 2,500 by market cap in the Dow Jones U.S. Total Stock Market Index. It is a float-adjusted market cap-weighted index that typically invests in stocks with a market value of roughly $19 million to $11 billion.
The index is rebalanced four times a year, in March, June, September and December. It was launched in February 2005, while SCHA got its start in November 2009. The fund currently has around 1,750 stocks with an average weighted market cap of $3.8 billion and a price-to-cash flow ratio of 7.0.
The largest three sectors by weight are industrials (17.5%), financials (15.9%) and healthcare stocks (13.6%). The fund's top 10 holdings account for just 3% of its $16 billion in total net assets and include enterprise cloud platform Nutanix (NTNX) and buy-now-pay-later stock Affirm Holdings (AFRM). The Schwab U.S. Small-Cap ETF has an annual turnover rate of 9%.
SCHA's weighting by market cap suggests that it is just as much about mid-cap stocks as it is small caps. Approximately 56% of the ETF's assets are invested in companies with market caps of $3 billion or higher. Stocks valued between $1 billion and $3 billion account for another 34% of the portfolio.
Over the past decade, the Schwab U.S. Small-Cap ETF has delivered an annual total return (price plus dividends) of 6.6%, outpacing similar small-cap funds.
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SPDR S&P 600 Small Cap Growth ETF
- Type: Domestic small-cap growth
- Assets under management: $3.1 billion
- Dividend yield: 1.4%
- Expenses: 0.15%
The SPDR S&P 600 Small Cap Growth ETF (SLYG, $84.63), as its name suggests, tracks the performance of the S&P 600 SmallCap 600 Growth Index, a collection of small-cap stocks from the S&P SmallCap 600 Index that exhibit above-average growth tendencies such as improving revenues, price-to-earnings changes and momentum.
There are a few requirements a company must meet to be included in the index, including having a public float of 10% or more and four straight quarters of positive earnings. The growth index is weighted by market cap and rebalanced quarterly, while the S&P SmallCap 600 Index is rebalanced annually in December.
Like many small-cap ETFs – and exchange-traded funds, in general – SLYG uses a sampling strategy to mimic the index's performance. Therefore, not every stock in the index is necessarily held by the fund.
However, the SPDR S&P 600 Small Cap Growth ETF currently has 343 holdings invested in its $3.1 billion in total net assets. The weighted average market cap of the fund's holdings is $3.4 billion, while earnings for the group are expected to rise 11.6% over the next three to five years.
The ETF's three largest sectors by weight are industrials (19.7%), consumer discretionary (16.2%) and technology (14.3%). So while it's labeled a small-cap growth fund, in reality, it's more of a blend with 50% of its portfolio considered both growth stocks and value stocks.
SLYG's top 10 holdings account for 11% of its total net assets, with an annual turnover of 48%.
The two largest holdings by weight are cosmetics company e.l.f. Beauty (ELF) and SPS Commerce (SPS), a provider of cloud-based supply chain management solutions.
Over the past 10 years, SLYG has turned in an annualized total return of 8.9%.
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Pacer US Small Cap Cash Cows 100 ETF
- Type: Domestic small-cap value
- Assets under management: $6.6 billion
- Dividend yield: 1.2%
- Expenses: 0.59%
The Pacer US Small Cap Cash Cows 100 ETF (CALF, $48.73) tracks the performance of the Pacer US Small Cap Cash Cows Index. It's one of the best small-cap ETFs to own because it invests in companies generating positive free cash flow, or the money left over after a company has paid its expenses, interest, taxes and long-term investments.
The ETF takes the 100 stocks from the S&P SmallCap 600 with the highest cash flow yields, defined as free cash flow divided by enterprise value. These stocks are then weighted based on their trailing 12-month free cash flow.
The holdings are capped at a 2% weighting and rebalanced four times a year. The stocks in the index have market caps between $88 million and $4.7 billion. The weighted average market cap is $2.4 billion, with an average free cash flow yield of 13.7%.
Why is this appealing to investors? Companies with high free cash flow can be some of the best dividend growth stocks, while also producing better earnings.
The top three sectors by weight are consumer discretionary (35.9%), industrials (16.8%) and technology (10.9%). CALF's largest three holdings by weight are homebuilder M/I Homes (MHO), mining stock Alpha Metallurgical Resources (AMR) and building materials manufacturer Boise Cascade (BCC).
Since its inception in June 2017, CALF has had an annualized total return of 10.2% through September 30. This compares to a 5.9% return for the S&P SmallCap 600 Index.
For those interested in owning more of Pacer's Cash Cow series of ETFs, Pacer has the Pacer Cash Cow Fund of Funds ETF (HERD) that invests 20% in each of five Cash Cow ETFs, including CALF.
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iShares MSCI Emerging Markets Small-Cap ETF
- Type: Foreign diversified emerging markets
- Assets under management: $353.5 million
- Dividend yield: 1.3%
- Expenses: 0.70%
The iShares MSCI Emerging Markets Small-Cap ETF (EEMS, $57.20) provides investors with exposure to smaller emerging market stocks by tracking the performance of the MSCI Emerging Markets Small Cap Index.
The benchmark includes small-cap companies from 24 emerging markets, covering roughly 14% of each country's free float-adjusted market cap. The average market cap is $1.4 billion.
Since the ETF's inception in August 2011, it has had an annual total return of 4.0%. More recently, EEMS has had some standout calendar-year returns. For example, between 2019 and 2021, it averaged an annual total return of 16.1%, with all three years in positive territory for the year.
EEMS currently has about 1,580 holdings invested in its $353.5 million in total net assets. Its top 10 holdings account for 3% of its portfolio, and its annual turnover is at 43%.
And it isn't a pure play as far as small-cap ETFs go. Small-cap and micro-cap stocks account for 27% of the EEMS portfolio, while mid-caps make up 62%, and large caps the rest.
The ETF's top three sectors by weight are technology (17.6%), industrials (16.7%) and material stocks (12.3%). The iShares MSCI Emerging Markets Small-Cap ETF's three biggest countries by weight are India (25.6%), Taiwan (22.2%) and South Korea (13.3%).
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JPMorgan BetaBuilders US Small Cap Equity ETF
- Type: Domestic small-cap blend
- Assets under management: $961.2 million
- Dividend yield: 1.6%
- Expenses: 0.09%
The JPMorgan BetaBuilders US Small Cap Equity ETF (BBSC, $62.53) was launched in November 2020. The ETF tracks the performance of the Morningstar US Small Cap Target Market Exposure Extended Index. While that sounds like a mouth full, it just means that it represents the 96th to the 99th percentile of free float market cap within the U.S. equity market. Even more simply, it's market caps that range from roughly $50 million to $5.0 billion.
The fees are quite low for a fund that invests in less liquid, smaller stocks and are passively managed by four portfolio managers with industry experience ranging from 16 to 26 years.
While the fund has only existed for a little more than two years, the index's performance has been tracked since June 2008. Over the past decade, it had an annualized total return of 8.4% through November 30. Its worst calendar-year performance was in 2022, down 19.8%. Conversely, its best year was 2013, with a dazzling 39.5% annual total return.
The ETF's current portfolio is 843 holdings with a 30% turnover ratio. This means the fund turns the entire portfolio every 3.3 years. The top 10 holdings account for just 4.4% of the $961 million in total net assets.
BBSC's top three sectors by weighting are financials (18.8%), industrials (16.6%), and consumer discretionary (15.9%). The average stock in the ETF has a below-category P/B of 1.6 and a P/S of 0.9.
The average market cap for the JPMorgan BetaBuilders US Small Cap Equity ETF is $2.0 billion, half the category average and significantly less than the index's $3.5 billion.
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Will Ashworth
Contributing Writer, Kiplinger.com
Will has written professionally for investment and finance publications in both the U.S. and Canada since 2004. A native of Toronto, Canada, his sole objective is to help people become better and more informed investors. Fascinated by how companies make money, he's a keen student of business history. Married and now living in Halifax, Nova Scotia, he's also got an interest in equity and debt crowdfunding.
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