Small Cap Exchange-Traded Funds (ETFs) have become increasingly popular instruments for those seeking to navigate the volatility of small-cap markets.
A small-cap ETF is an exchange-traded fund that primarily invests in stocks of small capitalization companies. The specific market capitalization of small-cap companies can vary depending on the ETF. But, in general, the range of market capitalization of a small-cap company falls between $250 Million and $2 Billion.
While large-cap stocks often hog the limelight, the nimble and promising small-cap companies can offer investors a gateway to undiscovered potential. They are a great option if you are looking for an investment option that offers growth and higher returns than medium and large-cap ETFs.
This article will review some of the basics of small-cap ETFs and the best small-cap ETFs you can invest in in 2024.
Pros of a Small-cap ETF
1. Higher Growth Potential / Higher Returns
Small-cap ETFs are comprised of companies that are still in the early stages; they have significantly higher growth potential than large-cap or medium-cap ETFs. Due to rapid growth, these companies might generate higher returns.
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2. Less Competition
Institutional investors invest less frequently in small-cap companies and ETFs, as such, these ETFs compete less than large capitalization companies.
Cons of Small-cap ETFs
1. Higher Risk
Small-cap ETFs are riskier than large-cap and medium-cap ETFs because they invest in companies that are smaller and more likely to fail compared to larger, more established companies.
While they offer higher potential returns, small-cap ETFs are also more volatile and have a higher risk than large-cap or medium-cap ETFs.
2. Volatile
Small-cap ETFs are more volatile than other stocks due to their instability. The instability associated with smaller companies makes the returns more volatile. The volatility of each stock can make the returns of a small-cap ETF harder to predict.
Pacer U.S. Small Cap Cash Cows 100 ETF (CALF)
| CALF | |
|---|---|
| Diversification | S&P SmallCap 600 |
| Expense Ratio | 0.59% |
| SEC Yield | 0.73% |
| 1-Year | 33.14% |
| 5-Year | 15.93% |
| 10-Year | - |
| Dividend Yield | 1.21% |
| Dividend Growth Rate 5Y (CAGR) | 11.82% |
The Pacer U.S Small Cap Cash Cows 100 ETF is a small-cap growth ETF that tracks the S&P Small Cap 600 Index. The index seeks to measure the small-cap segment of the U.S. equity market. The index includes companies with an unadjusted market cap of $900 million to $5.8 billion and comprises approximately 600 companies.
CALF is a passively managed fund that is managed by the Index Design Group an affiliate of Pacer Advisors Inc.
Schwab U.S. Small-Cap ETF (SCHA)
| SCHA | |
|---|---|
| Diversification | Dow Jones U.S. Small-Cap Total Stock Market Index |
| Expense Ratio | 0.04% |
| SEC Yield | 1.48% |
| 1-Year | 9.26% |
| 5-Year | 8.57% |
| 10-Year | 7.17% |
| Dividend Yield | 1.48% |
| Dividend Growth Rate 5Y (CAGR) | 6.96% |
Schwab U.S small-cap ETF or SCHA is an exchange-traded fund that is managed by Charles Schwap asset management. The fund aims to track the performance of the Dow Jones U.S Small-Cap total stock market index.
The Dow Jones U.S Small-Cap total stock market index includes companies that are ranked 3,000. The fund allows for easy access to the U.S. small-cap equities and may also provide long-term growth for your portfolio.
Invesco S&P SmallCap Value with Momentum ETF (XSVM)
| XSVM | |
|---|---|
| Diversification | S&P 600 High Momentum Value Index |
| Expense Ratio | 0.04% |
| SEC Yield | 1.38% |
| 1-Year | 10.97% |
| 5-Year | 14.47% |
| 10-Year | 9.69% |
| Dividend Yield | 1.35% |
| Dividend Growth Rate 5Y (CAGR) | 1.06% |
The Invesco S&P SmallCao Value with Momentum ETF or XSVM is an exchange-traded fund managed by Invesco. The fund aims to track the performance of the S&P 600 High Momentum Value Index. The fund holds approximately 120 S&P 600 High Momentum Value Index securities with the highest “value” and “momentum” scores.
This ETF allows investors to target a more value and momentum approach to their investment portfolio. Rather than just investing in small-cap stocks, the XSVM allows a portfolio with a targeted approach to small-cap investment.
Invesco Dorsey Wright SmallCap Momentum ETF (DWAS)
| DWAS | |
|---|---|
| Diversification | Dorsey Wright® SmallCap Technical Leaders Index |
| Expense Ratio | 0.04% |
| SEC Yield | 1.38% |
| 1-Year | 10.12% |
| 5-Year | 12.60% |
| 10-Year | 7.91% |
| Dividend Yield | 1.35% |
| Dividend Growth Rate 5Y (CAGR) | 1.06% |
The Invesco Dorsey Wright SmallCap Momentum ETF or DWAS is a small-cap ETF managed by Invesco. The ETF aims to track the performance of the Dorsey Wright® SmallCap Technical Leaders Index.
The Dorsey Wright® SmallCap Technical Leaders Index is a subset index based on the NASDAQ US benchmark index. The fund includes equities ranked between 1,001 and 3,000 by market capitalization. It also only includes those companies that have sufficient trading volume of at least $1 million three-month average daily dollar trading volume.
Vanguard Small-Cap Value ETF (VBR)
| VBR | |
|---|---|
| Diversification | CRSP US Small Cap Value Index |
| Expense Ratio | 0.07% |
| SEC Yield | 2.11% |
| 1-Year | 8.38% |
| 5-Year | 9.93% |
| 10-Year | 8.24% |
| Dividend Yield | 2.16% |
| Dividend Growth Rate 5Y (CAGR) | 7.30% |
The Vanguard Small-cap Value ETF or VBR is a small-cap growth ETF offered by Vanguard. VBR is a possibly managed fund that aims to track the performance of the CRSP US Small Cap Value Index.
This index uses the CRSP US Small-Cap Index as a baseline. Using the companies that fall into the small-cap index, which fall into the bottom 2%-15% of market capitalization. From those companies, the CRSP US small-cap value index includes companies classified as value securities.
VBR is a passively managed exchange-traded fund with a full replication approach.
SPDR S&P 600 Small Cap Growth ETF (SLYG)
| SLYG | |
|---|---|
| Diversification | S&P SmallCap 600 |
| Expense Ratio | 0.15% |
| SEC Yield | 1.08% |
| 1-Year | 9.31% |
| 5-Year | 8.41% |
| 10-Year | 8.59% |
| Dividend Yield | 1.22% |
| Dividend Growth Rate 5Y (CAGR) | 11.41% |
SPDR S&P 600 Small Cap Growth ETF or SLYG is a small cap growth exchange-traded fund that State Street Global Advisors Funds Management Inc manages. This fund tracks the performance of the S&P 600 Small Cap Growth ETF.
The index seeks to measure the small-cap segment of the U.S. equity market. The index includes companies with an unadjusted market cap of $900 million to $5.8 billion and is comprised of approximately 600 companies.
This ETF tracks the same index as the CALF ETF and generates very similar performance as a result. Although these funds track the same index the major difference is that SLYG has an expense ratio of only 0.15% compared to 0.59%.
Vanguard Russell 2000 ETF (VTWO)
| VTWO | |
|---|---|
| Diversification | Russell 2000 |
| Expense Ratio | 0.10% |
| SEC Yield | 1.30% |
| 1-Year | 7.75% |
| 5-Year | 7.71% |
| 10-Year | 6.81% |
| Dividend Yield | 1.50% |
| Dividend Growth Rate 5Y (CAGR) | 9.14% |
The Vanguard Russell 2000 ETF, or VTWO, is an exchange-traded fund that tracks the performance of the Russel 2000 Index. The Riussel 2000 index was initiated in 1984 and comprises 2,000 small-cap companies. The small-cap companies are determined by accumulating approximately the bottom two-thirds of the overall Russel 3,000 total market index.
Overall, the Russell 2000 accounts for approximately 7% of the total market cap of the Russel 3000. The Russel 2000 is often used to determine how the full small market cap market is performing.
First Trust Small Cap Value AlphaDEX (FYT)
| FYT | |
|---|---|
| Diversification | Nasdaq US 700 Small Cap Value Index |
| Expense Ratio | 0.70% |
| SEC Yield | 1.92% |
| 1-Year | 10.78% |
| 5-Year | 10.68% |
| 10-Year | 6.61% |
| Dividend Yield | - |
| Dividend Growth Rate 5Y (CAGR) | - |
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The First Trust Small Cap Value AlphaDEX or FYT is an index fund that tracks the Nasdaq US 700 Small Cap Value Index and uses the AlphaDex stock selection method. The AlphaDex stock selection method creates an index based on a selective criteria method.
The dex ranks securities based on price appreciation, sales to price, one-year sales growth, book value to price, cash flow to price, and return on assets. The selection methodology places the top 262 stocks into the index based on their ranking. The 262 stocks are split into quintiles, and then the top quintiles are given additional weight.
Final Thoughts
Investing in small-cap ETFs can offer investors unique opportunities for growth and diversification. The best small-cap ETFs combine a well-balanced portfolio of small-cap stocks with low expense ratios and efficient tracking of the underlying index. One important thing to consider when choosing your small-cap ETF is the index fund you want to use as your baseline. Each index will include different companies and metrics that will impact your returns in the short term and long term.
