9 small-cap ETFs to buy

Smaller companies can add diversification without sacrificing potential for growth.

  • By Jeff Reeves,
  • U.S. News & World Report
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Most investors tend to focus attention on large, blue-chip corporations. There are many good reasons, including that these well-known firms tend to have recognizable brands and important relationships to the broader economy. However, bigger isn't always better. Many multinational corporations can be complex and difficult to understand. Furthermore, there are no guarantees that a $100 billion company is safe from severe problems – as painfully shown in the wake of the 2008 financial crisis. Smaller companies can add an important layer of diversification to your portfolio. And depending on your strategy, they can offer just as much growth potential or long-term income. If you're interested in adding small-cap stocks to your portfolio, these exchange-traded funds are simple ways to do so.

iShares Core S&P Small Cap ETF

The largest small-cap focused fund on Wall Street, this ETF (IJR) boasts more than $44 billion in assets under management. It's easy to see why, too, with a rock-bottom expense ratio of just 0.07% (or $7 annually in fees on every $10,000 invested) and a deep bench of more than 600 small-cap components. Perhaps the only knock against IJR is that it's very light on some key sectors, with the four separate industries of consumer staples, energy, utilities and communications collectively adding up to just 12% of the entire portfolio. But on the whole, this is a simple and effective way to get exposure to smaller names.

Vanguard Small-Cap Value ETF

If you want a bit more tactical of an investment in smaller companies, this Vanguard fund (VBR) takes a focus on small caps that screens out only those that have value-oriented characteristics. That includes metrics such as book value, historic price-earnings ratios and dividend metrics. Unsurprisingly, you get more stocks like gas utility UGI Corp. (UGI) and real estate investment trusts like National Retail Properties Inc. (NNN) in the mix, which are sleepier than growth-oriented companies but also a bit more stable. You also get a decent yield of about 2.3%, too, with this bias toward value stocks.

Vanguard Small-Cap Growth ETF

The flip side of value is, of course, growth. And Vanguard offers a sister fund in VBK (VBK) that leans toward companies like aerospace and digital imaging player Teledyne Technologies (TDY) or diabetic medical supply firm Insulet Corp. (PODD). There's more risk here, but there's also more upside as these firms chase future growth and hope to become the next generation of large-cap leaders. After all, many companies in the current crop of large-cap leadership had to start somewhere, and investors who buy into VBK can potentially get in on the ground floor of the next industry leader.

Schwab Fundamental U.S. Small Company Index ETF

A slightly different but related fund is FNDA (FNDA), a Schwab ETF that holds a massive list of more than 900 small-cap companies with a bias toward those with strong fundamentals including sales growth and profit margins. This blended strategy doesn't strictly chase growth or value but instead prioritizes hard numbers like the top and the bottom line. Right now, that means top stocks include the $2 billion Asbury Automotive Group (ABG), a car dealer that has surged more than 50% so far in 2019 thanks to continued growth and strong underlying fundamentals. This is precisely the kind of small-cap stocks that many investors may overlook if they had to discover individual picks of this size on their own.

Invesco S&P SmallCap Low Volatility ETF

Some investors like the appeal of small caps but remain a bit hesitant given the fact that they are a bit riskier than blue-chip stocks in the Dow Jones Industrial Average (.DJI). Invesco has created the perfect product for investors like this, however, with a low volatility fund that is comprised of a targeted list of less than 120 small-cap stocks that are hand-picked for stability. Now, this doesn't mean that XSLV (XSLV) can't ever lose you money. However, the methodology behind the ETF focuses on statistical measurements of the magnitude of up and down price fluctuations over time. So there is a smaller chance that components will wiggle as much as other small caps, particularly in an uncertain market.

WisdomTree U.S. SmallCap Dividend Fund

A slightly different but related approach that may appeal to risk-averse small-cap investors is this WisdomTree ETF (DES) that places a priority on smaller stocks that are paying dividends. This is an interesting strategy, since companies have to have a decent baseline of profits to support any kind of dividend payment to shareholders, and a fairly reliable business model that won't cause a sharp contraction prohibiting those payouts in the future. Right now, the DES fund currently yields about 4.8% thanks to holdings that include utility Terraform Power (TERP) and waste management firm Covanta Holding Corp. (CVA).

iShares MSCI EAFE Small-Cap ETF

One drawback to all the funds discussed so far is that they don't look beyond America to find small-cap stocks that could help you profit. That's where this iShares ETF (SCZ) can really be useful, with a focus on EAFE offerings – that is, stocks from Europe, Australasia and the Far East. That means a healthy dose of stocks from Japan, the U.K. and Australia to round out your portfolio with names you may never have known existed and which may not be easily accessible in your brokerage account without an ETF. With a long list of 2,300 holdings, this iShares offering is a great way to supplement your existing portfolio, then, without the risk of overlapping domestic holdings.

Vanguard FTSE All-World ex-US Small-Cap ETF

Even broader is this Vanguard fund (VSS) that spans the entire world, excluding U.S.-based small-cap stocks. That way you also get exposure to markets like South and North America that are excluded from the aforementioned SCZ fund. That includes a huge range of small caps, from Canada-based Open Text Corp. (OTEX), a cloud-computing and automation technology firm, to U.K. asset manager Intermediate Capital Group, which trades on the London Stock Exchange. With a staggering 3,900 stocks from around the globe, you get a little bit of everything in this this small-cap fund.

WisdomTree Emerging Markets SmallCap Dividend Fund

A mash-up from several different strategies discussed in the prior exchange-traded products, this WisdomTree fund (DGS) is a sophisticated investment vehicle that is limited to small-cap stocks in emerging markets that offer significant dividends. It's quirky, but this WisdomTree product is a unique way to balance risks of smaller stocks in international markets by relying on a substantial dividend yield of 6.6%. That's roughly three times the yield of the S&P 500 index (.SPX) at present. If you're looking for income but still want to go smaller, then consider DGS as a unique tool in your toolbox.

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