ETFs have become incredibly popular with investors in recent decades—and understandably so. The potential benefits of ETFs can include diversification in a single trade, transparent holdings, tax advantages, and relatively low costs.
Scan the ETF universe and you’ll quickly run into terms like “large-cap growth” and “small-cap value” in ETF names. These are examples of style and capitalization ETFs. And these ETFs can be some of the most versatile tools in an investor’s belt—whether you’re looking to build a long-term core portfolio or even give your holdings a tactical tilt.
Read on for more about style and capitalization ETFs, and how to consider using them.
What are style ETFs?
Style ETFs are exchange-traded funds that are designed to track a particular investment style. Investment style describes whether the ETF focuses on companies with high-growth characteristics, undervalued characteristics, or a blend of growth and value characteristics.
What are capitalization ETFs?
Capitalization ETFs are exchange-traded funds that focus on companies of a particular size, as measured by market capitalization, or market cap. Main categories include small-cap, mid-cap, and large-cap stocks.
Many ETFs combine both dimensions, such as large-cap growth, mid-cap value, or small-cap blend. Knowing where an ETF lands on both axes can make it easier to understand its potential role in a portfolio.
What is market capitalization? Large-cap, mid-cap, and small-cap ETFs
Market capitalization is one way of measuring a company’s size and essentially refers to the total dollar value of a company’s outstanding shares of stock. It’s calculated by multiplying a company’s share price by the number of shares outstanding.
While it does not predict performance, market cap is often used as a shorthand for estimating business maturity, growth potential, and volatility.
What are large-cap ETFs?
Large-cap ETFs typically invest most of their assets in companies with a market cap of $10 billion or more. These are often well-established companies with relatively stable earnings. Large-cap stocks make up an outsized share of the US and global stock markets—for that reason, they are often used as core holdings in a portfolio. Some investors also view large-cap exposure as relatively defensive during periods of uncertainty, while recognizing that all stocks can experience declines.
What are mid-cap ETFs?
Mid-cap ETFs generally focus on investing in companies with a market cap between $2 billion and $10 billion. These businesses may still be expanding but are often more established than small caps. Investors may use mid-cap ETFs to help fill in gaps in their stock exposure or to seek a balance between growth potential and stability.
What are small-cap ETFs?
Small-cap ETFs usually focus on companies with a market cap between $250 million and $2 billion. These companies may be earlier in their business lifecycle. That could mean they have more runway for future growth—but also means they can be less financially stable and more sensitive to economic conditions. Investors may use small-cap ETFs to increase risk and return potential in their portfolio, whether as part of a long-term allocation or a tactical tilt.
What is investment style? Growth, value, and blend ETFs
While market capitalization focuses on a company’s size, investment style focuses on the underlying financial characteristics of its business or stock. The main styles are value, growth, and blend. Each of these styles may outperform and underperform at different times as economic conditions and investor preferences change.
What are growth ETFs?
Growth ETFs generally invest in companies that have exhibited faster revenue or profit growth than the broader market. These may include firms that benefit from innovation or from expanding demand.
Because future growth is uncertain, many growth ETFs rely on a historical pattern of growth—such as past earnings and sales growth—along with forward‑looking estimates from Wall Street analysts, to identify companies with potentially stronger growth characteristics. Growth stocks may perform well in strong economic environments but can be more sensitive to changes in interest rates and expectations about future profits.
What are value ETFs?
Value ETFs typically invest in stocks that appear to be underpriced given the issuing company’s earnings and profitability. Value ETFs often use metrics such as price-to-earnings ratios, price-to-book ratios, and price-to-cash-flow ratios to identify stocks that trade relatively cheaply. These might be mature companies that are no longer experiencing rapid growth, but that pay steady dividends to shareholders. Value stocks may appeal to investors seeking a more defensive tilt or income, though they can lag in certain market environments.
What are blend or core ETFs?
Blend ETFs (also known as core ETFs) invest in both value and growth stocks, plus stocks that exhibit a mix of growth and value characteristics. These ETFs often track broad market benchmarks. Investors who want wide exposure without emphasizing a particular style often use blend ETFs as foundational holdings.
How ETFs may combine style and market cap
Many stock ETFs target both a specific market capitalization range and investment style at the same time. This creates combinations such as large-cap growth, mid-cap blend, or small-cap value, each with distinct risk and return characteristics.
Using both dimensions together can allow investors to be more precise when choosing an investment to target a specific long-term or tactical allocation. It can also help investors be more thorough in ensuring their portfolio has sufficient diversification, with some investments in all the major capitalization and style areas.
Keep in mind that these investing strategies aren’t specific to ETFs. There are also mutual funds that share many of the same attributes of these style and capitalization ETFs.
How to build a portfolio with style ETFs and capitalization ETFs
Here are some of the ways investors can use style and capitalization ETFs in their portfolios.
Core exposure
Many investors start with a core ETF, such as a large-cap blend ETF, to provide broad diversification and a long-term foundation.
Filling gaps in a portfolio
Style and market-cap ETFs can also be used to build around existing holdings. For example, suppose that an investor owns individual small-cap growth companies making up a small part of their portfolio. If appropriate, they may decide to add positions in large-cap blend and small-cap value ETFs to create more balance in their stock portfolio.
Short-term or long-term tilts
Investors can use style and cap ETFs to add tilts based on their preferences or outlook. A tilt could focus on a specific style, such as growth or value, or on a market-cap segment, such as small caps. These positions are often sized modestly to complement, rather than replace, core exposure.
Style and capitalization ETFs from Fidelity
Fidelity offers a number of style and capitalization ETFs, including the following:
- Fidelity Enhanced Large Cap Core ETF (
) - Fidelity Enhanced Large Cap Growth ETF (
) - Fidelity Enhanced Large Cap Value ETF (
) - Fidelity Enhanced Mid Cap Core ETF (
) - Fidelity Enhanced Mid Cap Growth ETF (
) - Fidelity Enhanced Mid Cap Value ETF (
) - Fidelity Enhanced Small Cap Core ETF (
) - Fidelity Enhanced Small Cap Growth ETF (
) - Fidelity Enhanced Small Cap Value ETF (
) - Fidelity Fundamental Large Cap Core ETF (
) - Fidelity Fundamental Large Cap Growth ETF (
) - Fidelity Fundamental Large Cap Value ETF (
) - Fidelity Fundamental Small-Mid Cap ETF (
)
Investors may want to learn more about the similarities and differences between enhanced ETFs and fundamental ETFs.
The bottom line on style and capitalization ETFs
Market capitalization and investment style provide a practical framework for understanding stock ETFs and how they fit together—whether providing a core investment, filling in gaps in a portfolio, or allowing investors to make tactical tilts.
Investors who want to take the next step can use Fidelity’s ETF research tools, learn more about how to build a portfolio with ETFs, or read about what to consider when choosing an ETF.