Are you looking for the next big thing in the stock market? It has the potential to be hidden in small-cap stocks, which are often overlooked by investors. One way to gain broader market share is to buy small ETFs.
Topics covered on this page:
- What is a Small Cap ETF?
- High Performance Small Cap ETFs
- Are Small Cap ETFs a Good Investment?
What is a Small Cap ETF?
A small-cap ETF is an exchange-traded fund that invests in the smallest companies in the market through so-called small-cap or small-cap stocks. Small-cap ETFs give you an easy way to buy the “haystack” of small-cap stocks, rather than hunting for outperforming stocks.
Small-cap stocks may sound small, but they’re usually not that small. The total value of all outstanding shares is typically in the hundreds of millions to several billion dollars. However, that’s insignificant for a stock market that can reach a market cap of $1 trillion.
Investors love small-cap stocks because they can offer higher potential returns than the large-cap stocks typically represented by the S&P 500. However, because they are smaller and have fewer financial resources, they are generally riskier and more volatile.
Because of these risks, investing in individual small stocks is best reserved for more advanced investors. But new investors can also buy a basket of these companies through small-cap ETFs and take advantage of the potentially higher returns of undiscovered small stocks.
High Performance Small Cap ETFs
Eragoncred selects its top funds based on the following criteria:
- Featured U.S. Funds (Growth, Value, Mixed) in ETF.com Small Cap Screener
- Fund tops the list over the past five years
- Measure performance as of May 31, 2022 using the latest data.
Invesco DWA Small Cap Momentum ETF (DWAS)
This ETF is based on stocks in the Dorsey Wright SmallCap Technical Leaders Index, which includes stocks with strong momentum.
- 2022 YTD performance: -9.5%
- Historical performance (every year over 5 years): 14.8%
- Expense ratio: 0.60%
Invesco S&P SmallCap Value with Momentum ETF (XSVM)
The ETF tracks the S&P 600 High Momentum Value Index, which consists of 120 stocks with the highest scores on both momentum and value factors.
- 2022 YTD performance: -4.1%
- Historical performance (every year over 5 years): 14.6%
- Expense ratio: 0.39%.
Invesco S&P SmallCap 600 Income ETF (RWJ)
This ETF is based on the S&P SmallCap 600 Income Weighted Index, which reweights stocks in the S&P SmallCap 600 Index based on company income.
- 2022 YTD performance: -5.5%
- Historical performance (every year over 5 years): 13.6%
- Expense ratio: 0.39%
Invesco S&P Small Cap Momentum ETF (XSMO)
This ETF is based on the S&P SmallCap 600 Momentum Index, which includes the 120 stocks with the highest momentum scores in the S&P SmallCap 600 Index.
- 2022 YTD performance: -11.7%
- Historical performance (every year over 5 years): 12.1%
- Expense ratio: 0.39%
VictoryShares US Small Cap High Dividend Volatility Weighted ETF (CSB)
This ETF tracks the Nasdaq Victory America’s Performance Small Cap High Dividend 100 Volatility Weighted Index.
- 2022 YTD performance: -7.7%
- Historical performance (every year over 5 years): 11.0%
- Expense ratio: 0.35%.
First Trust Small Cap Core AlphaDEX ETF (FYX)
The ETF tracks the Nasdaq AlphaDEX Small Cap Core Index, which includes stocks from the U.S. Nasdaq. Included in the 700 Small Cap Index.
- 2022 YTD performance: -11.4%
- Historical performance (every year over 5 years): 10.8%
- Expense ratio: 0.61%
Invesco S&P SmallCap 600 Equal Weight ETF (EWSC)
This ETF tracks the performance of the S&P SmallCap 600 Equal Weight Index.
- 2022 YTD performance: -10.2%
- Historical performance (every year over 5 years): 10.6%
- Expense ratio: 0.40%
JPMorgan U.S. Diversified Return Small Cap ETF (JPSE)
The fund replicates the JP Morgan Diversified Factor US Small Cap Equity Index.
- 2022 YTD performance: -9.3%
- Historical performance (every year over 5 years): 10.5%
- Expense ratio: 0.29%
First Trust Small Cap Growth AlphaDEX Fund (FYC)
The ETF tracks the Nasdaq AlphaDEX Small Cap Growth Index, which includes stocks from the U.S. Nasdaq. Included in the 700 Small Cap Growth Index.
- 2022 YTD performance: -19.2%
- Historical performance (every year over 5 years): 10.5%
- Expense ratio: 0.70%
Nuveen ESG Small Cap ETF (NUSC)
This ETF tracks the TIAA ESG U.S. Small Cap Index, which includes small U.S. companies that meet certain environmental, social and governance (ESG) criteria.
- 2022 YTD performance: -12.9%
- Historical performance (every year over 5 years): 10.4%
- Expense ratio: 0.30%.
Are Small Cap ETFs a Good Investment?
Buying small ETFs at reasonable prices can generate decent returns, but there are some downsides to be aware of.
Small-cap ETFs allow you to acquire a diversified portfolio of small companies at relatively low cost. They also don’t require the extensive research required to invest in individual companies, and can be quickly added to your overall portfolio to increase exposure to small-cap stocks. Small-cap stocks can generate high returns when they grow and become large companies. Many of today’s most successful companies started as small-cap stocks.
However, one downside to investing in small-cap ETFs is that as the most successful companies grow, they are no longer considered small-cap stocks, and many funds are forced to sell them to keep up with their investment goals. You also don’t get the broad diversification that other funds offer. Therefore, if economic trends negatively affect small-cap stocks, you are not protected. Small-cap funds are also more volatile than funds that hold larger, more established companies.
Poanta
Small-cap ETFs are an attractive way to affordably invest in some of the market’s fastest-growing companies without taking the same risk as buying individual stocks. But like all investments in the stock market, they are not without risks and other drawbacks.
DISCLAIMER
The information contained in this website does not constitute, nor should it be construed as, advice, recommendation, offer and/or solicitation to buy or sell any financial product, and is entirely the responsibility of the reader.
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