The small cap ETFs play an essential role in portfolio diversification by offering exposure to relatively less mature companies. The Russell 2000 has delivered excellent returns after the sharp correction in 2016, reflecting that small caps are a highly dynamic market with high potential for outsized returns.
These are small companies that are still at the stage of scaling up. Thus providing investors the opportunity to achieve returns compared to large caps. However, they carry a higher risk too, as these are not yet established.
Therefore, I analyzed some small cap ETF. I compared their current valuation status, performance, return ratio, yield, assets under management, etc.
I have listed the best small cap ETFs below based on my analysis. So, have a conscious look to choose only the best.
Key Takeaways
- Small-company stocks generally have better growth potential.
- Small cap value index funds outperform the S&P 500 in the long run.
- Small-company stocks offer a higher return on investment over the long term.
- Since the small cap ETFs basically track an index, they do not charge additional fees like an active mutual fund manager.
- Small caps also experience higher volatility, and individual small companies are more likely to go bankrupt than large firms. Hence, the opportunities of small caps are best suited to investors who are willing to accept more risk in exchange for higher potential gains.
- The small cap ETF sector’s performance was low compared to the broader market in the past year.
What Is a Small Cap ETF?
The meaning of small cap fund is depicted by its name; they are the exchange-traded funds that invest in the small cap companies. But, don’t go by their name because they only sound small but are very progressive and high-return ETFs that can exponentially increase your portfolio’s value.
Moreover, the total value of many of these small cap stocks lies in the range of a hundred million dollars. Yes, you read it right, a hundred million dollars doesn’t sound like small cap funds, right?
But they are small only when compared to the stock market because the value in the international stock market rises to billions and trillions. Apple is one of the examples. It was the first company to reach the mark of a three trillion market cap.
Additionally, I personally like small cap funds because they are excellent in terms of returns. Small cap ETFs have more potential of providing higher returns when compared to the large-cap stocks, which the S&P 500 Index generally represents.
However, there is only one thing that I keep in mind – volatility and risk. As they are small caps and have very few financial resources, they carry high risk and are more volatile. But if you gather enough knowledge and do proper research, these risks can be omitted easily.
Thus, I see no reason for not keeping some small cap funds in your portfolio to balance out your overall risk profile. Also, these are low-cost investments and economical replacements for actively managed mutual funds.
List of the Best Small Cap ETF
There are hundreds of small cap ETFs in the market. Thus making it hard to select the best one. But, there’s no need to worry; you have me. I have listed the best ones for you here.
So, let’s just dig in!
XSVM – Invesco S&P SmallCap Value with Momentum ETF
I found XSVM to be an outstanding performer in the last year. The historical performance from the day of issuance to the previous year, its graph has ups more than downs. Also, it is anticipated that it will continue on the same growth path.
XSVM is issued by Invesco, and its index is composed of 120 securities in the S&P SmallCap 600 Index. XVSM is known to invest 90% of the assets in the index’s components. Moreover, the index on which it is based, the High Momentum Value Index, is composed of small cap stocks with strong price momentum.
- Dividend Yield – 0.83%
- Expense Ratio – 0.39%
- AUM – $503 million
- ESG Ratings – 5.45 / 10 (BBB)
- Average Spread – 0.16%
- YTD – 46.06%
- 2021 Return % – 56.38%
- Number of Holdings – 120
CALF – Pacer US Small Cap Cash Cows 100 ETF
In most cases, at least 80% of the fund’s total assets will be invested in the index components. Collateral held by securities lending is excluded from the index. The Small-Capitalization U.S. Equity Index is designed to offer exposure to small-capitalization firms in the United States with high free cash flow yields using an objective, rules-based approach.
This fund’s historical performance has been really great. It’s because it was issued only five years ago. In these five years, CALF attracted many investors due to its high return ratio and low expense.
- Dividend Yield – 0.51%
- Expense Ratio – 0.59%
- AUM – $594.3 million
- ESG Ratings – 5.77 / 10 (BBB)
- Average Spread – 0.13%
- YTD – 43.10%
- 2021 Return % – 40.50%
- Total Weight of Top 10 Holdings – 20.64%
AVUV – Avantis U.S. Small Cap Value ETF
One thing that I like the most about the AVUV is its efficient portfolio management and trading process. The approach is well organized and is intended to increase returns while reducing needless risks and expenditures for investors.
AVUV invests in a wide range of small cap companies that are U.S based. The performance of AVUV has been good so far. It is designed to help increase the return by trading at low valuations with higher profitability ratios.
- Dividend Yield – 0.55%
- Expense Ratio – 0.25%
- AUM – $2.2 billion
- ESG Ratings – 6.00 / 10 (A)
- Average Spread – 0.09%
- Performance over one year – 44%
- 2021 Return % – 42.23%
- Number of Holdings – 665
The iShares Morningstar Small-Cap Growth ETF tracks the investment performance of an index that includes small-capitalization U.S. equities with growth characteristics.
ISCG provides exposure to small public U.S. companies. It trades in the companies whose earnings are anticipated to grow exponentially compared to the stock market.
I utilize iShares Morningstar Small Cap Growth to gain focused access to a certain type of small cap domestic stocks. Furthermore, I use this ETF to diversify the U.S. stock allocation and move the portfolio towards growth stocks.
- Dividend Yield – 0.62%
- Expense Ratio – 0.06%
- AUM – $412.56 million
- ESG Ratings – 5.28 / 10 (BBB)
- Average Spread – 0.26%
- 10 Year Return – 13.20%
- YTD – (-6.97%)
- Number of Holdings– 1181
VIOG – Vanguard S&P Small-Cap 600 Growth ETF
The VIOG is designed to track the S&P Small-Cap 600 Growth index. The fund’s strategy is to identify and invest in growth stocks with a high enough liquidity and market capitalization.
VIOG’s historical performance depicts it as a good choice for long-term goals. In the long term, the small cap growth index can provide a better returns, which we all look for.
- Dividend Yield – 0.70%
- Expense Ratio – 0.16%
- AUM – $590.58 million
- ESG Ratings – 5.67 / 10 (BBB)
- Average Spread – 0.19%
- 10 Year Return – 14.70%%
- 2021 Return % – 22.62%
- Number of Holdings – 332
Are Small Cap ETFs Good For Your Portfolio?
Small cap ETFs invest in small cap companies with a high potential for development. When the economy improves and demand rises, well-run small caps may anticipate higher profits and a better re-rating of their company due to improved profitability. Small cap funds can help you develop your portfolio by investing in well-managed small cap stocks.
These funds are an excellent way to meet long-term financial goals and should be part of your portfolio. Invest in small cap funds through SIP or lump sum to acquire wealth over the long term by leveraging the promise of excellent little companies.
Small cap mutual funds may be a good fit if you have a hearty appetite for risks and want to diversify the portfolio.
How To Choose The Right Small Cap ETF
Now that we have gone through the list of small cap ETFs. Let’s look at how to decide which fund is suitable for the portfolio.
Fund Size
The asset threshold is another important indicator. Ideally, it should be above $10 million as only then it has the investor’s interest. It also helps depict whether the fund has good liquidity and less wide spreads.
Costs
The expense ratio is also a critical factor. When I invest, I look forward to high returns, minimum risks, and minimal cost involved in buying/selling. However, most ETFs are passively managed and have less expense than actively managed funds. But still, whenever comparing the two ETFs, always choose those with low expense ratios.
Trading Activity
Invest in the ETF that has the greatest amount of trading volume. It will be easier to sell when desired. Many international ETFs don’t even trade; leave those. Trading volume can also determine the liquidity of funds. So, always consider this indicator before investing.
Tracking Errors
To choose the right ETF, look for errors in tracking. Does it have a significant deviation from its benchmark index? If yes, then go for another option. If already invested in a fund and looking to change, consider this point before moving on.
Underlying Assets
Try to consider the underlying assets and index of every fund. A broader index is always preferred to invest in an ETF. It provides more diversification probability instead of a narrow market.
Final Words
Investing in small cap funds is a good choice for long-term goals. Look for the best possible options and ensure better returns. Remember to compare all the parameters before finalizing any ETF.
Moreover, I hope the list of some best small cap ETF options will help compare the high-performing funds. So, whichever ETF you choose, remember there are many emerging markets ETF, so always lookout for the latest trends.