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Small-cap stocks often present greater upside and higher growth potential than the blue-chip stocks that get most of the attention. One of the challenges investors face with small-cap stocks is simply knowing which ones to invest in.
Buying a small-cap ETF is one of the easiest ways to add exposure to small companies within your portfolio. Exchange-traded funds (ETFs) allow an investor to own a wide variety of companies within a single fund.
If you’re looking to invest in small caps, this article covers some of the best small-cap ETFs worth considering.
This article aims to highlight ETFs that may be a good fit if you’re looking to invest in small companies. This is not investment advice, and it’s possible to lose money with these ETFs. If you have questions about your situation, seek personalized help from a financial advisor.
How to Invest in ETFs
Thanks to brokers like Public.com, Webull, and Moomoo, investing in ETFs is very easy. It’s just like buying an individual stock. You can buy or sell any time the stock market is open, so it’s a completely liquid investment.
For more details, see How to Buy an ETF.
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The Best Small Cap ETFs
If you’re interested in adding U.S. small caps to your portfolio, here are a few ETFs you may want to consider.
The details for each small-cap ETF listed below are from VettaFi. They are valid as of the day this article was updated, November 17, 2022. Be sure to check the current details, as they will change with time.
Related: How to Get Free Stocks
Invesco S&P SmallCap 600 Revenue ETF (RWJ)
This small-cap ETF tracks the S&P SmallCap 600 Revenue-Weighted Index of U.S. stocks. As you can probably tell from the name of the index, it weights the constituents based on their revenue. Weighting based on revenue instead of market capitalization may help to prevent overweighting stocks that are overvalued.
The expense ratio of 0.39% is reasonable but considerably higher than some alternatives covered in this article. However, if you believe the revenue weighting will help produce better results, the difference in the expense ratio is more than justified. At this time, RWJ has been outperforming the other ETFs featured here, so the approach seems to be working.
Expense Ratio: 0.39%
Annual Dividend Yield: 0.50%
1 Year Return: -1.74%
3 Year Return: 78.06%
5 Year Return: 85.07%
Invesco S&P SmallCap Value with Momentum ETF (XSVM)
XSVM tracks the S&P SmallCap 600 Index, which is comprised of companies that meet “investability and financial viability criteria.” Although small-cap stocks represent a higher degree of risk compared to large-cap stocks, the SmallCap 600 Index includes key factors like earnings requirements in an effort to maximize returns while also limiting the downside.
Invesco also factors momentum to determine the most undervalued companies and the appropriate weight of the holdings. The expense ratio of 0.39% is the same as RWJ, but higher than some other small-cap ETFs.
Expense Ratio: 0.39%
Annual Dividend Yield: 0.83%
1 Year Return: -11.97%
3 Year Return: 57.01%
5 Year Return: 81.62%
Invesco DWA SmallCap Momentum ETF (DWAS)
DWAS tracks the Dorsey Wright SmallCap Technical Leaders Index. This index identifies companies with significant momentum using a proprietary formula. The top 200 companies out of the 2,000 listed are included in the index. The portfolio is also weighted based on those scores.
The expense ratio of DWAS is higher than any other ETFs covered in this article, but that’s due to the methodology used in the selection and weighting.
Expense Ratio: 0.60%
Annual Dividend Yield: 0.09%
1 Year Return: -22.19%
3 Year Return: 46.09%
5 Year Return: 66.19%
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Pacer US Small Cap Cash Cows 100 ETF (CALF)
CALF screens the S&P SmallCap 600 and identifies the 100 companies with the highest free cash flow yield. Free cash flow is whatever’s left after paying all the company’s expenses and taxes. The more cash left over, the more the business can invest in growth.
The expense ratio of 0.59% is almost as high as DWAS. However, it could be an option you want to consider if you’re looking for an ETF with a strong potential for growth.
Expense Ratio: 0.59%
Annual Dividend Yield: 0.55%
1 Year Return: -16.15%
3 Year Return: 55.56%
5 Year Return: 70.25%
Invesco S&P SmallCap Momentum ETF (XSMO)
Like others mentioned, XSMO attempts to identify small-cap stocks with strong momentum. Companies included in the S&P SmallCap 600 are analyzed, and the change in stock price over the past 12 months is calculated, with some adjustments for volatility.
Roughly 120 of the highest-scoring stocks are included. A calculation involving the momentum scores and market capitalization determines the weighting of the portfolio.
The expense ratio of 0.39% is higher than some of the low-cost options on this list but considerably lower than DWAS and CALF.
Expense Ratio: 0.39%
Annual Dividend Yield: 0.23%
1 Year Return: -16.61%
3 Year Return: 36.39%
5 Year Return: 73.12%
Vanguard S&P Small-Cap 600 Growth ETF (VIOG)
VIOG tracks the S&P SmallCap 600 Growth Index (SLYG is another popular ETF with a similar approach). The goal of this index is to identify small-cap companies that show the greatest likelihood of growth.
There are a few details about this small cap ETF that may appeal to investors. First, the 0.15% expense ratio is very low. Second, more than 300 securities are included in the portfolio, and the top holding currently accounts for just 1.33% of the portfolio. This approach helps to reduce the risk of being too heavily invested in any small cap company.
Expense Ratio: 0.15%
Annual Dividend Yield: 0.69%
1 Year Return: -19.66%
3 Year Return: 27.34%
5 Year Return: 47.43%
Vanguard Small Cap ETF (VB)
If you’re looking for a simple small-cap ETF, you may consider VB. This fund attempts to replicate the benchmark CRSP US Small Cap. With well over 1,500 different holdings, this ETF takes a very broad approach rather than trying to identify the highest momentum or highest growth stocks.
The incredibly low expense ratio of 0.05% makes VB very appealing. The fund is also relatively well diversified due to a large number of holdings, although it still qualifies as high-risk, like all small-cap ETFs.
Expense Ratio: 0.05%
Annual Dividend Yield: 1.10%
1 Year Return: -18.30%
3 Year Return: 24.01%
5 Year Return: 45.50%
Vanguard Small Cap Growth ETF (VBK)
VBK is another low-cost small-cap ETF from Vanguard. This one tracks the CRSP U.S. Small Cap Growth Index, which attempts to identify small-cap companies with high growth potential.
Like VB, VBK also includes a large number of holdings (around 1,000) to provide investors with some level of diversification. The expense ratio of 0.07% is extremely low, even though it’s not quite as low as VB. This is another solid option if you’re looking for a simple low-cost small-cap ETF.
Expense Ratio: 0.07%
Annual Dividend Yield: 0.38%
1 Year Return: -29.76%
3 Year Return: 11.96%
5 Year Return: 41.07%
Schwab Fundamental US Small Co. Index ETF (FNDA)
FNDA tracks and attempts to replicate the total return of the Russell RAFI Small Company US index. It’s a fairly straightforward U.S. small-cap ETF that’s well diversified with no holdings currently accounting for more than 1% of the portfolio.
The expense ratio of 0.25% is relatively low, although not as low as some other funds covered here. FNDA is a decent option for investors looking for a simple small-cap ETF and will appeal to existing Schwab customers.
Expense Ratio: 0.25%
Annual Dividend Yield: 0.90%
1 Year Return: -13.98%
3 Year Return: 29.61%
5 Year Return: 45.62%
Vanguard Small Cap Value ETF (VBR)
Several of the ETFs in this article aim to identify small-cap stocks with growth potential or momentum, but VBR focuses on value stocks. The ETF tracks the CRSP US Small Value Index.
Like the other Vanguard ETFs we’ve looked at, VBR offers a very low expense ratio of just 0.07%. The portfolio is also pretty well diversified with no holding accounting for more than 1%.
Expense Ratio: 0.07%
Annual Dividend Yield: 1.53%
1 Year Return: -9.04%
3 Year Return: 30.18%
5 Year Return: 43.73%
Final Thoughts on Small-Cap ETFs
Small-cap stocks and ETFs aren’t for everyone. The high-risk, high-reward approach may be a good fit for a part of your portfolio, but you’ll need to be comfortable with the possibility of seeing your investment drop in value very quickly. However, smaller companies also provide the potential for significant growth.
The best small-cap ETFs covered in this article are worth considering, but be sure to do your own due diligence.
To learn about more ETFs, please see:
- The Best ETFs for Long-Term Growth
- The Best ETFs with High Dividends
- The Best Tech ETFs
- The Best Energy ETFs
- The Best Commodity ETFs