Are you on the lookout for the next big opportunity in the stock market? It could be lurking within the realm of small-cap companies, as these smaller entities often go unnoticed by investors. One way to tap into this segment of the market is by investing in a small-cap ETF.
Topics discussed in this article:
- Understanding small-cap ETFs
- Top-performing small-cap ETFs
- Assessing the viability of small-cap ETFs
Understanding small-cap ETFs
A small-cap ETF is an exchange-traded fund that focuses on investing in the smallest companies in the market through small-capitalization, or small-cap, stocks. By investing in small-cap ETFs, you gain exposure to the entire spectrum of small-cap companies without the need to individually select high-performing stocks.
While small-cap stocks may seem diminutive, they typically have a total market value ranging from a few hundred million to a few billion dollars. Although considered small in the stock market landscape, their market capitalization can still be substantial.
Investors are drawn to small caps due to their potential for higher returns compared to large-cap stocks, typically represented by the S&P 500 index. However, it’s important to note that small-cap stocks are often riskier and more volatile due to their smaller size and limited financial resources.
For less experienced investors, investing in individual small-cap stocks may be too risky. Instead, opting for a small-cap ETF allows you to invest in a diversified portfolio of small companies and potentially benefit from the higher returns associated with undiscovered small-cap stocks.
Top-performing small-cap ETFs
Bankrate has identified the top-performing small-cap ETFs based on the following criteria:
- U.S. funds featured in ETF.com’s small-caps screener
- Funds that have performed well over the past five years
- Performance data as of June 28, 2024, sourced from ETF.com
Invesco S&P SmallCap 600 Revenue ETF (RWJ)
This ETF tracks the S&P SmallCap 600 Revenue-Weighted Index, which re-weights stocks based on company revenue.
- 2024 YTD performance: -3.4 percent
- Historical performance (annual over 5 years): 15.3 percent
- Expense ratio: 0.39 percent
Pacer U.S. Small Cap Cash Cows 100 ETF (CALF)
This ETF comprises the top 100 stocks in the S&P SmallCap 600 with the highest free cash flow yield.
- 2024 YTD performance: -9.9 percent
- Historical performance (annual over 5 years): 14.6 percent
- Expense ratio: 0.59 percent
Invesco S&P SmallCap Value with Momentum ETF (XSVM)
This ETF follows the S&P 600 High Momentum Value Index, consisting of stocks with strong momentum and value metrics.
- 2024 YTD performance: -3.6 percent
- Historical performance (annual over 5 years): 14.2 percent
- Expense ratio: 0.36 percent
Invesco S&P SmallCap 600 Pure Value ETF (RZV)
This fund is based on the S&P SmallCap 600 Pure Value Index, which selects stocks with favorable value metrics.
- 2024 YTD performance: -7.7 percent
- Historical performance (annual over 5 years): 11.2 percent
- Expense ratio: 0.35 percent
Invesco S&P SmallCap Momentum ETF (XSMO)
This ETF tracks the S&P SmallCap 600 Momentum Index, comprising stocks with strong momentum scores.
- 2024 YTD performance: 5.4 percent
- Historical performance (annual over 5 years): 11.0 percent
- Expense ratio: 0.39 percent
ALPS O’Shares U.S. Small-Cap Quality Dividend ETF (OUSM)
This ETF follows the O’Shares U.S. Small-Cap Quality Dividend Index, focusing on stocks with low volatility and strong fundamentals.
- 2024 YTD performance: 5.4 percent
- Historical performance (annual over 5 years): 10.7 percent
- Expense ratio: 0.48 percent
Invesco Dorsey Wright SmallCap Momentum ETF (DWAS)
This ETF is based on the Dorsey Wright SmallCap Technical Leaders Index, which includes stocks with robust momentum.
- 2024 YTD performance: 1.2 percent
- Historical performance (annual over 5 years): 10.6 percent
- Expense ratio: 0.60 percent
Assessing the viability of small-cap ETFs
Investing in small-cap ETFs can offer attractive returns if purchased at reasonable prices. However, there are certain drawbacks to consider.
Small-cap ETFs provide a cost-effective way to access a diversified portfolio of smaller companies without the need for extensive research. They can quickly enhance your exposure to the small-cap market within your overall investment portfolio. Small-cap companies have the potential to deliver substantial returns as they expand and evolve into larger enterprises, akin to many successful companies today that started as small caps.
One downside of small-cap ETFs is that as successful companies grow, they may outgrow the small-cap category, leading funds to sell them to align with their investment objectives. Additionally, small-cap ETFs may lack the broad diversification offered by other funds, leaving investors vulnerable to economic fluctuations impacting the small-cap sector. Furthermore, small-cap funds tend to exhibit higher volatility compared to funds holding larger, established companies.
(For more investment options, you may also want to explore our list of the best large-cap ETFs and best mid-cap ETFs.)
Conclusion
Small-cap ETFs present an enticing opportunity to invest in rapidly growing companies at a modest cost, mitigating the risks associated with individual stock selection. Nonetheless, like all stock market investments, small-cap ETFs come with inherent risks and limitations.
Editorial Disclaimer: It is recommended that all investors conduct thorough independent research on investment strategies before making any investment decisions. Additionally, past performance of investment products does not guarantee future price appreciation.