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What is a small-cap ETF
A small-cap is an exchange-traded fund that invests in the market’s smallest companies through what are called small-capitalization, or small-cap, stocks. Small-cap ETFs give you an easy way to buy the small-cap “haystack” rather than search through it for the high performers. Small-cap stocks may sound small, but they’re not usually that tiny. The total value of all their shares outstanding is typically between a few hundred million dollars and a few billion dollars. That’s small for the stock market, though, where market capitalization can hit a trillion dollars. Investors like small caps because they can offer higher potential returns than large-cap stocks, which are typically represented by the . However, because they’re smaller and have fewer financial resources, they’re often riskier and more volatile, too. Because of these risks, investing in individual small stocks is better left to more advanced investors. But even newer investors can buy a basket of these companies through a small-cap ETF and take advantage of the potential higher returns in undiscovered small stocks. Top-performing small-cap ETFs
Bankrate selected its top funds based on the following criteria: U.S. funds that appear in ETF.com’s screener for small-caps (growth, value, blend) Funds among the top performers over the last five years Performance measured on Oct. 31, 2022 using the most recent figures Invesco S&P SmallCap 600 Revenue ETF RWJ
This ETF is based on the S&P SmallCap 600 Revenue-Weighted Index, which re-weights stocks of the S&P SmallCap 600 Index by a company’s revenue. 2022 YTD performance: -10.9 percent Historical performance (annual over 5 years): 11.1 percent Expense ratio: 0.39 percent Invesco S&P SmallCap Value with Momentum ETF XSVM
This ETF tracks the S&P 600 High Momentum Value Index, which is composed of 120 stocks with the highest scores on momentum and value factors. 2022 YTD performance: -13.0 percent Historical performance (annual over 5 years): 11.1 percent Expense ratio: 0.36 percent Invesco S&P SmallCap Momentum ETF XSMO
This ETF is based on the S&P SmallCap 600 Momentum Index, which includes 120 stocks in the S&P SmallCap 600 Index having the highest “momentum scores.” 2022 YTD performance: -13.2 percent Historical performance (annual over 5 years): 10.2 percent Expense ratio: 0.37 percent Invesco DWA SmallCap 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: -15.6 percent Historical performance (annual over 5 years): 9.7 percent Expense ratio: 0.60 percent Pacer U S Small Cap Cash Cows 100 ETF CALF
This ETF includes the top 100 stocks in the S&P SmallCap 600 based on their free cash flow yield. 2022 YTD performance: -13.2 percent Historical performance (annual over 5 years): 9.4 percent Expense ratio: 0.59 percent Nuveen ESG Small-Cap ETF NUSC
This ETF tracks the TIAA ESG USA Small-Cap Index, which includes small companies in the U.S. that satisfy certain ESG (environmental, social and governance) criteria. 2022 YTD performance: -16.9 percent Historical performance (annual over 5 years): 7.4 percent Expense ratio: 0.30 percent JPMorgan Diversified Return U S Small Cap Equity ETF JPSE
This fund tracks the JP Morgan Diversified Factor U.S. Small Cap Equity Index. 2022 YTD performance: -14.6 percent Historical performance (annual over 5 years): 7.4 percent Expense ratio: 0.29 percent Principal U S Small Cap Multi-Factor ETF PSC
This ETF focuses on small-caps that score well on the factors of a high-quality business, favorable price and price momentum. 2022 YTD performance: -14.9 percent Historical performance (annual over 5 years): 7.3 percent Expense ratio: 0.38 percent VictoryShares U S Small Cap High Dividend Volatility Weighted ETF CSB
This ETF tracks the performance of the Nasdaq Victory U.S. Small Cap High Dividend 100 Volatility Weighted Index. 2022 YTD performance: -14.8 percent Historical performance (annual over 5 years): 7.2 percent Expense ratio: 0.35 percent Invesco S&P SmallCap 600 Equal Weight ETF EWSC
2022 YTD performance: Historical performance (annual over 5 years): Expense ratio: 0.40 percent Are small-cap ETFs a good investment
Investing in small-cap ETFs can provide attractive returns as long as they’re purchased at sensible prices, but there are some drawbacks to be aware of. Small-cap ETFs allow you to purchase a portfolio of smaller companies for a relatively low cost. They also won’t require the extensive research that investing in individual companies does and can be added to your overall portfolio quickly to boost exposure to the small-cap universe. Small caps can generate high returns as they grow and become larger businesses. Many of today’s most successful companies started as small caps. But one drawback of investing in small-cap ETFs is that as the most successful companies grow, they move on from being considered small-cap and many funds are forced to sell them to stay in line with their investment objectives. You also won’t get the broad diversification that comes with other funds, so if an economic development negatively impacts the small-cap universe, you won’t be protected. Small-cap funds also tend to be than funds that hold larger, more established companies. Bottom line
Small-cap ETFs are an attractive way to invest in some of the market’s fastest-growing companies at low cost without the same risks of buying individual stocks. But like all investments in the stock market, they aren’t without risk and other drawbacks. Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation. SHARE: Bankrate senior reporter James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more. Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Kenneth Chavis IV is a senior wealth manager who provides comprehensive financial planning, investment management and tax planning services to business owners, equity compensated executives, engineers, medical doctors and entertainers. Related Articles