Even Apple started somewhere.
Small-cap stocks are the market’s powder kegs — tiny companies with market capitalizations between $300 million and $2 billion that have the potential to turn into the next Apple (ticker: AAPL) or Exxon Mobil Corp. (XOM). Investors love them because of the potential breakneck growth. The flip side: Many of these companies can crater when either their concepts don’t play out or economic downturns squeeze their limited resources too tight. Exchange-traded funds reduce that risk by allowing you to invest in baskets of stocks in a single purchase, leveraging that growth potential.
iShares Russell 2000 ETF (IWM)
The Russell 2000 is the most well-known and followed index tracking small-capitalization stocks, and the iShares Russell 2000 ETF, at $22 billion-plus in assets, is the most popular way to track it. IWM holds roughly 2,000 small-cap companies, with no single stock accounting for more than 0.4 percent of the fund. The fund leans most heavily on financials (26 percent) and tech (18 percent), with top holdings including sanitizer/decontamination firm Steris (STE) and self-storage company CubeSmart (CUBE).
Expenses: 0.2 percent, or $20 annually per $10,000 invested
Vanguard Small-Cap Growth ETF (VBK)
It would seem redundant to have a small-cap growth fund, but it’s important to remember that some companies are “growthier” than others, featuring better earnings prospects among other traits. The VBK invests in 740 of these companies, including Ionis Pharmaceuticals (IONS), Signature Bank (SBNY) and Waste Connections (WCN). The fund, like IWM, is heaviest in financials, with significant weights in health care, industrials and technology.
Expenses: 0.09 percent
Vanguard Small-Cap Value ETF (VBR)
Funnily enough, those “growthier” stocks haven’t been the better play in the small-cap space — value has won out over the past few years. Instead of looking for growth prospects, VBR holds companies with more favorable valuations, and that recipe has won out across several time periods, including roughly 15 percent gains over the past three years versus 10 percent for the VBK. VBR sells out even more to financials and industrials, with half the fund invested in those two sectors alone.
Expenses: 0.09 percent
Schwab International Small-Cap Equity ETF (SCHC)
U.S. small-cap companies tend to have little economic exposure to the rest of the world, instead getting most of their revenues from the U.S. Diversification is key to ride out weak periods in America. That’s where SCHC comes in. This Schwab fund provides exposure to the small-cap companies of developed-market countries, including Japan, the U.K. and Canada. Note: There are only 10 countries represented, so it’s not wide in geographic diversity. Top holdings include Irish bookmaker Paddy Power and Canadian dollar-store operator Dollarama.
Expenses: 0.18 percent
WisdomTree Emerging Market SmallCap Fund (DGS)
Well, if you’re going to swing, you should swing for the fences. If you want to target the companies that theoretically have the most growth potential, DGS allows you to invest in small caps in emerging-market countries. In other words, you’ve got companies with a lot of upside in economies that have a lot of upside. Like most emerging-market funds, DGS is overweight in a couple of countries — namely, Taiwan (29 percent) and China (15 percent) — among its 16 countries.
Expenses: 0.63 percent
PowerShares DWA Small Technical Leaders Portfolio (DWAS)
The DWAS puts a spin on small-cap investing by focusing not on fundamental factors but technical quality. DWAS holds 200 smaller companies that exhibit “powerful relative strength characteristics based on that company’s market performance.” In short, this fund jumps on hot-moving stocks and keeps trying to ride that momentum. Top holdings include U.S. Concrete (USCR), Cantel Medical Corp. (CMN) and FBL Financial Group (FFG).
Expenses: 0.6 percent
PowerShares S&P SmallCap Information Technology Portfolio (PSCT)
Tech is a major part of most small-cap funds, and for good reason: Smaller technology companies have all sorts of untapped growth potential that’s just waiting for mass adoption to send shares flying. The PSCT invests in those companies, with software, IT services and Internet among the industries represented in the fund. Top holdings include names like gamemaker Take-Two Interactive Software (TTWO) and payment processor Heartland Payment Systems (HPY).
Expenses: 0.29 percent
Sprott Junior Gold Miners ETF (SGDJ)
Whereas regular mining companies are those that actually operate mines, junior mining companies typically explore, detect and test deposits, then sell them to the majors. They’re riskier plays, but they also have explosive growth potential — and tend to do very well when the price of gold ticks higher. SGDJ, which invests in 35 junior minors such as Sibanye Gold (SBGL) and Detour Gold Corp., has done quite well amid gold’s 2016 surge, up 20 percent year-to-date against a down market.
Expenses: 0.57 percent
Direxion Daily Small Cap Bull/Bear 3X Shares (TNA/TZA)
To make the ultimate bet on small-cap stocks, consider TNA … and to make the ultimate bet against small-cap stocks, there’s TZA. TNA looks to return 300 percent of the daily return of the Russell 2000, making it an uber-leveraged long bet on the performance of small caps. TZA does the exact opposite, returning -300 percent of the index’s daily performance. Just be warned: These funds are only for quick swing trades, not for holding. And they move rapidly, with TNA already down 36 percent this year.
Expenses: 0.95 percent
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10 Ways to Play the Explosive World of Small-Cap Stocks originally appeared on usnews.com
