Small companies that pack a big punch.
Many investors rely on the familiarity of large blue-chip stocks in their portfolio, and for good reason. These are established companies have been around for decades that have proven their business models to investors. The downside, however, is that many entrenched big corporations don’t have that much growth potential. After all, where do you go with a global brand like Coca-Cola Co. (NYSE: KO)? It’s much harder to find a small up-and-coming stock, but when you do there can be much larger rewards. And thanks to exchange-traded funds, it’s now easier than ever to zero in on small companies that might deliver big-time potential.
Vanguard Small-Cap ETF (VB)
If you’re looking for an affordable and diversified index fund to play smaller stocks, then Vanguard has you covered. This ETF spreads your investment across over 1,400 small-cap investments and includes video game studio Take-Two Interactive (TTW), oil and gas explorer Diamondback Energy (FANG) and medical products company Teleflex Incorporated (TFX). You get a pretty balanced mix of just about everything that’s out there, with the guiding principle simply being to pursue gains in smaller stocks instead of larger ones.
Expenses: 0.06 percent, or $6 annually per $10,000 invested
iShares Russell 2000 Growth ETF (IWO)
Getting a bit more tactical, the IWO is biased toward U.S. small caps that exhibit growth characteristics. If you’re interested in jumping into small companies because they have the potential to benefit faster from any economic tailwinds, then this is a good bet. Roughly 25 percent of this iShares fund is in the information technology sector and another 23 percent in health care. That makes sense, since up-and-coming tech stocks and biotechnology firms are often the fastest-moving companies on Wall Street.
Expenses: 0.24 percent
iShares Russell 2000 Value ETF (IWN)
Of course, the flip side of growth investing is value investing. And if you’d rather look for good companies trading at great prices instead of chasing aggressive growth potential, look no further than IWN. The sector makeup is very different than its sister fund, with more than 30 percent allocated toward small banks and the financial sector and the next closest sector being industrials at about 12 percent. Remember, the name and ticker here is awfully similar to the last fund, but the flavor is very different. If you’re going to buy one, double-check before you place your trade in either of these iShares funds.
Expenses: 0.24 percent
WisdomTree US Small Cap Dividend ETF (DES)
Another flavor of small-cap investing involves going after smaller companies that pay bigger dividends than their peers. That’s what the DES offers, delivering roughly 3.1 percent annual yield on its portfolio of small-cap stocks. A dividend ETF like this is attractive not just because of the yield, but because of its monthly distributions instead of quarterly dividends from an individual stock. After all, there are more than 650 total holdings in the fund and they don’t all pay on the same schedule. Nineteen percent of the fund’s portfolio is in consumer discretionary stocks.
Expenses: 0.38 percent
PowerShares S&P Small Cap Low Volatility Portfolio (XSLV)
Another twist on small-cap investing is to limit the risk that’s inherent with these more aggressive stocks via a low volatility strategy. That’s what the XSLV provides, with a focused group of about 600 stocks that have exhibited the lowest realized volatility over the past 12 months versus their peers. This fund is biased toward small financial and real estate companies as a result, since local banks and rental companies provide some of the most reliable returns out there. You’re not going to see breakneck growth with this strategy, but if you’re worried about volatility then this ETF is a great way to keep things steady in your overall portfolio.
Expenses: 0.25 percent
John Hancock Multifactor Small Cap ETF (JHSC)
Confused by the options of chasing growth versus value or share appreciation versus dividends? Then think holistically, with this John Hancock multifactor fund that is simply about owning the best small-cap stocks. It’s formulated on specific factors that include attractive valuation metrics and higher profitability, among others. This fund is certainly intriguing and dynamic, but it only launched in 2017 and has gathered only $25 million in assets thus far, so there’s not a lot of history behind how its formulation will work long term. But it’s an interesting idea for those who want something different than the mainstream small-cap index funds.
Expenses: 0.5 percent
Direxion Daily Small Cap Bull 3X Shares (TNA)
If you really want to spice up your portfolio with small-cap stocks, however, take a look at the TNA leveraged fund from Direxion. This ETF seeks to deliver three times the performance of the Russell 2000 index each day. In other words, when the small cap benchmark goes up 5 percent, this fund goes up 15 percent. Be careful, however, because the inverse is also true; when the Russell 2000 loses 5 percent, you’ll see your investment decline a whopping 15 percent. But if you don’t mind the risk and think we’ll be in a market that’s trending up, a fund like TNA can deliver big-time gains for you.
Expenses: 1.09 percent
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7 Small-Cap ETFs to Buy Now originally appeared on usnews.com
