The same tickers tend to pop up constantly across financial news sites, with plenty of headlines dedicated to mega-cap stocks like chipmaker Nvidia Corp. (ticker: NVDA) or electric vehicle powerhouse Tesla Inc. (TSLA). But what if you’re not interested in the same old list of popular names, either because you’re looking for an edge over the competition or simply because you want to diversify beyond the list of usual suspects?
Stocks with a smaller market capitalization are a good fit for either of these scenarios. Small-cap stocks can sometimes carry more risk because they are less established, but they offer a number of benefits all the same — including a higher ceiling and the potential to achieve “alpha” as your strategy takes on a different flavor than a plain vanilla portfolio.
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Investing always carries risk, and small caps in particular can be a bit more volatile than other stocks. But if your goals or strategy involve thinking differently, the following small-cap exchange-traded funds, or ETFs, could be ways to position yourself for growth and success.
Here are seven of the best small-cap ETFs to buy for growth:
| ETF | Assets under management | Expense ratio |
| iShares Russell 2000 ETF (IWM) | $56 billion | 0.19% |
| Vanguard Small-Cap ETF (VB) | $45 billion | 0.05% |
| Vanguard Small-Cap Value ETF (VBR) | $25 billion | 0.07% |
| WisdomTree US SmallCap Dividend ETF (DES) | $1.9 billion | 0.38% |
| Vanguard Small-Cap Growth ETF (VBK) | $14 billion | 0.07% |
| iShares MSCI USA Small-Cap Min Vol Factor ETF (SMMV) | $830 million | 0.20% |
| iShares MSCI EAFE Small-Cap ETF (SCZ) | $11 billion | 0.39% |
iShares Russell 2000 ETF (IWM)
The Russell 2000 index is one of the most popular groupings of smaller companies out there, and this iShares fund is the most popular way to play this flagship index. The Russell 1000 comprises the largest 1,000 companies on Wall Street — and the Russell 2000 is the next cut of stocks after that, excluding the big dogs. At present the average market value of stocks in this ETF is less than $3 billion, ensuring you’re getting small names and not mid-sized players masquerading as small caps. With 2,000 small-cap holdings and the deepest pool of liquidity of any ETF on this list, IWM is the natural place to start if you’re interested in smaller stocks.
Assets under management (AUM): $56 billion Expense ratio: 0.19% annually, or $19 on every $10,000 invested.
Vanguard Small-Cap ETF (VB)
Though slightly smaller asset-wise and with a smaller list of “only” 1,500 or so components, this Vanguard fund remains one of the best small-cap ETFs out there and a great alternative to the prior fund. It holds many similar companies, but is a bit cheaper expense-wise — and with an average market capitalization of about $6 billion, you still get small companies but cut out some of the smallest and potentially most volatile companies at the lower end of the spectrum. Both of these starting funds are great options, so if you have an account at Vanguard or just prefer the brand and philosophy, you can buy VB with confidence.
AUM: $45 billion Expense ratio: 0.05%
Vanguard Small-Cap Value ETF (VBR)
Getting more tactical, this small-cap ETF from Vanguard is biased towards value stocks.
Specifically, this product looks at the larger universe of small-cap companies and then ranks them based on factors including book value, price-to-earnings ratios and other metrics. The result is a more focused list of about 900 companies that is led by industrials at 24% of holdings and then financial services at about 20%. If you’re interested in finding “hidden gems” out there, VBR is a way to go small but still focus on companies that have proven underlying value. It also offers a decent 30-day SEC yield of about 2.3% thanks to this focus on financially sound small-cap stocks.
AUM: $25 billion Expense ratio: 0.07%
WisdomTree US SmallCap Dividend ETF (DES)
Of course, if you’re after income then one of the best small-cap ETFs for dividend investors is this WisdomTree fund that offers a yield of 3.3% at present — more than double that of the S&P 500 at present. The list of about 600 companies is built by taking the smallest 25% of U.S. companies by market capitalization, then weighting them based on fundamental factors including both dividend yield as well as cash flow and risk-adjusted returns, among other factors. DES has admittedly underperformed pretty significantly in 2023 thanks to a market environment where riskier, growth-oriented names have thrived. But if you’re a long-term dividend investor who wants to get beyond the typical blue-chip stocks and instead look at smaller real estate investment trusts, manufacturers and regional banks, then consider this WisdomTree option.
AUM: $1.9 billion Expense ratio: 0.38%
[SEE: 9 of the Best Bond ETFs to Buy Now.]
Vanguard Small-Cap Growth ETF (VBK)
The flip side of value and dividend-oriented investing is, of course, growth investing. VBK looks at the universe of small-cap stocks and then prioritizes holdings based on quantitative criteria including the potential for future earnings and sales growth. Perhaps unsurprisingly, the ETF is led by technology at about 21% of total assets, followed by industrials and health care stocks, which each account for more than 19% of all holdings. Health care and technology in particular tend to be areas where one innovative product can unlock tremendous potential. But keep in mind that there’s usually a tradeoff between risk and reward, so the small growth stocks on this list may be a bit more volatile. Still, with a list of about 650 total holdings, it’s diversified enough that one or two duds won’t ruin your retirement account.
AUM: $14 billion Expense ratio: 0.07%
iShares MSCI USA Small-Cap Min Vol Factor ETF (SMMV)
A small-cap fund focused on lower-volatility stocks, SMMV is a unique way to play some of the less-established companies on Wall Street without taking on too much extra risk. We’re talking companies like logistics provider Landstar System Inc. (LSTR), gas station operator Murphy USA Inc. (MUSA) and medical care provider Chemed Corp. (CHE), to name a few. These are smaller companies, so there’s always a bit more risk than in deep-pocketed blue-chip stocks boasting hundreds of billions in market value. Furthermore, a track record of low volatility for shares is never a guarantee about what the future holds. That said, SMMV is a way to invest in smaller and less proven companies with a bit more peace of mind.
AUM: $830 million Expense ratio: 0.2%
iShares MSCI EAFE Small-Cap ETF (SCZ)
We’ve unpacked a variety of strategies for small-cap ETF investing, but one thing we’ve left out so far is the global nature of the stock market and the potential for international growth. That’s where SCZ comes in, an EAFE fund that comprises stocks in Europe, Australasia and the Far East to exclude the domestic companies you’ll find in these prior funds. Japan leads the portfolio with about 32% of assets in this region, followed by the U.K. at 15% and Australia at about 10%. If it’s hard to find a name you recognize on U.S. small-cap ETFs, then it’s a heck of a challenge to locate a familiar face in SCZ. That may be a good selling point for some investors looking to get off the beaten path of the same old stocks, however.
AUM: $11 billion Expense ratio: 0.39%
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7 Best Small-Cap ETFs to Buy for Growth originally appeared on usnews.com
Update 07/26/23: This story was previously published at an earlier date and has been updated with new information.
