So far, 2024 has been a good year for large-cap stocks, especially those in the tech sector. March’s higher-than-expected inflation numbers, however, seem to have cooled off the stock market and slowed the rise of large caps. Small caps, on the other hand, have lagged behind larger companies all year, and have fallen even more drastically since the inflation data hit the tape.
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What does this mean for investors? It could mean that the relative underperformance of smaller stocks over the first few months of the year coupled with the dramatic drawdown we’ve seen since the inflation report may have created a significant opportunity in the small-cap space.
What Are Small Caps?
In general, small-cap stocks are exactly what their name suggests. They’re equity securities issued by relatively small publicly traded firms. More specifically, small-cap companies have a market capitalization — the total value of outstanding shares — of between $250 million and $2 billion.
Small-cap stocks should be considered more aggressive than mid-cap and large-cap shares. History has demonstrated that small caps do carry a bit more risk than their larger counterparts. Higher risk, however, is often a prerequisite for higher reward.
Small-Cap ETFs for Growth
Professionally managed, diversified exchange-traded funds, or ETFs, are one of the most convenient and efficient ways to invest in the small-cap universe. An ETF can contain hundreds of issues with exposure to broad swaths of the small-cap market, yet they’re highly liquid and can be traded almost effortlessly like shares of a single stock.
There are plenty of small-cap ETF options for investors to choose from and a wide range of small-cap indexes these funds use as benchmarks.
If you’re interested in small-cap ETFs and looking for some funds with a high potential for superior capital appreciation, here is our list of seven small-cap ETFs to buy now for growth:
| Small-Cap ETF | Expense Ratio |
| iShares Russell 2000 Growth ETF (ticker: IWO) | 0.24% |
| Vanguard Small-Cap Value ETF (VBR) | 0.07% |
| WisdomTree U.S. SmallCap Dividend ETF (DES) | 0.38% |
| iShares S&P Small-Cap 600 Growth ETF (IJT) | 0.18% |
| Invesco Dorsey Wright SmallCap Momentum ETF (DWAS) | 0.60% |
| First Trust Small Cap Value AlphaDEX Fund (FYT) | 0.70% |
| Direxion Daily Small Cap Bull 3X Shares (TNA) | 1.08% |
iShares Russell 2000 Growth ETF (ticker: IWO)
The Russell 2000 Growth Index is a subset of the broader Russell 2000 index, which is itself a subset of the even bigger Russell 3000 Index. The stocks in the index are drawn from among the 2000 smallest stocks in the Russell 3000 but are additionally screened for superior earnings growth potential.
IWO is an ETF designed to mirror the performance of the Russell 2000 Growth Index after subtracting the 0.24% expense ratio, giving shareholders good exposure to the small-cap growth space.
IWO is a domestic stock fund appropriate for investors who know the potential of growth stocks and are looking to add small caps to their portfolios.
This popular fund has assets totaling $11.7 billion.
Vanguard Small-Cap Value ETF (VBR)
VBR is a $29 billion ETF that tracks the CRSP US Small Cap Value Index. The index is operated by the Center for Research in Security Prices, or CRSP, and is designed to reflect the universe of small-cap stocks that exhibit value characteristics. That is to say, analysts feel they could be undervalued compared to their peers and the market in general.
VBR has an expense ratio of just 0.07%, which is low even by Vanguard’s standards. What this means to investors is that VBR should come very close to matching the performance of its benchmark.
The index and, subsequently, the fund has a very low position turnover. The managers look to hold stocks for the long run rather than engage in frequent trading. This helps to explain the low expenses and low tracking error.
In addition, VBR has a current dividend yield of 2%. The income is distributed quarterly and should serve to enhance the fund’s total return.
WisdomTree U.S. SmallCap Dividend ETF (DES)
Speaking of dividend yield, consider DES. This $2 billion ETF is based on the WisdomTree U.S. SmallCap Dividend Index, which is unique in that it is a proprietary index maintained by asset manager WisdomTree.
The index is not cap weighted or equally weighted but is allocated based on a fundamental weighting structure.
The index and the fund comprises stocks that represent the smallest 25% of companies in the WisdomTree Dividend Index after the largest 300 stocks have been removed. The result is excellent exposure to a pool of high-quality, dividend-paying small-cap stocks professionally selected by the experts at WisdomTree.
DES has a yield of 2.6% and a reasonable expense ratio of 0.38%.
[READ: 7 Best Actively Managed ETFs]
iShares S&P Small-Cap 600 Growth ETF (IJT)
IJT is an index ETF that tracks the S&P Small Cap 600 Growth ETF, which is a growth-oriented subset of the broader S&P Small Cap 600 Index. To be included in the index and in IJT, stocks must be in the S&P 600 and show superior revenue, earnings and stock price momentum as judged by the equity research team at S&P Global.
This $5.9 billion fund has a relatively low expense ratio of just 0.18%. This will keep tracking error down and provide investors with virtually the same performance of the underlying index.
IJT currently has 369 stocks in its portfolio, many of which investors will never have heard of. Shareholders will, however, recognize some names in fund. For example, Boise Cascade Co. (BCC) and Abercrombie & Fitch Co. (ANF) are counted among the fund’s top holdings.
Invesco Dorsey Wright SmallCap Momentum ETF (DWAS)
Dorsey Wright is a very well-known name in the realm of quantitative asset management. They specialize in building profitable portfolios using technical analysis and sophisticated computer-driven algorithms. DWAS is a small-cap fund that mirrors the Dorsey Wright SmallCap Technical Leaders Index.
The stocks in DWAS are selected using Dorsey Wright’s proprietary methods, which are designed to identify stocks with very high relative strength on a technical, rather than fundamental, basis.
The solid reputations of Invesco LTD and Dorsey Wright & Associates have combined to attract $1.2 billion in assets to DWAS. The expense ratio of this unique ETF comes in at 0.60%.
If and when small caps come back into favor, DWAS shareholders should should see higher momentum and good capital appreciation.
First Trust Small Cap Value AlphaDEX Fund (FYT)
With $196 million in assets, FYT is the smallest ETF on our list, and, with an expense ratio of 0.70%, it’s also one of the most expensive. Still, FYT is worth considering by serious small-cap investors because it’s one of the most interesting and innovative funds on the market.
FYT is an index fund based on the Nasdaq AlphaDEX Small Cap Value index. That index was developed by and is maintained by Nasdaq Inc. and uses a very sophisticated stock selection method they call AlphaDEX. The AlphaDEX system looks at short- and mid-term stock price data, revenue growth, cash flow and several other factors to find small-cap stocks that exhibit both value and growth characteristics. Of the 700 stocks they screen, only 262 make the cut and get included in FYT.
The holdings in FYT are weighted based on value and growth scores assigned by the managers of the index. FYT is rebalanced quarterly to reflect market and momentum changes. The goal of FYT is to substantially match the benchmark index while beating the Nasdaq US 700 Small Cap Index.
Direxion Daily Small Cap Bull 3X Shares (TNA)
TNA is a leveraged ETF that is not for conservative investors or for the faint of heart. This fund will deliver outsized returns when small caps are going up, but will drastically underperform when small caps are headed down.
TNA is not an index fund, but it does use the Russell 2000 Index as its benchmark. TNA is designed to deliver three times the performance of the underlying index. It accomplishes its goal by using a high degree of leverage — buying securities on margin — to buy the stocks of the index and ETFs that mirror the index. It further enhances performance by buying derivative investments called swap agreements, which can return roughly triple what the index returns.
This fund is not recommended as a long-term holding and, as mentioned above, is not appropriate for investors with a low tolerance for risk. Nonetheless, when small caps are running to the upside, very few small-cap ETFs will outperform TNA.
The fund has net assets of $2.2 billion and a fairly high expense ratio of 1.08%.
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7 Small-Cap ETFs to Buy for Growth originally appeared on usnews.com
Update 04/22/24: This story was previously published at an earlier date and has been updated with new information.
