Small-cap stocks — those with market capitalizations between $250 million and $2 billion — are becoming increasingly popular among both retail and institutional investors. Small caps have lagged behind large caps and the broader market for most of the last few years but, for several interesting reasons, they are returning to favor.
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One reason might be the economy. Small-cap stocks generally do well when economic growth is accelerating. That’s because smaller companies tend to be more innovative and agile. Due to their size, they’re often in a better position to respond to increases in consumer and business spending. If the U.S. economy continues to improve as it recovers from the post-COVID-19 inflationary shock it endured, small caps could thrive.
Interest rates are also a factor in the growing interest in small caps. After a prolonged period of rate hikes, the Federal Reserve has embarked on a rate-cutting program that, although slower and less aggressive than some experts predicted, will likely continue into 2025. The falling federal funds rate should eventually lower borrowing costs for corporations. Lower rates help small-cap stocks because smaller companies are more dependent on borrowing and subsequently benefit more from better loan terms.
The last and maybe the best explanation for the resurgence of interest in small caps is valuation. Many analysts and investors believe that small-cap stocks are trading at very attractive levels compared to larger companies that have appreciated much more over the last few years.
Investors willing to embrace the somewhat higher risks of investing in smaller companies should consider owning exchange-traded funds, or ETFs, that hold small-cap stocks. Small-cap ETFs are professionally managed by industry experts and provide a much greater degree of diversification than retail investors can achieve on their own.
To that end, here is an updated list of seven quality small-cap ETFs investors should consider buying today and holding through 2025 and beyond:
| Small-cap ETF | Expense Ratio | Forward Dividend Yield* |
| iShares Core S&P Small-Cap ETF (ticker: IJR) | 0.06% | 1.2% |
| Vanguard Small-Cap Value Index Fund ETF Shares (VBR) | 0.07% | 1.8% |
| iShares Russell 2000 ETF (IWM) | 0.19% | 1.1% |
| Direxion Daily Small Cap Bull 3X Shares (TNA) | 1.08% | 0.8% |
| Schwab U.S. Small-Cap ETF (SCHA) | 0.04% | 1.2% |
| Vanguard Small-Cap Growth Index Fund ETF Shares (VBK) | 0.07% | 0.6% |
| Invesco S&P SmallCap Momentum ETF (XSMO) | 0.39% | 0.5% |
*As of Dec. 20 close.
iShares Core S&P Small-Cap ETF (IJR)
With assets of close to $95 billion, IJR may be the largest small-cap ETF on the market. The fund is designed to match the performance of the S&P SmallCap 600 Index after its low expense ratio of 0.06% is subtracted.
The fund follows the index by investing in 600 domestic small-cap companies. The S&P SmallCap 600 is a well-known benchmark that is considered a key measure of the performance of the small-cap segment of the U.S. stock market.
Investors looking for broad exposure to U.S. small caps in a low-cost fund with low internal turnover can consider IJR a core long-term growth holding.
IJR features a dividend yield of 1.2%.
Vanguard Small-Cap Value Index Fund ETF Shares (VBR)
VBR is a small-cap index ETF with assets of about $63 billion. Typical of Vanguard index funds, VBR has a very reasonable expense ratio of just 0.07%.
The fund mirrors the CRSP U.S. Small-Cap Value Index. That index is considered the premiere small-cap value index in the financial industry. In tracking the index, VBR holds small-cap stocks that experts believe are undervalued compared to peers in the small-cap space and the broad stock market.
Another benefit of owning VBR is the fund’s tax efficiency. Historically, the index VBR follows has had a relatively low turnover rate. This translates into a low level of internal trading in VBR and a lower tax bill for shareholders.
The current dividend yield of VBR is about 1.8%.
[READ: 7 Best International Dividend Stocks for Diversification]
iShares Russell 2000 ETF (IWM)
The Russell 2000 is the most respected and most-watched small-cap index on Wall Street. That famous benchmark tracks the smallest 2,000 companies by market cap in the larger Russell 3000.
IWM is an $81 billion ETF that seeks to match the performance of the Russell 2000 after subtracting the fund’s expense ratio of 0.19%.
IWM is suitable for investors who want exposure to the small-cap segment of the market and who understand the value of broad diversification over about 2,000 stocks covering all 11 GICS sectors.
The fund is currently yielding about 1.1%.
Direxion Daily Small Cap Bull 3X Shares (TNA)
Aggressive small-cap investors with short-term investment time horizons may want to consider trading TNA. TNA is a leveraged ETF with the objective of achieving roughly three times the daily performance of the Russell 2000.
The fund seeks to achieve its objective through the aggressive use of margin — that is, using borrowed money to buy securities — and by investing in derivatives and an exotic class of securities called swap agreements.
While TNA can provide outsized returns when small caps are moving up, investors should realize that the fund will drastically underperform when small caps are falling.
The fund’s managers make no assurances that they are able to achieve the fund’s objective over any time period longer than one trading day. TNA is a fairly expensive fund — the expense ratio is 1.08% — that is not suitable for conservative long-term investors.
The fund’s dividend yield is 0.8%.
Schwab U.S. Small-Cap ETF (SCHA)
SCHA is the right small-cap ETF for investors looking for a broadly diversified fund with a low cost structure. The fund has assets of close to $20 billion and an expense ratio of just 0.04%
SCHA mirrors the Dow Jones U.S. Small-Cap Total Stock Market Index. The index was designed to be an accurate representation of the entirety of the domestic small-cap market segment. In other words, SCHA shareholders enjoy broad diversification. The fund, in fact, has more than 1,700 holdings.
All 11 GICS sectors are represented in the SCHA portfolio. In its current configuration, however, SCHA is heavily weighted toward financials, industrials and health care stocks. Those three sectors represent about 49% of the fund’s assets.
The current dividend yield for SCHA is 1.2%.
Vanguard Small-Cap Growth Index Fund ETF Shares (VBK)
The CRSP U.S. Small-Cap Growth Index is an investment benchmark designed to closely track the performance of smaller companies that show significant growth stock characteristics.
The index is administered by the Center for Research in Security Prices (CRSP) and is widely followed by investors and asset managers interested in small-cap growth stocks. VBK is an ETF that mirrors that index.
VBK has assets of about $41 billion. With an expense ratio of 0.07%, this ETF can be considered a low-cost fund.
VBK offers investors a convenient, cost-efficient way to gain exposure to a diversified portfolio of smaller growth companies. The fund is passively managed and takes a strict full-replication approach. There are just over 600 holdings in the fund and it has a current dividend yield of 0.6%.
Invesco S&P SmallCap Momentum ETF (XSMO)
XSMO is an innovative, $1.5 billion ETF based on the concept of momentum investing. Momentum investing involves investing in stocks that are exhibiting a strong uptrend in share price appreciation over a predetermined time period, usually not more than one year.
XSMO tracks the S&P Small-Cap 600 Momentum Index, which is a benchmark based on the themes of small-cap momentum investing.
There are less than 120 holdings in the XSMO portfolio. The fund is not appropriate for investors looking for broad diversification. Instead, this ETF is suitable for more aggressive investors who want exposure to a relatively small group of stocks that score well for momentum factors according to the predetermined methodology of the index managers.
The fund rebalances at least semiannually. It has an expense ratio of 0.39% and a current yield of 0.5%.
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7 Best Small-Cap ETFs to Buy for Growth originally appeared on usnews.com
Update 12/23/24: This story was previously published at an earlier date and has been updated with new information.
