Best Small Cap ETFs in June 2021
Are you looking for the next big thing in the stock market? There is a chance that it is lurking among small caps, as these small companies often remain overlooked by investors. One way to gain exposure to the entire market segment is to buy a small cap ETF.
What is a small cap ETF?
A small-cap ETF is an exchange-traded fund that invests in the smaller companies in the market through what is known as small-cap or small-cap stocks. Small-cap ETFs give you an easy way to buy the small-cap “haystack” rather than looking through the top performers.
Small cap stocks may seem small, but they usually aren’t. The total value of all of their outstanding shares is typically between a few hundred million dollars and a few billion dollars. That’s little for the stock market, however, where the market cap can reach around a trillion dollars.
Investors like small caps because they can offer higher potential returns than large cap stocks, which are typically represented by the S&P 500 Index. However, because they are smaller and have less financial resources, they are often riskier and more volatile.
Because of these risks, it is best to let more advanced investors invest in smaller individual stocks. But even new investors can buy a basket of these companies through a small-cap ETF and enjoy the potentially higher returns of small, undiscovered stocks.
Best performing small cap ETFs
Bankrate selected its best funds based on the following criteria as measured by Morningstar.
- Funds that appear in Morningstar’s ETF filter for small cap funds (growth, value, mix)
- Some of the best performing funds of the past five years
- Performance measured as of June 1, 2021 using the most recent figures
IShares Microcap ETF (IWC)
This ETF tracks the Russell Microcap Index of US Micro-Cap Equities and includes stocks with a market capitalization of a few million dollars to a few billion dollars.
- 2020 performances: 19.7 percent
- Historical performance (annual over 5 years): 17.3 percent
- Spending rate: 0.60%
Invesco S&P SmallCap Value ETF with Momentum (XSVM)
This ETF tracks the S&P 600 High Momentum Value Index, which is made up of 120 stocks with the highest scores on both momentum and value factors.
- 2020 performances: 3.2%
- Historical performance (annual over 5 years): 17.9 percent
- Spending rate: 0.39 percent
Invesco S&P SmallCap 600 Equal Weight ETF (EWSC)
This ETF tracks the performance of the S&P SmallCap 600 Equal Weight index.
- 2020 performances: 13.3 percent
- Historical performance (annual over 5 years): 15.9 percent
- Spending rate: 0.40 percent
First Trust Small Cap Core AlphaDEX ETF (FYX)
This ETF tracks the NASDAQ AlphaDEX Small Cap Core Index, which includes stocks from the Nasdaq US 700 Small Cap Index.
- 2020 performances: 18.6 percent
- Historical performance (annual over 5 years): 16.1 percent
- Spending rate: 0.61 percent
SPDR S&P 600 Small Cap ETF (SPSM) Portfolio
This ETF tracks the performance of the S&P Small Cap 600 index.
- 2020 performances: 9.5%
- Historical performance (annual over 5 years): 16.0 percent
- Spending rate: 0.05%
Janus Henderson Growth Small Cap Alpha ETF (JSML)
This ETF tracks the performance of the Janus Henderson Small Cap Growth Alpha index.
- 2020 performances: 34.8%
- Historical performance (annual over 5 years): 21.2 percent
- Spending rate: 0.30 percent
Invesco DWA SmallCap Momentum ETF (DWAS)
This ETF is based on stocks from the Dorsey Wright SmallCap Technical Leaders Index, which includes high momentum stocks.
- 2020 performances: 32.9%
- Historical performance (annual over 5 years): 19.8 percent
- Spending rate: 0.60%
iShares Morningstar Small-Cap Growth ETF (ISCG)
This ETF tracks an index of US small-cap growth stocks.
- 2020 performances: 44.4 percent
- Historical performance (annual over 5 years): 19.1 percent
- Spending rate: 0.06 percent
Vanguard Small Cap Growth ETF (VBK)
This ETF tracks the performance of the CRSP US Small Cap Growth Index, which is an index of small-scale growth stocks.
- 2020 performances: 34.8%
- Historical performance (annual over 5 years): 18.4 percent
- Spending rate: 0.07 percent
Vanguard Russell Growth ETF 2000 (VTWG)
This ETF tracks the performance of the Russell 2000 Growth Index, an index made up of growth stocks of US small companies.
- 2020 performances: 34.5%
- Historical performance (annual over 5 years): 17.6 percent
- Spending rate: 0.15 percent
Pros and Cons of Investing in Small Cap ETFs
There are many advantages to investing in small cap ETFs, but it is also not without disadvantages. Here are the most important advantages and disadvantages of investing in small cap ETFs:
Benefits of Small Cap ETFs
- High growth potential: Small-cap ETFs give you access to the high growth potential that typically comes with these types of companies.
- Diversified exhibition: An ETF allows you to buy a diversified portfolio of small caps, which reduces your risk compared to owning a few stocks.
- At low price: Many ETFs charge low expense ratios for these benefits.
- Less work: Unlike investing in individual stocks, where you will have to do a lot of work to analyze your stock, buying an ETF allows you to enter without the same work.
- Easy to insert into a wallet: Need small cap exposure in your portfolio? Just add a small cap ETF and you get instant exposure.
Disadvantages of Small Cap ETFs
- The most efficient come out of the sector: The best small caps grow so quickly that they break out of their small cap label, which means funds often have to sell them as companies become more successful.
- Narrow diversification: Since small cap ETFs focus on a single sector, they will not protect against risks for small caps as a whole. So if investors switch from small caps to large caps, for example, this type of ETF will not offset that risk.
- Higher volatility: Small caps are riskier than large caps, so even a diversified investment such as a small cap ETF can also be more volatile.
At the end of the line
Small-cap ETFs are an attractive way to invest in some of the fastest growing companies in the market at low cost without the same risks of buying individual stocks. But like all investments in the stock market, they are not without risks and other drawbacks.