Following a tumultuous and turbulent year in 2020, the US economy appears to be on track for a strong turnaround in 2021. Many investors are once again willing to take bets on small-cap stocks during the early stages of economic growth cycles. The Russell 2000 has gained 48% in the last six months, outpacing the large-cap S&P 500, which has gained 28%.
Because of their size, small-cap stocks have strong, albeit volatile, growth potential. If you’re interested in adding small-cap stocks to your portfolio but want to cut back on the risk, these ETFs can reduce the volatility associated with individual stocks while adding an important layer of diversification to your portfolio.
In this article, our analysts look at three important small-cap ETFs to consider if you want to take advantage of the benefits that small-caps can provide but don’t want to deal with the analysis and decision-making.
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iShares Core S&P Small-Cap ETF (IJR)
The largest small-cap focused fund on Wall Street with over $60 billion in assets under management. The investment thesis behind a small cap investment is the growth factor that comes along with these securities. While mega cap firms have already hit their peak, many of these companies may be well on their way to becoming the next large cap, and this product gives investors access to over 600 of them.
IJR tends to spread its investments across several market sectors, though it slightly favors the technology and industrial segments. This fund will make for a good investment for traders looking for growth and are aware of the risks that come along with investing in a small cap ETF.
iShares Core S&P Small-Cap ETF (IJR) Data Summary
- Weighted Average Market Cap $2.68B
- Price / Earnings Ratio -66.84
- Price / Book Ratio 2.40
- YTD Daily Total Return 21.98%
- Yield 0.97%
- Expense Ratio 0.06%
- Net Assets 65.69B
- Number of Holdings 603
Vanguard Small-Cap Growth ETF (VBK)
This fund leans toward the companies that aspire to become the next generation of stock market leaders. Investors who buy VBK can potentially get in on the ground floor of the next industry leader.
The investment thesis behind small caps is that these firms are likely to provide strong growth prospects to a portfolio and should have a much easier time growing then their large cap counterparts. However, these securities are highly volatile and can experience significant losses or gains in a very short period of time. Despite their uncertainty, these stocks add an important aspect to a well rounded portfolio as they tend to move somewhat independently of large caps and can be a better ‘pure play’ on the American economy.
VBK does an excellent job of dividing up assets as the fund holds more than 600 securities in total and doesn’t give any one security more than 0.6% of the total assets. Thanks to this high level of diversification and VBK’s ultra-low expense ratio, the fund could make for a superb addition to portfolios of investors who are looking for small caps but are seeking a higher risk/reward profile in the space.
Vanguard Small-Cap Growth ETF (VBK) Data Summary
- Weighted Average Market Cap $7.67B
- Price / Earnings Ratio -2545.19
- Price / Book Ratio 5.52
- YTD Daily Total Return 5.86%
- Yield 0.41%
- Expense Ratio 0.07%
- Net Assets $15.77B
- Number of Holdings 639
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iShares MSCI EAFE Small-Cap ETF (SCZ)
This fund focuses on stock offerings from Europe, Australia and the Far East (EAFE). Allowing investors to round out their portfolio with stocks from Japan and the U.K. and Australia with names you may never have known existed and which may not be easily accessible in your brokerage account without an ETF. With more than 2,300 holdings, this iShares offering is a great way to supplement your existing portfolio without the risk of overlapping domestic holdings.
Most international ETFs are dominated by mega cap stocks, a bias that can tilt exposure towards energy and financials and result in a weak correlation to domestic consumption patterns in the target market. Small cap equities may be a better “pure play” on the economies where shares are traded, and as such funds like SCZ can be nice complements to products. This ETF is competitive from a cost perspective, and the depth of holdings assures balanced exposure to a number of ex-U.S. developed economies. SCZ is a nice complement to EAFE ETFs such as EFA, and should be used to achieve more complete international equity exposure.
iShares MSCI EAFE Small-Cap ETF (SCZ) Data Summary
- Weighted Average Market Cap $3.16B
- Price / Earnings Ratio 95.23
- Price / Book Ratio 1.56
- YTD Daily Total Return 9.60%
- Yield 1.45%
- Expense Ratio 0.4
- Net Assets $35.95B
- Number of Holdings 2,336
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