The key question for small-caps is – will they successfully adapt to rapid changes in economic conditions in the 2020s? The answer to this question may depend on the course of the pandemic and what the world looks like when the pandemic eventually subsides. Unfortunately, there is no crystal ball, no way to know what the future may hold. Instead, we can look to the past for clues and patterns to get an idea of possible outcomes.
During past periods of economic distress (1979-82, in the early 1990s, the early 2000s, and the global financial crisis and immediate aftermath), small-caps have outperformed. Many analysts are warning that rising infection rates across the U.S. and in other countries could indicate that it’s time for a reality check as to where we may be headed regarding our economic recovery.
Aside from current conditions, there are other reasons to think about adding small-caps to your portfolio right now. Some of the most successful names of our time began as speculative small-caps. Amazon was a $7 stock in 1998, and Tesla had a market valuation of just $1 billion in 2010. Of course, not every small-cap company becomes a giant. The truth is, some of today’s burgeoning small-cap names could cease to exist down the line.
Investing in small caps can be highly rewarding but also comes with risks that need to be considered. If you’re interested in adding small-caps to your portfolio but want to cut back on the risk, investing in ETFs can reduce the volatility associated with individual companies while adding an important layer of diversification to your portfolio because they provide exposure to a variety of stocks.
In this article, our team compares three important small-cap ETFs to consider if you want to take advantage of the benefits that small-caps can provide.
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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 favors 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 $2.85B
- Price / Earnings Ratio 2.28
- Price / Book Ratio 2.37
- YTD Daily Total Return 19.47%
- Yield 0.93%
- Expense Ratio 0.06%
- Net Assets 71.48B
- Number of Holdings 599
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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 than 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. 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 anyone 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 looking for small caps but seeking a higher risk/reward profile in the space.
Vanguard Small-Cap Growth ETF (VBK) Data Summary
- Weighted Average Market Cap $37.89B
- Price / Earnings Ratio 8.81
- Price / Book Ratio 5.36
- YTD Daily Total Return 6.83%
- Yield 0.45%
- Expense Ratio 0.07%
- Net Assets $37.89B
- Number of Holdings 677
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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 nearly 2,400 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. 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 complete international equity exposure.
iShares MSCI EAFE Small-Cap ETF (SCZ) Data Summary
- Weighted Average Market Cap $3.36B
- Price / Earnings Ratio 11.67
- Price / Book Ratio 1.57
- YTD Daily Total Return 11.10%
- Yield 1.63%
- Expense Ratio 0.4
- Net Assets $13.72B
- Number of Holdings 2,397
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