Top Small-Cap ETFs: Investment Strategies & October 2021 Performance

Are you looking for the next big thing in the stock market? There’s a chance it’s hiding among the small caps, because these smaller companies often remain overlooked by investors. One way to gain exposure to the entire segment of the market is to buy a small-cap ETF.

Topics covered on this page

• What is a small-cap ETF?
• Top performing small-cap ETFs
• Pros and cons of investing in small-cap ETFs
• Bottom line

What is a small-cap ETF?

A small-cap ETF is an exchange-traded fund that invests in the market’s smallest companies through what are called small-capitalization, or small-cap, stocks. Small-cap ETFs give you an easy way to buy the small-cap “haystack” rather than search through it for the high performers.

Small-cap stocks may sound small, but they’re not usually that tiny. The total value of all their shares outstanding is typically between a few hundred million dollars and a few billion dollars. That’s small for the stock market, though, where market capitalization can hit 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’re smaller and have fewer financial resources, they’re often riskier and more volatile, too.

Because of these risks, investing in individual small stocks is better left to more advanced investors. But even newer investors can buy a basket of these companies through a small-cap ETF and take advantage of the potential higher returns in undiscovered small stocks.

Top performing small-cap ETFs

Bankrate selected its top funds based on the following criteria:

• U.S. funds that appear in ETF.com’s screener for small-caps (growth, value, blend)
• Funds among the top performers over the last five years
• Performance measured on Sept. 28, 2021 using the most recent figures

Janus Henderson Small Cap Growth Alpha ETF (JSML)

This ETF tracks the performance of the Janus Henderson Small Cap Growth Alpha Index.

• 2020 performance: 34.8 percent
• Historical performance (annual over 5 years): 18.4 percent
• Expense ratio: 0.30 percent

Invesco DWA SmallCap Momentum ETF (DWAS)

This ETF is based on stocks in the Dorsey Wright SmallCap Technical Leaders Index, which includes stocks with strong momentum.

• 2020 performance: 32.9 percent
• Historical performance (annual over 5 years): 18.3 percent
• Expense ratio: 0.60 percent

Vanguard Small-Cap Growth ETF (VBK)

This ETF tracks the performance of the CRSP U.S. Small Cap Growth Index, which is an index of small growth stocks.

• 2020 performance: 34.8 percent
• Historical performance (annual over 5 years): 17.9 percent
• Expense ratio: 0.07 percent

iShares Morningstar Small-Cap Growth ETF (ISCG)

This ETF tracks an index of small-cap U.S. growth stocks.

• 2020 performance: 44.4 percent
• Historical performance (annual over 5 years): 16.7 percent
• Expense ratio: 0.06 percent

First Trust Small Cap Growth AlphaDEX Fund (FYC)

This ETF tracks the NASDAQ AlphaDEX Small Cap Growth Index, which includes stocks from the Nasdaq U.S. 700 Small Cap Growth Index.

• 2020 performance: 33.0 percent
• Historical performance (annual over 5 years): 16.7 percent
• Expense ratio: 0.71 percent

Invesco S&P SmallCap Value with Momentum ETF (XSVM)

This ETF tracks the S&P 600 High Momentum Value Index, which is composed of 120 stocks with the highest scores on momentum and value factors.

• 2020 performance: 4.8 percent
• Historical performance (annual over 5 years): 16.3 percent
• Expense ratio: 0.39 percent

Invesco S&P SmallCap Momentum ETF (XSMO)

This ETF is based on the S&P SmallCap 600 Momentum Index, which includes 120 stocks in the S&P SmallCap 600 Index having the highest “momentum scores.”

• 2020 performance: 22.5 percent
• Historical performance (annual over 5 years): 16.0 percent
• Expense ratio: 0.39 percent

Vanguard Russell 2000 Growth ETF (VTWG)

This ETF tracks the return of the Russell 2000 Growth Index, an index composed of growth stocks of small U.S. companies.

• 2020 performance: 34.5 percent
• Historical performance (annual over 5 years): 16.0 percent
• Expense ratio: 0.15 percent

Invesco S&P SmallCap 600 Revenue ETF (RWJ)

This ETF is based on the S&P SmallCap 600 Revenue-Weighted Index, which re-weights stocks of the S&P SmallCap 600 Index by a company’s revenue.

• 2020 performance: 19.0 percent
• Historical performance (annual over 5 years): 16.1 percent
• Expense ratio: 0.39 percent

iShares Russell 2000 Growth ETF (IWO)

This ETF tracks an index of small-cap U.S. growth stocks.

• 2020 performance: 35.3 percent
• Historical performance (annual over 5 years): 16.0 percent
• Expense ratio: 0.24 percent

Pros and cons of investing in small-cap ETFs

Investing in small-cap ETFs offers a lot of advantages, but it’s not without some drawbacks as well. Here are the most significant pros and cons of investing in small-cap ETFs:

Pros of small-cap ETFs

• High-growth potential: Small-cap ETFs give you access to the potential for high growth that generally comes with these types of companies.
• Diversified exposure: An ETF lets you buy a diversified portfolio of small caps, reducing your risk versus owning just a few stocks.
• Low cost: Many ETFs charge low expense ratios for these benefits.
• Less work: Unlike investing in individual stocks, where you’ll need to do a lot of work to analyze your stock, buying an ETF allows you to get in without the same work.
• Easy to plug into a portfolio: Need some small-cap exposure in your portfolio? Just add a small-cap ETF and you have instant exposure.

Cons of small-cap ETFs

• High performers grow out of the sector: The best small caps expand so fast that they grow out of their small-cap label, meaning funds often must sell them as the companies become more successful.
• Narrow diversification: Because small-cap ETFs are focused on just one sector, they won’t protect against risks to small caps as a whole. So if investors shift away from small caps to large caps, for example, this kind of ETF won’t offset that risk.
• Higher volatility: Small caps are riskier than large caps, so even a diversified investment such as a small-cap ETF can be more volatile, too.

Bottom line

Small-cap ETFs are an attractive way to invest in some of the market’s fastest-growing companies at low cost without the same risks of buying individual stocks. But like all investments in the stock market, they aren’t without risk and other drawbacks.

Learn more:

• How to start investing
• Best online brokers for beginners
• Best mutual funds

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.