As the Federal Reserve has prepared to cut rates, some investors have shifted their focus toward small-cap stocks — small companies, such as those of the Russell 2000 index, that often depend on borrowed money to stay afloat.
If you’re looking to add smaller companies to your investment portfolio, small-cap ETFs make it easy to invest in lots of small-cap companies at once.
What is a small-cap ETF?
A small-cap ETF is a type of exchange-traded fund that invests in companies whose value is less than $2 billion. And while $2 billion may sound like a lot, these companies are relatively tiny compared with mid-cap, or even large-cap companies, which start at $10 billion. So if you invest in a small-cap ETF, you’re essentially investing in a collection of small companies in a single investment.
Best-performing small-cap ETFs
The ETFs below are small-cap growth ETFs. These funds invest in companies that are predicted to increase in price faster than other small-cap stocks.
Ticker
Company
Performance (Year)
SMIN
iShares MSCI India Small-Cap ETF
32.68%
MMSC
First Trust Multi-Manager Small Cap Opportunities ETF
One reason small-cap ETFs may be attractive to investors is that they provide further diversification to a portfolio that has exposure to large or medium-sized companies. Some investors believe in what’s called the “small-cap effect,” a theory that smaller companies have more room to grow than larger companies — and thus have more potential for a bigger return.
Because smaller companies don’t have as much financial wiggle room, they are often riskier than larger companies. But when those single stocks are rolled into an ETF, it can smooth out the overall risk. For example, if one company goes out of business, the other companies in that ETF may help buoy your portfolio.
While it’s impossible to know if investing in smaller companies will definitively lead to a more significant profit, diversifying the companies in your portfolio, even if they are smaller, can help you safeguard against risk.
Because Vanguard is a leader in low-cost ETF investing and the CRSP U.S. Small-Cap Value Index is the premier small-cap value index in the industry, you are likely to see VBR on any list of the best small-cap ETFs to own.
Because Vanguard is a leader in low-cost ETF investing and the CRSP U.S. Small-Cap Value Index is the premier small-cap value index in the industry, you are likely to see VBR on any list of the best small-cap ETFs to own.
, as offering the “most compelling near-term investment case.” Lee reckons small caps can gain 50% in 2024, and given the category is up only 6% so far, there is plenty to go. “The astonishingly low June CPI, in our view, is giving the 'green light' for small caps to continue to rally,” he says.
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