Over the last 29 years, U.S. exchange-traded fund (ETF) assets have grown to over $7.2 trillion across more than 7,600 funds. They’ve become the product of choice for individual and institutional investors alike.
However, of those several trillion dollars, only a small fraction – roughly 4% – gets put into small-cap ETFs, according to the Investment Company Institute (ICI), an association representing regulated funds globally, signaling there’s plenty of room for growth.
Small-cap stocks, like the broader global market, started poorly in 2022, with the Russell 2000 Index down 13.5% for the year-to-date. In addition to geopolitical concerns, investors are also worried that the Federal Reserve’s rate-hiking cycle will slow the U.S. economy and put a dent in their future earnings.
But this short-term setback takes away from small caps longer-term outperformance. Over the past 10 years, smaller capitalization stocks were the second-best performing asset, up 14.4% annually, trailing only large caps. This is a good sign for small-cap funds.
That said, here are 10 small-cap ETFs that should be on your radar. If you want to build a well-constructed portfolio, it would be wise to consider a fund that invests in U.S. small-cap stocks, as well as one that holds foreign small caps.
Data is as of March 14. Dividend yields represent the trailing 12-month yield, which is a standard measure for equity funds.
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Vanguard Small-Cap ValueGetty Images
Type: Domestic small-cap value Assets under management: $26.0 billionDividend yield: 1.8%Expenses: 0.07%, or $7 annually for every $10,000 investedThe Vanguard Small-Cap Value (VBR, $168.42) is the largest of the small-cap ETFs featured here by total net assets. It also has reasonable management fees, charging $7 per year for every $10,000 invested in VBR.
The ETF tracks the performance of the CRSP US Small Cap Value Index, a collection of U.S. small-cap stocks exhibiting value tendencies based on various financial metrics, including the price-to-book (P/B), forward price-to-earnings(P/E), historic price-to-earnings, dividend-to-price and price-to-sales (P/S) ratios.
The Vanguard Small-Cap Value aims to replicate its underlying benchmark by investing in all or nearly all of the stocks that make up the CRSP US Small Cap Value Index. And each asset is given the same weighting as it is in the underlying index.
VBR currently has 997 holdings compared to 940 for the index. The median market cap is $6.1 billion. The fund’s $26 billion in total net assets are entirely invested in U.S. companies.
The average stock in the ETF has a P/E of 12.4x, a P/B of 1.9x and an average five-year earnings growth rate of 12.3% annually. The top three sectors by weight are financials (22.8%), industrials (19.7%) and consumer discretionary (14.5%).
The ETF’s top 10 holdings account for just 6% of the portfolio. The three largest positions are oil stock Diamondback Energy (FANG) at 0.8%, regional financial firm Signature Bank (SBNY) at 0.6% and real estate investment trust (REIT) VICI Properties (VICI) at 0.6%. VBR’s turnover rate is 26%, which means it turns the entire portfolio once every 3.8 years.
Since its inception in January 2004, VBR has had an annual total return of 9.3% through Feb 28.
Learn more about VBR at the Vanguard provider site.
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SPDR S&P 600 Small Cap Growth ETFGetty Images
Type: Domestic small-cap growthAssets under management: $2.1 billionDividend yield: 0.8%Expenses: 0.15%The SPDR S&P 600 Small Cap Growth ETF (SLYG, $80.05), as its name suggests, tracks the performance of the S&P 600 SmallCap 600 Growth Index, a collection of small-cap stocks that exhibit above-average growth tendencies such as improving revenues, price-to-earnings changes and momentum.
There are a few requirements a company must meet to be included in the index, including having a public float of 10% or more and four straight quarters of positive earnings. The benchmark is weighted by market cap and rebalanced annually in December.
Like many small-cap ETFs – and exchange-traded funds, in general – SLYG uses a sampling strategy to mimic the index’s performance. Therefore, not every stock in the index is necessarily held by the fund.
However, the SPDR S&P 600 Small Cap Growth ETF currently has 332 holdings invested in its $2.1 billion in total net assets – the same as its underlying benchmark. The average market cap of the fund’s holdings is $2.9 billion, while the earnings for the group are expected to rise 16.6% over the next three to five years.
The ETF’s three largest sectors by weight are technology (18.7%), financials (16.9%) and industrials (15.4%). While it’s labeled a small-cap growth fund, in reality, it’s more of a blend with 55% of its portfolio considered both growth and value.
SLYG’s top 10 holdings account for 11% of its total net assets, with an annual turnover of 38%. The three largest holdings by weight are healthcare management solutions firm Omnicell (OMCL), lumber producer UFP Industries (UFPI) and electronics firm Rogers (ROG) – each accounting for about 1.1% of the fund’s portfolio.
If you are into cannabis stocks, one of the fund’s top 10 holdings is Innovative Industrial Properties (IIPR), a real estate investment trust that owns and manages specialized industrial properties leased by state-licensed medical cannabis growers. Over the past five years, IIPR has turned in an annualized total return of 65.8%, more than three times higher than the entire U.S. market.
Learn more about SLYG at the SPDR provider site.
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Schwab U.S. Small-Cap ETFGetty Images
Type: Domestic small-cap blendAssets under management: $15.2 billionDividend yield: 1.3%Expenses: 0.04%The Schwab U.S. Small-Cap ETF (SCHA, $44.51) tracks the performance of the Dow Jones U.S. Small-Cap Total Stock Market Index. The index comprises the stocks ranked between 751 to 2,500 by market cap in the Dow Jones U.S. Total Stock Market Index. It is a float-adjusted market cap-weighted index that typically invests in stocks with a market value of roughly $37 million to $22 billion.
The index is rebalanced four times a year in March, June, September and December. It was launched in February 2005, while SCHA got its start in November 2009. The fund currently has 1,794 stocks with an average weighted market cap of $4.9 billion and a price-to-cash flow ratio of 12.2x.
The largest three sectors by weight are industrials (16.7%), financials (16.2%) and technology (15.2%). The fund’s top 10 holdings account for just 3% of its $15.2 billion in total net assets, and include aluminum giant Alcoa (AA) and construction services firm Builders FirstSource (BLDR). The Schwab U.S. Small-Cap ETF has an annual turnover rate of 17%.
SCHA’s weighting by market cap suggests that it is just as much about mid-cap stocks as it is small caps. Approximately 67% of the ETF’s assets are invested in companies with market caps between $3 billion and $15 billion. Stocks valued between $1 billion and $3 billion account for another 26% of the portfolio.
Over the past decade, the Schwab U.S. Small-Cap ETF has delivered an annual total return of 11.6%, outpacing similar small-cap funds.
Learn more about SCHA at the Schwab provider site.
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iShares MSCI United Kingdom Small-Cap ETFType: Miscellaneous regionAssets under management: $79.2 millionDividend yield: 4.0% Expenses: 0.59% The iShares MSCI United Kingdom Small-Cap ETF (EWUS, $37.67) is the first of two country funds featured on this list of small-cap ETFs. EWUS provides investors with exposure to smaller U.K. companies by tracking the performance of the MSCI United Kingdom Small Cap Index.
The index accounts for approximately 14% of the free float-adjusted market cap in the U.K. and looks to include stocks with positive momentum, dividends and solid balance sheets. The average market cap of the fund’s 282 holdings is $2.8 billion. The average P/S and P/E are 1.1x and 13.7x, respectively.
The top three sectors that make up the EWUS portfolio are industrials (21.58%), consumer discretionary (16.71%) and financials (15.33%). The largest 10 holdings account for 13% of the total lineup. Many of the names on the list aren’t household names in the U.S., but are reasonably well known in the U.K. Among them are specialty equipment maker Weir Group (WEGRY) and communication services stock Rightmove (RTMVY).
Like a lot of small-cap funds, EWUS is a combination of mid-cap stocks (55%), small caps (41%) and large caps (1%). The ETF has a relatively low turnover for small caps of 15%.
Since its inception in January 2012, the fund has had an annual total return of 7.7% through Feb. 28.
Learn more about EWUS at the iShares provider site.
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iShares MSCI Brazil Small-Cap ETFType: Latin America Assets under management: $106.1 millionDividend yield: 4.3%Expenses: 0.57%The iShares MSCI Brazil Small-Cap ETF (EWZS, $13.88) tracks the performance of the MSCI Brazil Small Cap Index. It is a free float-adjusted market cap-weighted index intended to follow the performance of small caps listed on Brazil’s stock exchanges.
While the fund will invest at least 80% of its assets in a sampling of the index’s constituents, it can also invest up to 20% of its $106.1 million in total net assets in futures, options and swap contracts.
The fund has been in existence since September 2010, and has experienced bouts of volatility over the past 11 years. In 2019, it had a total return of 50.7%, followed by declines in both 2020 (-20.0%) and 2021 (-15.8%). As such, the iShares MSCI Brazil Small-Cap ETF would work well in a dollar-cost averaging plan.
The fund’s top three sectors are consumer discretionary (18.1%), utilities (17.2%) and industrials (16.3%). The largest 10 holdings account for 27% of the portfolio, with an average market cap of $1.5 billion. EWUS currently has 101 holdings with average P/E and P/B ratios of 4.2x and 1.0x, respectively.
If you’re looking for full coverage of the Brazilian markets, you might also consider the iShares MSCI Brazil ETF (EWZ), which provides investors with exposure to mid-cap and large-cap stocks in the South American country.
Learn more about EWZS at the iShares provider site.
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SPDR S&P International Small Cap ETFGetty Images
Type: Foreign small/mid blendAssets under management: $764.8 millionDividend yield: 3.0%Expenses: 0.40%The SPDR S&P International Small Cap ETF (GWX, $35.08) invests in the stocks of smaller companies located in developed markets outside the U.S. It tracks the performance of the S&P Developed Ex-U.S. Under USD2 Billion Index.
While the name is a mouthful, it simply means that to be included in the index, a stock must have a market cap between $100 million and $2 billion and be located in one of the developed countries in the S&P Developed Broad Market Index (BMI). The index is a free float-adjusted market cap-weighted index and rebalanced quarterly.
GWX comprises 2,443 holdings, which are a sampling of the 3,877 stocks held by the index. The average weighted market cap of the ETF’s holdings is $1.0 billion. As for the financial metrics of the stocks making up the fund, the estimated earnings growth over the next three to five years is 15%, while the P/B and P/E ratios are 1.1x and 9.1x, respectively – lower than the category average.
The top 10 holdings account for just 2% of the ETF’s $764.8 million in total net assets, so no one stock is likely to have a major effect on returns. GWX has a relatively low turnover of 16% in the last 12 months. The largest sector exposures are industrials (19.3%), technology (12.9%) and consumer discretionary (12.3%).
In terms of country representation, Japan is tops at 33.7%, South Korea is the second at 13.2% and Canada is at 9.8%. Despite excluding the U.S., it does have a small weighting of 1.5%.
The ETF got its start in April 2007, and its total annual return from inception through Feb. 28, 2022, is 3.5%.
GWX is not only one of the best small-cap ETFs, but it is also one of the top SPDR funds for buy-and-hold investors.
Learn more about GWX at the iShares provider site.
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iShares MSCI Emerging Markets Small-Cap ETFType: Foreign diversified emerging marketsAssets under management: $358.9 millionDividend yield: 3.8%Expenses: 0.68%The iShares MSCI Emerging Markets Small-Cap ETF (EEMS, $53.25) provides investors with exposure to smaller public companies in emerging markets by tracking the performance of the MSCI Emerging Markets Small Cap Index.
The benchmark includes small-cap companies from 25 emerging markets, and covers roughly 14% of each country’s total free float-adjusted market cap. The largest company in the index has a market cap of $4.5 billion. The smallest is $46.8 million, while the average is $592.2 million.
Since the ETF’s inception in August 2011, it has had an annual total return of 3.9% through Feb. 28. More recently, EEMS has had some standout calendar-year returns, including a 34% jump in 2017 and 18%+ gains in 2020 and 2021.
EEMS currently has 1,370 holdings invested in its $358.9 million in total net assets. Its top 10 holdings account for 3% of its portfolio, and the annual turnover is 34%.
And it isn’t a pure play as far as small-cap funds go. Small-cap stocks account for 25% of the EEMS portfolio, while mid-caps make up 66%, and large caps the rest.
The ETF’s top three sectors by weight are technology (18.3%), industrials (15.5%) and materials (13.2%). The iShares MSCI Emerging Markets Small-Cap ETF’s two biggest holdings are industrial firm Voltas and software services firm Tata Elxsi – both from India.
Learn more about EEMS at the iShares provider site.
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WisdomTree Emerging Markets SmallCap Dividend FundGetty Images
Type: Foreign diversified emerging marketsAssets under management: $2.4 billionDividend yield: 4.1%Expenses: 0.58%The WisdomTree Emerging Markets SmallCap Dividend Fund (DGS, $50.06) is the last of the international small-cap funds featured here. DGS tracks the performance of the WisdomTree Emerging Markets SmallCap Dividend Index and aims to provide investors with exposure to dividend-paying small-cap stocks.
The index includes companies that are in the bottom 10% of the total market cap of the WisdomTree Emerging Markets Dividend Index. The companies included in the index are weighted based on the annual cash dividends they pay. And exposure to any one country or sector should not exceed 25% of the portfolio.
DGS has a total of 1,021 holdings. The top three countries by weight are Taiwan (27.81%), China (12.45%) and South Korea (10.90%). The top three sectors are technology (18.19%), financials (14.97%) and industrials (13.77%).
The portfolio’s top 10 holdings account for just 9% of its total net assets, with its largest position – Brazilian utility firm Transmissora Alianca de Energia Eletrica – making up 1.6% of the portfolio. DGS has a high turnover rate of 59% over the last 12 months.
Small-cap stocks make up roughly 30% of the fund’s portfolio, and the average market cap is $1.4 billion. Meanwhile, the fund boasts below-category P/E and P/S ratios of 7.8x and 0.6x, respectively. The WisdomTree Emerging Markets SmallCap Dividend Fund also has an above-market dividend yield of 4.1%.
A $10,000 investment in DGS three years ago is worth $12,222 as of March 14.
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Horizon Kinetics Inflation Beneficiaries ETFGetty Images
Type: ThematicAssets under management: $855.0 millionDividend yield: 0.9%Expenses: 0.85%At 0.85%, the Horizon Kinetics Inflation Beneficiaries ETF (INFL, $31.66) is the most expensive of the small-cap ETFs on this list. However, in these inflationary times, investors ought to be willing to at least learn more about it.
The ETF is an actively managed fund that seeks long-term growth in real (inflation-adjusted terms). To do this, it looks to invest in global companies whose revenues are expected to benefit directly or indirectly from higher prices.
The fund is managed by Horizon Kinetics Asset Management, with President Steven Bregman, Managing Director Peter Doyle and Portfolio Manager James Davolos at the helm since INFL’s inception in December 2020.
These managers look for asset-light businesses that have strong pricing power but whose assets are underappreciated by investors. They are interested in businesses with high cash flow in moderate inflationary periods that will also benefit in times of rising inflation. These can include mining, energy and transportation firms.
INFL currently has 43 holdings with an average weighted market cap of $11.5 billion. Agriculture commodities firm Archer-Daniels-Midland (ADM) and oil and gas company Texas Pacific Land (TPL) are at the top of the list. The Horizon Kinetics Inflation Beneficiaries ETF also has a below-category average price-to-free cash flow ratio of 4.7x.
The fund’s top three sectors by weight are financial services (28.1%), materials (25.6%) and energy (22.4%). The top three countries by weight are the U.S. (48.9%), Canada (34.5%) and Australia (5.6%).
Learn more about INFL at the Horizon Kinetics provider site.
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Pacer US Small Cap Cash Cows 100 ETFGetty Images
Type: Small-cap valueAssets under management: $776.4 millionDividend yield: 2.7%Expenses: 0.59%The Pacer US Small Cap Cash Cows 100 ETF (CALF, $39.75) tracks the performance of the Pacer US Small Cap Cash Cows Index. It’s not only one of the best small-cap funds, but it’s one of the best ETFs for 2022 because it invests in 100 cash cows generating positive free cash flow, or the money left over after a company has paid its expenses, interest, taxes and long-term investments.
The ETF takes the 100 stocks from the S&P SmallCap 600 with the highest cash flow yields, which is defined as free cash flow divided by enterprise value. These stocks are then weighted based on their trailing 12-month free cash flow. The holdings are capped at a 2% weighting and rebalanced four times a year.
Why is this appealing to investors? Companies that generate high free cash flow are able to grow dividends over time while also producing better earnings.
The top three sectors by weight are consumer discretionary (40.5%), industrials (17.7%) and technology (10.1%). CALF’s largest three holdings by weight are shipping stock Matson (MATX) at 2.9%, oil and gas firm PDC Energy (PDCE) at 2.7%, and building materials company Boise Cascade (BCC) at 2.4%.
Since its inception in June 2017, CALF has had an annualized total return of 14.5% through Dec. 31. This compares to a 13.2% return for the S&P SmallCap 600 Index.
For those interested in owning more of Pacer’s Cash Cow series of ETFs, Pacer has the Pacer Cash Cow Fund of Funds ETF (HERD) that invests 20% in each of five Cash Cow ETFs, including CALF.
Learn more about CALF at the Pacer provider site.