Make Money in Growing Small Caps the Easy Way

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Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect small-cap companies to thrive over time, the Vanguard Small Cap Growth ETF (NYS: VBK) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The Vanguard ETF's expense ratio -- its annual fee -- is a very low 0.12%. (Vanguard offerings typically sport exceedingly low fees.)

This ETF has performed rather well, beating the S&P 500 over the past five years, on average. But as with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

With a low turnover rate of 34%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.

What's in it?
Several of this ETF's components made strong contributions to its performance over the past year. Level 3 Communications (NAS: LVLT) , for example, gained about 68% over the past year, partly on optimism over its deal to carry much of Netflix's (NAS: NFLX) traffic on its network. But the company has been losing lots of money and sports hefty debt, so some still worry.

Deckers Outdoor (NAS: DECK) , maker of Uggs boots and Teva sandals, doubled in value over the past year. It has been enjoying revenue growth, especially strong growth abroad, and has been opening its own stores, which deliver higher margins than sales through other retailers. While some view shoe sellers as faddish, remember that Nike is still delivering robust growth, with its stock averaging 16% annual growth over the past 20 years and 17% (higher!) over the past five years.

Other companies didn't add as much to the ETF's returns last year but could have an effect in the years to come. JDS Uniphase (NAS: JDSU) , for instance, shed 6% over the past year, but a strong recent earnings report from Cisco Systems (NAS: CSCO) bodes well for it and other optical-networking stocks.

The big picture
Great small caps tend to become great large caps, making many people rich along the way. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

Learn aboutthe best dividend ETFs. And if you're looking for some great investments beyond ETFs, consider these10 Stocks for Your Retirement Portfolio.

At the time this article was published Longtime Fool contributorSelena Maranjianowns shares of Netflix, but she holds no other position in any company mentioned. Check out hisholdings and a short bio. The Fool owns shares of and has created a bull call spread position on Cisco Systems.Motley Fool newsletter serviceshave recommended buying shares of Netflix, Cisco Systems, Nike, and Deckers Outdoor, as well as creating a diagonal call position in Nike and a bear put spread position in Netflix. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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