Make Money in Profitable 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 companies to do well in coming years as the global economy recovers, partly because they have so much room for growth due to their size, the iShares S&P SmallCap 600 Index ETF (NYS: IJR) 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 iShares ETF's expense ratio -- its annual fee -- is a very low 0.20%.

This ETF has performed rather well, beating the S&P 500 over the past three, five, and 10 years, on average. 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 21%, 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. Regeneron Pharmaceuticals (NAS: REGN) , for example, gained 116%. The developer of a treatment for macular degeneration is seeing its future look brighter recently, as some of its rivals stumble. Questcor Pharmaceuticals (NAS: QCOR) surged 231%, as its primary drug, one that treats multiple sclerosis, has been doing well, despite competition from a little outfit called Pfizer (NYS: PFE) .

World Fuel Services (NYS: INT) , meanwhile, gained 46% as its profits exploded recently -- though its cash flow didn't grow as spectacularly. Cubist Pharmaceuticals (NAS: CBST) gained 55%, partly on the successful settlement of a dispute with TevaPharmaceutical (NAS: TEVA) that delays the debut of a generic version of a Cubist antibiotic.

Other companies didn't add quite as much to the ETF's returns last year, but could have an effect in the years to come. Piedmont Natural Gas, up just 13%, has been reporting solid operational results, but revenue slipped lately.

The big picture
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 Teva Pharmaceutical Industries, but she holds no other position in any company mentioned.Click hereto see her holdings and a short bio. The Motley Fool owns shares of Teva Pharmaceutical.Motley Fool newsletter serviceshave recommended buying shares of Piedmont Natural Gas, Teva Pharmaceutical, and Pfizer. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not 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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