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'd like to invest in a range of small-cap companies because of their great growth potential, the Vanguard Small Cap ETF (NYS: VB) 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 small-cap ETF's expense ratio -- its annual fee -- is a very low 0.17%.

This ETF has performed reasonably well, but it's also very young, with just a few years on the books. It outperformed the S&P 500, on average, over the past three and five years. 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.

What's in it?
Plenty of small-cap companies had strong performances over the past year. BioMarin Pharmaceutical (NAS: BMRN) , for example, surged 45%. It sports a handful of approved medications and has several promising drugs in its pipeline, but it has been posting quarterly losses lately. It has more than doubled its manufacturing capacity recently, and it has also acquired other rare-disease specialists.

Westar Energy (NYS: WR) , up 13%, has been posting strong revenue, earnings, and margin growth recently, and it offers a tasty 4.7% dividend. Fellow energy company ITC Holdings (NYS: ITC) advanced 12%, also posting solid growth. Bulls are excited about its purchase of Entergy's transmission business and the billions it's spending on updating its infrastructure and investing in development projects.

Other companies didn't do as well last year, but they could see their fortunes change in years to come. Senior Housing Properties Trust (NYS: SNH) , for instance, only gained 1%. A real estate investment trust recently yielding 7%, it stands to gain from the inevitable growth of the senior population as Baby Boomers get older.

The big picture
Small-cap stocks can add diversity and some great growth potential to your portfolio. 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 about the "5 ETFs That Could Soar in 2012." And if you're looking for some great investments beyond ETFs, consider these "12 Dividend Stocks for 2012."

At the time this article was published LongtimeFool contributorSelena Maranjian,whom you canfollow on Twitter here, holds no position in any company mentioned.Click hereto see her holdings and a short bio.Motley Fool newsletter serviceshave recommended buying shares of ITC Holdings and BioMarin Pharmaceutical. 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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