Profit From 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 add a bunch of small-cap companies to your portfolio because of their great growth potential, the Guggenheim Russell 2000 Equal Weight ETF (NYS: EWRS) 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 Guggenheim ETF's expense ratio -- its annual fee -- is a relatively low 0.44%. (The fund is fairly small, too, so if you're thinking of buying, beware of occasionally large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.)

This ETF doesn't have much of a performance to assess, as it's only a year or two old. It underperformed the S&P 500 in 2011 and is slightly ahead of it so far this year. 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 38%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.

What's in it?
Lots of small-cap companies had strong performances over the past year. Cal-MaineFoods (NAS: CALM) , with its soothing ticker symbol, advanced 58%, as did Cincinnati Bell (NYS: CBB) . Cal-Maine is very focused -- on eggs. That's not the fastest-growing industry, but Cal-Maine owns 18% of it and can grow via consolidation. It's also addressing growing demand for organic and cage-free eggs. Regional telecom Cincinnati Bell is unusual among its peers because instead of paying out excess earnings in dividends, it's reinvesting to fuel further growth. That's common, though, for small companies. Bears worry about its steep debt load.

Star Scientific (NAS: CIGX) jumped 33%, on enthusiasm over its products such as dietary supplements and smokeless tobacco offerings. Bears worry about competitive and legal threats from the likes of Altria and Reynolds American and point to years of net losses.

Other companies didn't do as well last year but could see their fortunes change in years to come. Alliance One International (NYS: AOI) , in the tobacco-leaf business, gained just 1%. It turned the corner into profitability in 2011 and has been struggling with an oversupply of tobacco in the market. With smoking waning a bit in the U.S., the company's international focus can help it.

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 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 Longtime Fool contributor Selena Maranjian,whom you canfollow on Twitter, holds no position in any company mentioned.Click hereto see her holdings and a short bio. 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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