Make Money in Growing Small Caps the Easy Way

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect small companies to do well over time because many of them have so much potential and room to grow, the Charles Schwab U.S. Small-Cap ETF (NYS: SCHA) 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 Schwab ETF's expense ratio -- its annual fee -- is an ultra-low 0.13%.

This ETF's performance can't really be evaluated yet, as it's very young, with less than two years on the books. The long-term historical track record for small companies is promising, though, with the commonly used CRSP 6-10 Index averaging 11.2% annually since 1926, vs. 9.4% for the S&P 500. 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 11%, 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 in 2011. Ulta Salon (NAS: ULTA) , for instance, has more than doubled this year, seeing its revenue and earnings rise strongly on new products, new stores, and various promotions. If its plan to start selling grooming products for men works out, that could be a major new revenue stream. Deckers Outdoor (NAS: DECK) gained 24%, but some investors are nervously watching to see if its popular UGG boots turn out to be a fad. Still, it has been successfully expanding in Europe and by selling through its own stores as well as elsewhere.

Online software concern SuccessFactors (NAS: SFSF) surged 37% this year, rising more than 50% in a single day recently -- but that was due to news that it would be acquired by SAP (NYS: SAP) .

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. VeriFone (NYS: PAY) is up 8%, and is expecting to immediately boost its profit margins and growth rates via its acquisition of the Sweden-based company Point. It's also developing payment terminals for wireless handsets with Identive Group (NAS: INVE) .

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 these "10 Stocks for Your Retirement Portfolio."

At the time thisarticle was published

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