Make Money in Rapidly Growing Small Caps the Easy Way

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like some exposure to small-cap companies because of their great potential and ability to grow briskly, the SPDR S&P 600 Small Cap ETF (NYS: SLY) 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 SPDR ETF's expense ratio -- its annual fee -- is a very low 0.20%. It's 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 has performed rather 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?
Lots of small-cap companies had strong performances over the past year. Questcor Pharmaceuticals (NAS: QCOR) , for example, gained 159%, enjoying strong sales of its multiple sclerosis treatment Acthar. The drug is also effective against kidney disease, so Questcor is pursuing that market as well. ViroPharma (NAS: VPHM) , up 87%, has investors hopeful about continued growth of its Cinryze drug to combat hereditary angioedema. ViroPharma is aiming to make it easier to take by licensing technology from Halozyme Therapeutics (NAS: HALO) that would permit the drug to be dispersed via a subcutaneous shot. The treatment is still in development, though, so the jury is out on its ultimate potential.

Other companies didn't do quite as well last year, but they could have better returns in the years to come. Energy equipment supplier Lufkin Industries (NAS: LUFK) , for instance, advanced 23%, derailed a bit when it lowered its near-term earnings expectations due to materials shortages, shipment delays, and the overall lackluster economy.

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 5 ETFs That Could Soar in 2012. And if you're looking for some great investments beyond ETFs, consider these12 Dividend Stocks for 2012.

At the time thisarticle was published Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter @SelenaMaranjian, holds no position in any company mentioned. Click here to see her holdings and a short bio. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.