Make Money in Growing Small-Cap Stocks -- the Easy Way

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you're attracted to small-cap stocks because of their great growth potential, the RevenueShares Small Cap ETF (NYS: RWJ) 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. It invests in the same 600 stocks as the S&P SmallCap 600 index, but it ranks and weights them by revenue, not market capitalization.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The RevenueShares ETF's expense ratio -- its annual fee -- is a relatively low 0.54%. (The fund is 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 reasonably well, beating the S&P 500, on average, over the past three years. But it's also very young, with just a few years on the books. It underperformed the S&P 500 in 2008 and 2010, though it beat it substantially in 2007 and 2009. 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. Outdoor recreation gear retailer Cabela's (NYS: CAB) gained 55%, for example, recently posting solid earnings and announcing plans to expand its sales square footage by double digits over the coming year, while targeting smaller markets. Strong gun sales have helped boost its margins, as well.

Molina Healthcare (NYS: MOH) , focusing on delivering health-care services to low-income people, gained 28%. Some are worrying now, though, that if President Obama's health-care reform that plans to expand Medicaid by 2014 is called off or reduced, companies such as Molina will suffer, as they're likely to take in less money from the government.

Other companies didn't do as well last year but could see their fortunes change in the coming years. Momenta Pharmaceuticals (NAS: MNTA) gained just 6% and is involved not only in developing new drug treatments but also in producing generic versions of existing drugs. Debt-free, growing briskly, and operating in the black, some speculate that it might make a good takeover target.

AK Steel (NYS: AKS) , meanwhile, is down 52%, recently warning that it expects to lose money in the near term. The eventual global economic recovery bodes well for the steel industry, as it should boost manufacturing and infrastructure spending, but that's not in full swing yet. Some worry that AK Steel's dividend may get cut soon, too.

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 contributorSelena Maranjian, whom you canfollow on Twitter, holds no position in any company mentioned. Check out herholdings and a short bio. The Motley Fool owns shares of Momenta Pharmaceuticals.Motley Fool newsletter serviceshave recommended buying shares of Cabela's and Momenta Pharmaceuticals. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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