Behold -- a Basket of Undervalued Small-Cap Stocks

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you want some undervalued small-caps in your portfolio because of their great potential to grow, the Vanguard Small Cap Value ETF (NYS: VBR) 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 Vanguard ETF's expense ratio -- its annual fee -- is a very low 0.21%. (Vanguard is known for its low fees.)

This ETF has performed reasonably well, outperforming its benchmark over the past three years, and roughly matching it over the past five. 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 30%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.

What's in it?
Plenty of small-cap companies had strong performances over the past year. Consider RPM International (NYS: RPM) , for example, up 24%. Not many know of it, but it specializes in chemicals in the form of paints, sealants, adhesives, foams, membranes, glazes, protective coatings, roofing systems, and more. It has averaged gains of about 10% annually over the past 10 years, too, and stands to benefit when the housing market eventually recovers.

Private equity and venture capital specialist American Capital (NAS: ACAS) , up 7%, has been selling off some businesses, buying back shares, and paying down debt. Some worry about insiders selling a lot of shares but, while that's not bullish, it's not necessarily a red flag, because they may just be raising cash for personal purposes. Bulls anticipate the company reinstating a solid dividend in the near future, but those are eggs that haven't yet hatched.

Other companies didn't do as well last year, but could see their fortunes change in the coming years. E*TRADE Financial (NYS: ETFC) , down 42%, has been improving its loan portfolio and topping analyst expectations recently, and appears to be turning itself around. It has also been adding new customer accounts, and beefing up its customer assets.

First Niagara Financial (NAS: FNFG) , down 38%, has recently touched 52-week-low levels, but that only makes it more attractive to some investors. Well capitalized and sporting a recent 4% dividend yield, the regional bank is busy expanding in the Northeast, and fueling that with new share issuances and a dividend reduction. (The 4% yield is after the reduction.) This positions it for future growth, based on its bigger branch base.

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.

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