Make Money in Promising Small-Cap Stocks the Easy Way

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some small-cap stocks to your portfolio because their great room for growth, the Vanguard S&P Small-Cap 600 Index ETF (NYS: VIOO) 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 a lot 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 0.16%. (Vanguard is known for its low fees.) The fund is very 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 underperformed the S&P 500 over the past year, but it's also very young, with not much of a track record to assess. 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. Questcor Pharmaceuticals (NAS: QCOR) , which develops treatments for central nervous system disorders, surged 62%, for example. Unlike many biotech companies, it sports significant revenue and positive earnings, and both are growing at accelerating and rapid rates, thanks in large part to sales of its MS drug, Acthar. It did take a hit, though, when one research firm issued a bearish report.

Salix Pharmaceuticals (NAS: SLXP) , which focuses on gastrointestinal diseases, jumped 40%. The consensus among analysts is that Salix is a buy, but there have been some downgrades lately, perhaps due to the stock approaching an estimate of full value. Sales have been growing briskly, thanks to products on the market, not just in development.

Brunswick (NYS: BC) gained 18%, which is impressive in this economy for a company specializing in many discretionary big-ticket items such as powerboats, engines, and billiard tables, along with bowling products. One bit of good news for Brunswick is its Sea Ray division adding 20 new dealers recently.

Other companies didn't do as well last year, but could see their fortunes change in the coming years. CommVault Systems (NAS: CVLT) , a data management software specialist, sank 8%, despite posting strong growth in recent years. It has been targeting global growth via a presence in India, is collaborating with Microsoft on cloud storage solutions, and has earned a 94% customer satisfaction rating.

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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