These Small-Caps Have Been on Fire (in a Good 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, the iShares Core S&P SmallCap Index ETF (NYS: IJR) 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 iShares ETF's expense ratio -- its annual fee -- is a very low 0.16%.

This ETF has performed rather well, handily beating the S&P 500 over the past three, five, and 10 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.

Why small caps?
It's good to hold some small-cap companies in your portfolio because of their great growth potential. Some of them will become mid-caps, and then large-caps, in short order, while some others will wither. Thus, buying a bundle of them can reduce your risk.

Plenty of small-cap companies had strong performances over the past year. The 3-D printing specialist 3D Systems (NYS: DDD) surged 181%, for example, reporting "a corporate home run" in its third quarter. A recent secondary offering has left it with much more cash than rival Stratasys (NAS: SSYS) , while the industry consolidates. Despite these companies' rapid growth, some worry about cutbacks in military or industrial spending, though there's also a promising consumer market.

Semiconductor chip designer Cirrus Logic (NAS: CRUS) has more than doubled in value, largely due to its strong ties to Apple. Its chips are in almost every iProduct, but it's also rather dependent on Apple for a big chunk of its revenue, with some concerned about margin shrinkage. Still, the company posted solid third-quarter results recently, and issued strong projections, too.

Organic and natural food products company Hain Celestial (NAS: HAIN) surged 78% over the past year, thwarting naysayers worried about rising food costs. It has also announced the acquisition of Britain's Premier Foods, a maker of sweet spreads and jellies. It may sell Sleepytime tea, but it has been posting double-digit revenue and earnings growth recently, too, reflecting growing interest in healthier packaged foods.

Turf maintenance equipment maker Toro (NYS: TTC) gained 60%, and has also been posting double-digit revenue and earnings gains, lately. It's poised to benefit from a housing recovery, and in its last quarter, a drop in residential offerings was partly offset by growth in its landscaping and golf course units. It offers a modest 1% dividend yield, but it has been upping that payout by an annual average of 12% over the past five years, with much more room to grow.

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.

To learn more about a few ETFs that have great promise for delivering profits to shareholders in a recovering global economy, check out the Motley Fool's special free report, 3 ETFs Set to Soar During the Recovery. Just click here to access it now.

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Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Stratasys. The Motley Fool owns shares of Cirrus Logic, 3D Systems, and Hain Celestial and has the following options: short NOV 2012 $35.00 calls on 3D Systems. Motley Fool newsletter services recommend 3D Systems, Hain Celestial, and Stratasys. 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.

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