Behold: The Part of the Market That Can Grow Faster


Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add non-large-cap companies to your portfolio because of their superior growth potential, the Vanguard Extended Market Index ETF 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 0.14 %. (Vanguard is known for low fees.) The ETF focuses on the part of the stock market that doesn't include the 500 big companies in the S&P 500 - in other words, smaller and mid-sized enterprises.

This ETF has performed well, 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.

With a low turnover rate of 14%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.

Why smaller companies?
It's common, and reasonable, to invest in lots of large-cap companies, as they've typically proved themselves enough to grow large, and tend to have some competitive strengths. But it's also smart to include smaller companies in your portfolio, since the best of them can grow rapidly, as they eventually become large-caps.

More than a handful of mid-sized and smaller companies had strong performances over the past year. Sirius XM Radio , for example, soared 57%, while many called it overvalued. (They've been saying that for a long time, and the stock's 10-year average annual return is 14%.) Some worry that streaming music competition will sink Sirius, but it has been growing its subscribership and monthly price. (A recent smart move that could boost its subscriber rolls is its temporary activation of dormant accounts.) My colleague Rick Munarriz thinks Sirius might want to buy rival Pandora . Sirius recently announced a special dividend and a boost in its share-buyback plans.

Circuitry maker Maxim Integrated Products , up 20%, is a technology stock with a sizable dividend yield, recently of 3.3%. It's also at a 52-week high. In its last quarter, the company posted revenue down 2% over year-earlier levels, and a backlog of $400 million of business. Net income was also down a mite.

Other companies didn't do as well last year but could see their fortunes change in the coming years. Las Vegas Sands , for example, gained just 7%. It recently announced a big special dividend and has been challenged by slowing growth in China (it's a major operator in gambling haven Macao) and now also by China's crackdown on gambling junkets. Some wonder whether the company is erring by not getting involved in online gambling.

Finally, VMWare , down 4%, sports a hefty valuation, with a P/E ratio of 55 and a forward P/E ratio of 30. It's majority owned by storage giant EMC , and the two recently announced plans to combine their cloud-computing application and "Big Data" offerings. VMWare, unlike some rivals, is focusing more on "private" cloud services, which are of interest to corporations, for example. Some analysts are bullish on the company's prospects, though EMC might be the better bargain right now.

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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Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Maxim Integrated Products. The Motley Fool owns shares of EMC and VMware. Motley Fool newsletter services recommend VMware. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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