Small Companies, Big Gains


Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some small caps to your portfolio, the Charles Schwab U.S. Small-Cap ETF (NYS: SCHA) 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 Schwab ETF's expense ratio -- its annual fee -- is a very low 0.10 %.

This ETF has performed reasonably, topping the S&P 500 over the past three years, though it hasn't been around much longer than that. 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 12 %, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.

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

Plenty of small companies had strong performances over the past year. Natural-gas specialist Cheniere Energy (NYS: LNG) , for example, soared 104% and some think it might initiate a dividend. Its bulls are excited about its plans to build a liquid natural gas (LNG) export terminal to ship gas procured relatively inexpensively here to regions where it fetches a much higher price. They also like the stability that the company's planned long-term contracts should offer. Bears worry about competition abroad that might threaten Cheniere's business. There's a lot to like about the company, though.

ARIAD Pharmaceuticals (NAS: ARIA) bulls are rejoicing about its leukemia drug ponatinib getting FDA approval, though they don't all love its new name, Iclusig. But its bone-tumor drug ridaforolimus was rejected in Europe. All isn't lost for that formula, though, as it might still prove effective against other cancers. The company's recent quarterly results were mixed, with cash burn a concern as losses increase. The company has been spending heavily on research and development, and it needs some more success from its pipeline. In the meantime, ponatinib's approval will pave the way for revenue to help with cash burn.

Two Harbors Investment (NYS: TWO) , a mortgage REIT (real estate investment trust), gained 40%. The company has begun renting out some of its delinquent properties, and its recent spinoffSilver Bay Realty Trust (NYS: SBY) sports one of the lowest reductions, going from $0.40 to $0.36 recently. Two Harbors yields a whopping 12.6%, but know that mortgage REITs have some special considerations.

Duke Realty (NYS: DRE) , another REIT, advanced 22%, and recently yielded 5.2%. Its diverse portfolio includes the U.S. government as a major tenant, its occupancy level has been inching up, and the company has been paying down some debt. Revenue is down, though, and net income has recently been in the red .

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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