Small, Dynamic Companies, Huge Yields


Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some small-company stocks to your portfolio, and favor seemingly undervalued ones, the iShares Russell 2000 Value 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 iShares ETF's expense ratio -- its annual fee -- is a relatively low 0.37 %.

This ETF has performed rather well, beating the S&P 500 large-cap index 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 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.

More than a handful of smallish companies had strong performances over the past year. Louisiana-Pacific , for example soared 139% over the past year. The home construction and remodeling supplier is near a 52-week high, enjoying a rebound in lumber demand, which is expected to continue as new housing starts are rising. The company is boosting its output in response. In its last quarter, revenue surged 33% .

Invesco Mortgage Capital jumped 67%, and sports a whopping dividend yield of 13.2%. It's an mREIT, a mortgage-focused real estate investment trust, required to pay out the lion's share of its earnings as dividends. The company's diversified portfolio includes both government-agency-backed and non-agency mortgages, and it enjoys some prepayment protection, as well. (The prepayment of mortgages by borrowers, such as via refinancing, can limit profitability for mREITs.) Still, there are multiple risks facing mREITs, such as narrowing interest rate spreads.

The fourth-largest bank in Pennsylvania, Susquehanna Bancshares , rose 32%%. It has been snapping up other banks over the years (nine since 2002), with two major acquisitions in the past year: Abington Bancorp and Tower Bancorp. The company has projected tens of millions of dollars in expected cost savings from these purchases. Its provisions for loan and lease losses have been falling , too, and its business is growing organically, as well.

Prospect Capital , up 29%, is a private-equity business development company ("BDC"), specializing in energy companies, and recently yielding a huge 12%. It has posted average annual revenue and earnings growth over the past three years of more than 60%. Insiders have been buying shares, and they plan to issue more shares, which my colleague Tim Beyers has voted to let them do.

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, has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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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