7 Best Small-Cap ETFs for May 2024

The term “small cap,” short for “small-capitalization company,” refers to a company with a total market value of between $250 million and $2 billion. Market cap is calculated by multiplying the number of shares outstanding by the current market price. For example, if a stock trades at $100 per share and has 10 million shares outstanding, it has a market cap of $1 billion, making it a small cap.

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Small caps offer higher growth potential than larger companies because they are growing from a much smaller base. But they can also be much more volatile. Many are not profitable, and some are built around a single product, making them make-or-break stocks. They can also be hard to research, as they may not put out a lot of news releases and few analysts may provide research coverage on them.

That’s why many investors prefer to invest in small-cap stocks via exchange-traded funds. Here’s a look at exactly how small-cap ETFs operate and which ones are among the best.

What Are Small-Cap ETFs?

Small-cap ETFs are funds that are essentially similar to mutual funds and trade on the stock exchange. You can buy or sell them anytime the market is open. They invest in small companies with market caps under $2 billion and are run by professional money managers.

Many small-cap ETFs are passively managed, meaning that while they are under the control of money managers, they essentially track a market index, such as the well-known small-cap index the Russell 2000. Some are actively managed, meaning the managers pick and choose which stocks to buy and sell according to the ETF’s stated investment objectives.

Which small-cap ETF is best for you for the long term is a determination you will have to make based on your own investment objectives and risk tolerance.

What Are the Best Small-Cap ETFs?

Good small-cap ETFs post above-average returns while taking on lower-than-expected risk. The best ones consistently maintain this profile over significant periods of time. Here’s a look at seven of the best small-cap ETFs.

Methodology

The best small-cap ETFs listed below have a combination of excellent absolute and relative performance along with endorsements in terms of risk-reward from outside analytical sources like Morningstar.

1. Vanguard Small-Cap ETF (VB)

• Assets under management: $54.3 billion

• Five-year average return: 8.06%

• Expense ratio: 0.05%

• SEC yield: 1.45%

Vanguard is well known in the fund industry for having rock-bottom fees, and the Vanguard Small-Cap ETF is no exception, coming in with an expense ratio of just 0.05%. Its performance is also top-notch, as it easily beats the 6.69% average five-year return of the index it tracks, the CRSP US Small Cap Index. According to Vanguard, this fund uses a “passively managed, full-replication approach.”

2. iShares Core S&P Small-Cap ETF (IJR)

• Assets under management: $77.7 billion

• Five-year average return: 7.28%

• Expense ratio: 0.06%

• SEC yield: 1.72%

The iShares Core S&P Small-Cap ETF is an index-tracking fund, like the Vanguard Small-Cap ETF. However, they use different indexes, with IJR tracking the S&P SmallCap 600 index.

3. Schwab US Small-Cap ETF (SCHA)

• Assets under management: $16.5 billion

• Five-year average return: 6.72%

• Expense ratio: 0.04%

• SEC yield: 1.45%

Another index-tracking fund, the Schwab U.S. Small-Cap ETF attempts to replicate the total return of the Dow Jones U.S. Small-Cap Total Stock Market Index. The fund has the lowest expense ratio of any on this list, besting even Vanguard’s funds.

4. Vanguard Russell 2000 ETF (VTWO)

• Assets under management: $9.2 billion

• Five-year average return: 6.25%

• Expense ratio: 0.10%

• SEC yield: 1.30%

Like its sister fund VB, the Vanguard Russell 2000 ETF is an index-tracking ETF. However, they use different indexes, with VTWO tracking the broad-based Russell 2000 index. This is the index that most financial institutions and investors use as a proxy for the overall small-cap market in America.

5. Invesco S&P SmallCap Value With Momentum ETF (XSVM)

• Assets under management: $770.7 million

• Five-year average return: 14.03%

• Expense ratio: 0.36%

• SEC yield: 1.67%

The Invesco S&P SmallCap Value With Momentum ETF invests at least 90% of its assets in securities found in the S&P 600 High Momentum Value Index. However, it tweaks its holdings by selecting the 120 securities that have the highest “value scores” and “momentum scores.” Selections are then weighted according to their value scores, with those with the top value scores receiving greater weighting within the fund. Stocks in the fund are then rebalanced and reconstituted on a semiannual basis.

6. Pacer US Small Cap Cash Cows 100 ETF (CALF)

• Assets under management: $9.5 billion

• Five-year average return: 13.67%

• Expense ratio: 0.59%

• SEC yield: 0.73%

If you’re looking for something a bit different with your ETF, consider the Pacer US Small Cap Cash Cows 100 ETF. This fund is actively managed and uses a specific strategy to provide excess capital appreciation. Specifically, it screens the S&P SmallCap 600 for the top 100 companies based on free cash flow yield. Its five-year average returns nearly double the index it tracks.

7. ALPS O’Shares US Small-Cap Quality Dividend ETF (OUSM)

• Assets under management: $584.4 million

• Five-year average return: 9.91%

• Expense ratio: 0.48%

• SEC yield: 1.56% (12-month yield)

A relative newcomer in the small-cap ETF world, the ALPS O’Shares U.S. Small-Cap Quality Dividend ETF has only been around since 2016. This fund is a bit different in that it follows its own index of small-cap stocks, chosen specifically to be high-quality, low-volatility stocks in the U.S. that demonstrate dividend growth.

FAQ

• Does Vanguard have a small-cap ETF?

  • Vanguard has no fewer than nine small-cap ETFs, so investors can pick and choose from among the fund company's offerings to find the ETF that best suits their needs.

• What is considered a small-cap stock?

  • A small-capitalization stock is one with a market value between $250 million and $2 billion. Stocks below that capitalization level are known as micro-cap stocks, while those with bigger market caps are classified as mid-cap, large-cap or mega-cap stocks.

• Is it risky to invest in small-cap funds?

  • There are many types of risk in the investment world. If you consider risk to equate to volatility and/or the potential for capital loss, it's true that small-cap funds can be riskier than other investments, such as large-cap stocks. But risk can be diversified away. If you include an allocation of small-cap stocks to a well-diversified portfolio that already holds things like larger stocks, bonds, international investments and so on, the right small-cap funds may actually boost your long-term returns.

Data is accurate as of May 5, 2024, and is subject to change.

Editorial Note: This content is not provided by any entity covered in this article. Any opinions, analyses, reviews, ratings or recommendations expressed in this article are those of the author alone and have not been reviewed, approved or otherwise endorsed by any entity named in this article.

This article originally appeared on GOBankingRates.com: 7 Best Small-Cap ETFs for May 2024