7 Best Small Cap ETFs for May 2024

The term “small cap”, short for “small-cap company”, refers to a company with a total market value between $250 million and $2 billion. Market capitalization is calculated by multiplying the number of shares outstanding by the current market price. For example, if a stock is trading at $100 per share and has 10 million shares outstanding, its market cap is $1 billion, making it 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 unprofitable and some are built around a single product, making them make-or-break stocks. They can also be difficult to research because they don’t issue many press releases and few analysts can provide research coverage on them.

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

What are small cap ETFs?

Small-cap ETFs are funds essentially similar to mutual fund and trade on the stock exchange. You can buy or sell them at any time when the market is open. They invest in small companies with market capitalizations below $2 billion and are run by professional fund managers.

Many small-cap ETFs are passively managed, meaning that even though they are under the control of fund managers, they essentially track a market index, such as the popular Russell 2000 small-cap index. Some are actively managed , meaning managers choose which stocks to buy and sell based on the ETF’s stated investment objectives.

Which small cap ETF is what is best for you in the long term is a decision you will need to make based on your own investment objectives and risk tolerance.

What are the best small cap ETFs?

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

Data is accurate as of May 5, 2024.

Methodology

The best small-cap ETFs listed below combine excellent absolute and relative performance as well as risk-reward endorsements from external analytical sources like Morningstar.

1. Vanguard Small Cap ETF (VB)

• Assets under management: $54.3 billion
• Average return over five years: 8.06%
• Expense rate: 0.05%
• SEC yield: 1.45%

Avant-garde is well known in the fund industry for its very low fees, and the Vanguard Small-Cap ETF is no exception, with an expense ratio of just 0.05%. Its performance is also excellent, as it easily beats the five-year average return of 6.69% of the index it tracks, the CRSP US Small Cap Index. According to Vanguard, this fund uses a “passive management and full replication approach.”

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

• Assets under management: $77.7 billion
• Average return over five years: 7.28%
• Expense rate: 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 American Small Cap ETF (SCHA)

• Assets under management: $16.5 billion
• Average return over five years: 6.72%
• Expense rate: 0.04%
• SEC yield: 1.45%

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

4. Vanguard Russell 2000 ETF (VTWO)

• Assets under management: $9.2 billion
• Average return over five years: 6.25%
• Expense rate: 0.10%
• SEC yield: 1.30%

Like its sister fund VB, the Vanguard Russell 2000 ETF is an index ETF. However, they use different indexes, with the 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
• Average return over five years: 14.03%
• Expense rate: 0.36%
• SEC yield: 1.67%

The Invesco S&P SmallCap Value With Momentum ETF invests at least 90% of its assets in securities of the S&P 600 High Momentum Value Index. However, he fine-tunes his holdings by selecting the 120 stocks that have the highest “value scores” and “momentum scores.” Selections are then weighted based on their value scores, with those with higher value scores receiving greater weighting within the fund. The fund’s shares are then rebalanced and reconstituted semi-annually.

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

• Assets under management: $9.5 billion
• Average return over five years: 13.67%
• Expense rate: 0.59%
• SEC yield: 0.73%

If you’re looking for something a little 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 selects the S&P SmallCap 600 Index to select the 100 largest companies based on free cash flow performance. Its five-year average yields nearly double the index it tracks.

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

• Assets under management: $584.4 million
• Average return over five years: 9.91%
• Expense rate: 0.48%
• SEC yield: 1.56% (12-month return)

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

FAQs

• Does Vanguard offer a small cap ETF?
  • Avant-garde has no fewer than nine small-cap ETFs, so investors can choose from the fund company’s offerings to find the ETF that best suits their needs.

• What is considered a small cap stock?
  • A small cap stocks is one with a market value between $250 million and $2 billion. Stocks below this capitalization level are called micro-cap stocks, while those with a higher market capitalization are classified as mid-, large-, or mega-cap stocks.

• Is it risky to invest in small cap funds?
  • There are many types of risks in the world of investing. If you consider risk to equate to volatility and/or potential for capital loss, it is true that small-cap funds can be riskier than other investments, such as large-cap stocks. But the risk can be diversified. If you include a small-cap stock allocation in a well-diversified portfolio that already contains things like larger stocks, bonds, international investments and so on, good small cap funds can actually increase your returns in the long run.

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, evaluations 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.

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