Small cap ETFs are designed to give investors direct exposure to a portfolio of small cap stocks without the headaches of the typical higher volatility associated with owning small cap stocks individually. The small cap ETF provides diversified exposure in a cost effective manner.
The tradeoff of investing via index fund or ETF rather than buying stocks directly is the returns could potentially be lower. However unless you have an edge in consistently beating the market in picking small cap stocks. Small Cap ETF is the recommended route for most investors.
Best Small Cap ETF List
Investors can choose from a universe of small cap ETFs that are designed to capture specific niches in the small cap space.
| Name | Symbol | ETF Type | Holdings |
| iShares Russell 2000 ETF | IWM | Small Cap Index ETF | 2000 |
| iShares Core S&P Small-Cap ETF | IJR | Small Cap Index ETF | 600 |
| Vanguard Small-Cap ETF | VB | Low Cost Small Cap ETF | 1500 |
| iShares Russell 2000 Growth ETF | IWO | Small Cap Growth ETF | 1206 |
| iShares Russell 2000 Value ETF | IWN | Small Cap Value ETF | 1400 |
| Vanguard Small-Cap Value ETF | VBR | Small Cap Value ETF | 820 |
| Vanguard Small-Cap Growth ETF | VBK | Small Cap Growth ETF | 750 |
| Emerging Market Small Cap Fund | DGS | Small Cap Emerging Market ETF | 600 |
| Small Cap Dividend Fund | DES | Small Cap Dividend ETF | 720 |
| FTSE All-World ex-US Small Cap Index ETF | VSS | International Small Cap ETF | 3400 |
List of Small Capitalization ETFs shows the variety of small cap index funds available to investors. All the exchange traded funds are passive index fund that mirrors the performance of the index only.
Best Small Cap ETF – Russell 2000 ETF
One of the best small cap ETF is the iShares Russell 2000 ETF (IWM ETF) which tracks the most well known small cap index, Russell 2000. It is the most well known and largest small cap index which includes 2000 largest domestic small capitalization stocks in the US.
On a sector chart and map for IWM ETF shows that no major sector that dominates the fund unlike the NASDAQ which is dominated by technology stocks.
Historically Russell 2000 and IWM ETF is the go to small cap index and small cap index fund for investors that want a small cap exposure in their portfolio. Upside of using IWM ETF over investing in individual small cap stocks is that with 2000 stocks in the portfolio. Investors will receive small cap exposure without individual stock specific risks.
iShares Core S&P Small Capitalization ETF (IJR) and Vanguard Small Capitalization ETF (VB) are alternative options in the small cap ETF space. The primary differentiator of IJR to IWM is that the fund is created using a smaller range of stocks (600 vs 2000) and in turn lower gross expense ratio of 0.10% vs 0.20%.
Vanguard VB ETF reflects vanguards principal of providing low cost index funds which has an expense ratio of just 0.09%.
Smart Beta Small Cap ETF
The newest trend moving beyond typical passive index funds is the approach of creating funds which mirror the performance of specific stock factors called smart beta ETFs. The 2 common examples in this approach is the value or growth factor ETFs. For those are leaning towards a particular end of value or growth there are also small capitalization ETF that invests in only in stocks that fits factor criteria.
Small Cap Value ETF
iShares Russell 2000 Value ETF (IWN) further breakdown the Russell 2000 into stocks that are perceived to be undervalued by the market. Investors in IWN should note that more than 40% of the fund is invested in financial small cap stocks.
Small Cap Growth ETF
There is usually some crossover between value and growth. For investors that are looking for a group of small companies that are about to become large cap stocks then look no further than Vanguard Small Cap Growth ETF (VBK). VBK invests in over 700 small cap growth stocks. With a R squared correlation of 0.9 and beta of 1.1 means that this small cap growth ETF tracks the broader market movement 90% of the time and when it does it will move 110% of what the market moved.
Small Cap Dividend ETF
One interesting approach in investing in small cap stocks that pays dividends. Since it is easier for small companies to grow earnings. Dividend growth of small cap dividend stocks is usually at a higher rate than more established companies or the broader market.
Wisdom Tree Small Cap Dividend ETF (DES) is just one of many small cap ETF that invests in stocks that pay dividends. It tracks the smallest stocks in Wisdom Tree Small Cap Dividend Index. While typical ETF weights are determined by the market cap of the company and weight in the portfolio from the relative size of each company to each other. DES stand out from the others by sizing the stocks in the portfolio by the dividends the company pay. Hence DES are weighted to large dividend paying stocks.
3x Leveraged Small Cap ETF
Direxion Daily Small Cap Bull & Bear 3x ETF (TNA and TZA) are the long and short option for investors that would want to take a leveraged bet on the small cap sector. Investors should note that these are trading vehicles rather than instruments for long term investments.
The underlying index is the Russell 2000 so essentially TNA and TZA aim to track 3x the daily up and down change in the Russell 2000. The downside of investing in 3x leverage small cap ETF is that the expense ratio is much higher for leveraged ETFs than typical passive index funds. It averages around 0.90%.
International Small Cap ETF
There are two ways investors can invest in international small cap ETFs. First investors can use international small cap ETF like FTSE All-World ex-US Small Cap (VSS) which focus on developed and emerging market small cap stocks. Emerging Market Small Cap Fund (DGS) provides concentrated exposure on small caps in the emerging markets only. Alternatively, investors can also use emerging market bond ETF can provide higher yield than domestic bonds.
Small Cap Sector Analysis
Interestingly the map of small cap sector trends across the list of small cap ETFs. Financials, Information Technology and Industrials are 3 sectors that are consistently represented in these ETF. IWM has the largest exposure to Financials at 40% of the AUM.
On the other end of sector allocation shows traditional defensive sectors like Utilities and Telecommunications are under represented. This could be due to these being mature sectors that has slower level of change.