For those who can stomach high volatility, small-capitalization stocks can provide people the opportunity to invest in tomorrow’s next big thing. However, it is time-consuming and difficult to pick and choose small companies, so investors may be better off with a broad asset category exchange traded fund.
ETFs allow investors to capture a specific group of stocks in return for a nominal fee, and while there are no ETFs that target penny stocks, people can still track a basket of companies with small market capitalizations, writes Casey Murphy for Investopedia.
For instance, the iShares Russell 2000 ETF (NYSEArca: IWM) and Vanguard Small Cap ETF (NYSEArca: VB) both provide exposure to the small-cap space. IWM follows the Russell 2000 index while VB tracks the MSCI US Small Cap 1750 Index. IWM has a 0.20% expense ratio and VB has a 0.09% expense ratio.
While falling behind the broader markets this year, small-cap stocks have historically outperformed in the long-run.
“Small-cap stocks have earned a return premium of about 2% over large-cap stocks since 1926,” according to Morningstar analyst Micahel Rawson. “However, this premium has become smaller in recent decades.”
Alternatively, investors can focus on value or growth plays. The iShares Russell 2000 Growth ETF (NYSEArca: IWO) and Vanguard Small-Cap Growth (NYSEArca: VBK) target growth stocks, while the iShares Russell 2000 Value Index (NYSEArca: IWN) and Vanguard Small-Cap Value ETF (NYSEArca: VBR) focus on value styles. IWO has a 0.25% expense ratio, VBK has a 0.09% expense ratio, IWN has a 0.25% expense ratio and VBR has a 0.09% expense ratio.
The growth stocks provide access to the faster growing and more expensive half of the U.S. small-cap market. The value stocks, on the other hand, provide exposure to cheaper and potentially higher-returning half of the small-caps market
Alternatively, investors can look into the even smaller, micro-cap segment of the market through the iShares Micro-Cap ETF (NYSEArca: IWC), PowerShares Zacks Micro Cap Portfolio (NYSEArca: PZI) and Guggenheim Wilshire Micro-Cap ETF (NYSEArca: WMCR). However, due to the illiquid nature of the micro-cap market, these ETFs have exhibited greater volatility and trade less frequently than their large-cap counterparts. IWC has a 0.60% expense ratio, PZI has a 0.91% expense ratio and WMCR has a 0.53% expense ratio.
For foreign exposure, international small-cap ETFs allow investors to diversify away from a U.S.-centric portfolio. Investors can browse through options like the WisdomTree International SmallCap Dividend Fund (NYSEArca: DLS), SPDR S&P International Small Cap ETF (NYSEArca: GWX) and Schwab International Small-Cap Equity ETF (NYSEArca: SCHC). Moreover, there are a number of country-specific ETFs that target the small-cap category as well. DLS has a 0.58% expense ratio, GWX has a 0.59% expense ratio and SCHC has a 0.19% expense ratio. [ETFs To Tap Into India’s Rising Consumer Confidence]
For more information on small-capitalization stocks, visit our small-cap category.
Max Chen contributed to this article.