With tech behemoths like Microsoft and Apple having expanded to colossal proportions, they no longer have the potential to double or triple in size so easily. Small-cap companies can still multiply exponentially and many still exhibit some degree of freedom from institutional investor involvement. However, smaller firms do have a somewhat higher rate of failure, so investing in only a select few companies opens investors up to undue risk. This is where an ETF can be instrumental in achieving diversification without sacrificing growth.
Small cap is a term used to classify companies with relatively small market capitalization, or market value of its outstanding shares. While the definition of small cap can vary among brokerages, according to Investopedia, it is generally a company with a market capitalization of between US$300 million and $2 billion.
Typically small cap companies provide investors with more room for growth but also typically contain a greater risk profile and volatility than large cap companies. A large cap offering, in contrast, has a market capitalization of $10 billion or higher is usually a longer term play, but does offer a bit more stability.
For those investors looking for that growth, but are willing to take on a bit more risk in their portfolios, investing in small cap ETFs can offer a more balanced way to see potentially more rapid gains than investing in larger cap companies.
The Vanguard Small-Cap Value ETF (VBR) is one fund that offers investors the chance to participate in small cap growth. VBR seeks to track the performance of the CRSP US Small Cap Value Index, which measures the investment return of small-capitalization value stocks.
CRSP classifies growth securities using the following factors: future long-term growth in earnings per share (EPS), future short-term growth in EPS, 3-year historical growth in EPS, 3-year historical growth in sales per share, current investment-to-assets ratio, and return on assets. CRSP classifies value securities using the following factors: book to price, forward earnings to price, historic earnings to price, dividend-to-price ratio and sales-to-price ratio.
Some of the benefits of VBR is that it provides a convenient way to match the performance of a diversified group of small value companies, and it follows a passively managed, full-replication approach, making it very inexpensive to own: the expense ratio is only 0.07%.
With $13 Billion in assets under management, and a low expense ratio, VBR is surely a fund for investors looking for small cap growth to consider.
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