Investors are increasingly looking to cheap options, no matter the investment environment. Cheap index-based ETFs have been the go-to choice among long-term investors through rain or shine. Despite increased anxiety through volatile periods like the financial downturn, many long-term investors did not engage in panicked trading but opted stay the course.
Better still, expense ratios on ETFs continue falling, a movement led in part by some of the largest issuers, such as iShares and Vanguard. Plus, low fees are not reserved for domestic large-cap funds. Scores of small-cap ETFs are already cheap and have the potential to get cheaper in the future.
That group includes the Vanguard Small Cap ETF (NYSEArca: VB) and the iShares Core S&P Small-Cap ETF (NYSEArca: IJR). The $33.9 billion IJR charges 0.07% per year, or $7 on a $10,000 investment, while VB has an annual fee of just 0.06%. That makes VB cheaper than 95% of rival funds, according to Vanguard data.
Small-caps are also focused on the domestic economy and have less direct exposure to global geopolitical uncertainty and currency risks, as opposed to large-cap companies that have an international footprint, which may be affected by overseas risks and a strengthening U.S. dollar.
“Our two most highly rated small-cap U.S. equity ETFs are the Vanguard Small-Cap ETF, VB, and the iShares Core S&P Small Cap ETF, IJR,” said Morningstar in a recent note. “We’ve awarded both of these funds Morningstar Analyst Ratings of Gold, which indicates that we believe that these ETFs will produce superior risk-adjusted returns relative to their peers in the small-blend category over a full market cycle. We have that degree of conviction chiefly because these funds charge rock-bottom fees–that is their most sustainable competitive advantage relative to the rest of the cohort.”