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.”
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Small-cap stocks were strengthening as traders renewed their outlook on the Trump administration’s pro-growth agenda. In recent weeks, U.S. markets have been roiled over uncertainty concerning President Donald Trump’s ability to push through pro-growth economic policies through Congress as the White House wades through political intrigue. However, the small-cap segment is highly levered to expectations that the administration could overhaul the U.S. tax policy.
“Furthermore, we like the way that the underlying benchmarks are built,” according to Morningstar. In the case of the Vanguard fund it tracks the CRSP U.S. Small Cap Index, which is a broad-based market-cap-weighted slice of the smallest segment of the U.S. stock market. It has sensible rules in place to mitigate unnecessary turnover within the portfolio, these are all things that score highly in our view.”
IJR tracks the widely followed S&P SmallCap 600 Index.
For more information on small-capitalization stocks, visit our small-cap category.