Small-cap exchange-traded funds (ETFs) are designed to invest in a basket of stocks with relatively small market capitalizations. A small-cap company is generally one whose market value is somewhere from $300 million to $2 billion. However, small-cap ETFs are not necessarily restricted to that range, as evidenced by some of the holdings of the ETFs outlined below.
Because of their size, small-cap stocks have strong, albeit often volatile, growth potential. A small-cap ETF can reduce the volatility associated with individual small-cap stocks while offering investors greater diversification.
Key Takeaways
- The small-cap sector significantly underperformed the broader market over the past year.
- The small-cap exchange-traded funds (ETFs) with the best one-year trailing total returns are AVUV, INFL, and KBWR.
- Investing in small-cap ETFs can reduce the volatility associated with owning individual small-cap stocks.
There are 48 small-cap ETFs that trade in the U.S., excluding inverse and leveraged ETFs as well as ETFs with less than $50 million in assets under management (AUM).
The small-cap sector, as measured by the Russell 2000 Index, has underperformed the broader market over the past 12 months. The Russell 2000 posted a one-year trailing total return of -9.0% compared with the S&P 500’s -2.6% as of Aug. 12, 2022. The best-performing small-cap ETF, based on one-year trailing total returns, is the Avantis U.S. Small Cap Value ETF (AVUV).
We examine the three best small-cap ETFs below. All numbers below are as of Aug. 12, 2022, unless otherwise stated.
- Performance over one year: 6.3%
- Expense ratio: 0.25%
- Annual dividend yield: 0.99%
- Three-month average daily volume: 1,029,016
- AUM: $3.7 billion
- Inception date: Sept. 24, 2019
- Issuer: American Century Investments
AVUV is an actively managed ETF that aims to provide long-term capital appreciation by investing in U.S. small-cap companies with low valuations and high profitability ratios. The fund has hundreds of holdings, providing exposure to a broad set of small-cap stocks.
Financial companies receive the largest weighting in the fund, followed by energy companies and industrials. Its top three holdings are PDC Energy Inc. (PDCE), a producer and distributor of petroleum products; class A shares of Triton International Ltd. (TRTN), a lessor of intermodal containers and chassis; and Ryder Systems Inc. (R), a global logistics and transportation operator.
- Performance over one year: 5.33%
- Expense ratio: 0.85%
- Annual dividend yield: 0.50%
- Three-month average daily volume: 320,388
- AUM: $1.3 billion
- Inception Date: Jan. 11, 2021
- Issuer: Horizon Kinetics LLC
INFL is an actively managed ETF that aims to provide long-term growth of capital in real terms. Real returns, as opposed to nominal returns, are inflation-adjusted returns. To achieve those inflation-adjusted returns, the fund invests in stocks of companies that are expected to benefit from rising prices of real assets, such as commodities. The revenue of these companies is expected to grow along with inflation, while their expenses are expected to remain relatively steady. The ETF is primarily focused on small-cap growth stocks.
Its top three holdings as of Aug. 17, 2022, are Texas Pacific Land Corp. (TPL), an owner of land in Texas that earns income from land sales, oil and gas royalties, grazing leases, and interest; Archer Daniels Midland Co. (ADM), an agricultural origination and processing company; and Viper Energy Partners LP (VNOM), a developer of oil and natural gas properties in North America.
- Performance over one year: 5.0%
- Expense ratio: 0.35%
- Annual dividend yield: 1.93%
- Three-month average daily volume: 4,931
- AUM: $79.5 million
- Inception date: Nov. 1, 2011
- Issuer: Invesco
KBWR is a small-cap, blended fund that tracks the KBW Nasdaq Regional Banking Index. The index is composed of U.S. regional banking and thrift companies. Due to its narrow focus, KBWR may be used by investors looking for a tactical tilt toward a specific niche of the banking industry. Assets are well-distributed across the fund’s portfolio, with no single holding receiving more than 4% allocation as of Aug. 11, 2022.
The top holdings of KBWR include Western Alliance Bancorp (WAL), a bank holding company serving Arizona primarily; Cullen/Frost Bankers Inc. (CFR), a Texas-based regional bank; and Commerce Bancshares Inc. (CBSH), a bank holding company serving Missouri.
The comments, opinions, and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or adopt any investment strategy. While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described in our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.
