10 Small-Cap ETFs to Buy for Big Upside

Over the last 29 years, U.S. exchange-traded fund (ETF) assets have grown to over $7.2 trillion across more than 7,600 funds. They’ve become the product of choice for individual and institutional investors alike.

However, of those several trillion dollars, only a small fraction – roughly 4% – gets put into small-cap ETFs, according to the Investment Company Institute (ICI), an association representing regulated funds globally, signaling there’s plenty of room for growth.

Small-cap stocks, like the broader global market, started poorly in 2022, with the Russell 2000 Index down 13.5% for the year-to-date. In addition to geopolitical concerns, investors are also worried that the Federal Reserve’s rate-hiking cycle will slow the U.S. economy and put a dent in their future earnings. 

But this short-term setback takes away from small caps longer-term outperformance. Over the past 10 years, smaller capitalization stocks were the second-best performing asset, up 14.4% annually, trailing only large caps. This is a good sign for small-cap funds.  

That said, here are 10 small-cap ETFs that should be on your radar. If you want to build a well-constructed portfolio, it would be wise to consider a fund that invests in U.S. small-cap stocks, as well as one that holds foreign small caps.

  1. Vanguard Small-Cap Value
  • Type: Domestic small-cap value 
  • Assets under management: $26.0 billion
  • Dividend yield: 1.8%
  • Expenses: 0.07%, or $7 annually for every $10,000 invested

The Vanguard Small-Cap Value (VBR, $168.42) is the largest of the small-cap ETFs featured here by total net assets. It also has reasonable management fees, charging $7 per year for every $10,000 invested in VBR.

The ETF tracks the performance of the CRSP US Small Cap Value Index, a collection of U.S. small-cap stocks exhibiting value tendencies based on various financial metrics, including the price-to-book (P/B), forward price-to-earnings(P/E), historic price-to-earnings, dividend-to-price and price-to-sales (P/S) ratios. 

The Vanguard Small-Cap Value aims to replicate its underlying benchmark by investing in all or nearly all of the stocks that make up the CRSP US Small Cap Value Index. And each asset is given the same weighting as it is in the underlying index.

VBR currently has 997 holdings compared to 940 for the index. The median market cap is $6.1 billion. The fund’s $26 billion in total net assets are entirely invested in U.S. companies.

The average stock in the ETF has a P/E of 12.4x, a P/B of 1.9x and an average five-year earnings growth rate of 12.3% annually. The top three sectors by weight are financials (22.8%), industrials (19.7%) and consumer discretionary (14.5%).

The ETF’s top 10 holdings account for just 6% of the portfolio. The three largest positions are oil stock Diamondback Energy (FANG) at 0.8%, regional financial firm Signature Bank (SBNY) at 0.6% and real estate investment trust (REIT) VICI Properties (VICI) at 0.6%. VBR’s turnover rate is 26%, which means it turns the entire portfolio once every 3.8 years.

Since its inception in January 2004, VBR has had an annual total return of 9.3% through Feb 28.

2. SPDR S&P 600 Small Cap Growth ETF

  • Type: Domestic small-cap growth
  • Assets under management: $2.1 billion
  • Dividend yield: 0.8%
  • Expenses: 0.15%

The SPDR S&P 600 Small Cap Growth ETF (SLYG, $80.05), as its name suggests, tracks the performance of the S&P 600 SmallCap 600 Growth Index, a collection of small-cap stocks that exhibit above-average growth tendencies such as improving revenues, price-to-earnings changes and momentum. 

There are a few requirements a company must meet to be included in the index, including having a public float of 10% or more and four straight quarters of positive earnings. The benchmark is weighted by market cap and rebalanced annually in December.

Like many small-cap ETFs – and exchange-traded funds, in general – SLYG uses a sampling strategy to mimic the index’s performance. Therefore, not every stock in the index is necessarily held by the fund.

However, the SPDR S&P 600 Small Cap Growth ETF currently has 332 holdings invested in its $2.1 billion in total net assets – the same as its underlying benchmark. The average market cap of the fund’s holdings is $2.9 billion, while the earnings for the group are expected to rise 16.6% over the next three to five years.

The ETF’s three largest sectors by weight are technology (18.7%), financials (16.9%) and industrials (15.4%). While it’s labeled a small-cap growth fund, in reality, it’s more of a blend with 55% of its portfolio considered both growth and value.

SLYG’s top 10 holdings account for 11% of its total net assets, with an annual turnover of 38%. The three largest holdings by weight are healthcare management solutions firm Omnicell (OMCL), lumber producer UFP Industries (UFPI) and electronics firm Rogers (ROG) – each accounting for about 1.1% of the fund’s portfolio.

If you are into cannabis stocks, one of the fund’s top 10 holdings is Innovative Industrial Properties (IIPR), a real estate investment trust that owns and manages specialized industrial properties leased by state-licensed medical cannabis growers. Over the past five years, IIPR has turned in an annualized total return of 65.8%, more than three times higher than the entire U.S. market. 

3. Schwab U.S. Small-Cap ETF

  • Type: Domestic small-cap blend
  • Assets under management: $15.2 billion
  • Dividend yield: 1.3%
  • Expenses: 0.04%

The Schwab U.S. Small-Cap ETF (SCHA, $44.51) tracks the performance of the Dow Jones U.S. Small-Cap Total Stock Market Index. The index comprises the stocks ranked between 751 to 2,500 by market cap in the Dow Jones U.S. Total Stock Market Index. It is a float-adjusted market cap-weighted index that typically invests in stocks with a market value of roughly $37 million to $22 billion.

The index is rebalanced four times a year in March, June, September and December. It was launched in February 2005, while SCHA got its start in November 2009. The fund currently has 1,794 stocks with an average weighted market cap of $4.9 billion and a price-to-cash flow ratio of 12.2x.

The largest three sectors by weight are…

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