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.
- The small-capitalization sector underperformed the broader market over the past year.
- The small-cap exchange-traded funds (ETFs) with the best one-year trailing total returns are XSVM, INFL, and AVUV.
- The top holdings of these ETFs are Olympic Steel Inc., PrairieSky Royalty Ltd., and Alcoa Corp., respectively.
There are 48 small-cap ETFs that trade in the United States, 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, underperformed the broader market over the past 12 months, posting a one-year trailing total return of -12.0% compared with the S&P 500’s 10.4%, as of Feb. 23, 2022. The best-performing small-cap ETF in one-year trailing return is the Invesco S&P Small-Cap Value with Momentum ETF (XSVM).
We examine the three best small-cap ETFs below. All numbers below are as of Feb. 27, 2022.
- Performance Over One Year: 19.1%
- Expense Ratio: 0.39%
- Annual Dividend Yield: 0.83%
- Three-Month Average Daily Volume: 164,898
- Assets Under Management: $615.1 million
- Inception Date: March 3, 2005
- Issuer: Invesco
XSVM tracks the S&P SmallCap 600 High Momentum Value Index, which is composed of undervalued small-cap stocks that show strong price momentum. The index is composed of 120 securities in the S&P SmallCap 600 Index with the highest value and momentum scores.
The fund invests at least 90% of its assets in components of the index. Its investing strategy largely targets buy-and-hold investors. It also may be a suitable investment vehicle for tactical investors looking to apply a value and momentum tilt to their small-cap exposure.
XSVM’s major sector allocations are the financial, consumer discretionary, and industrial sectors. The fund’s top three holdings are Olympic Steel Inc. (ZEUS), which processes, sells, and distributes metal products; Rayonier Advanced Materials Inc. (RYAM), a global supplier of cellulose specialties products; and Realogy Holdings Corp. (RLGY), a residential real estate services provider.
- Performance Over One Year: 16.7%
- Expense Ratio: 0.85%
- Annual Dividend Yield: 0.50%
- Three-Month Average Daily Volume: 251,006
- Assets Under Management: $903.2 million
- Inception Date: Jan. 11, 2021
- Issuer: Horizon Kinetics LLC
INFL seeks to provide long-term capital growth by investing in securities of local and foreign companies that are expected to benefit, either directly or indirectly, from the rising prices of real assets. The revenues of these assets are expected to rise with inflation.
This actively managed fund is not diversified, so it may concentrate its assets in fewer individual holdings than a diversified ETF. INFL also invests in foreign securities that may have higher volatility and greater political, economic, and accounting risk.
The fund’s top three holdings are PrairieSky Royalty Ltd. (PSK.TO), a company that owns royalty properties across Canada; Viper Energy Partners L.P. (VNOM), which owns, acquires, develops, and exploits oil and natural gas properties in North America; and Archer-Daniels-Midland Co. (ADM), an agricultural origination and processing company.
- Performance Over One Year: 10.7%
- Expense Ratio: 0.25%
- Annual Dividend Yield: 0.99%
- Three-Month Average Daily Volume: 408,468
- Assets Under Management: $2.6 billion
- Inception Date: Sept. 24, 2019
- Issuer: American Century Investments
AVUV is an actively managed fund that seeks long-term capital appreciation by investing in U.S. small-cap companies with low valuations and high profitability ratios. The ETF invests in a broad array of small-cap stocks and has hundreds of holdings.
AVUV’s largest allocations are in the financial, consumer discretionary, and industrial sectors, which comprise nearly two-thirds of the portfolio.
The fund’s top three holdings are Alcoa Corp. (AA), which produces bauxite, alumina, and aluminum products; PDC Energy Inc. (PDCE), an oil and natural gas exploration and production company; and Murphy Oil Corp. (MUR), an oil and natural gas exploration and production holding company.
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