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 total shares outstanding are considered to have a market value somewhere between $300 million and $2 billion. However these are not strict limits, and 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 volatile, growth potential. A small-cap ETF can reduce the volatility associated with individual stocks while offering investors greater diversification.

Key Takeaways

  • The small-cap sector underperformed the broader market over the past year.
  • The ETFs with the best 1-year trailing total return are SILJ, SGDJ, and JKK.
  • The top holding of the first two of these ETFs is Hecla Mining, and the top holding for the third is Match Group.

The small-cap ETF universe is comprised of about 39 ETFs, excluding inverse and leveraged ETFs, as well as funds 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 with a total return of 7.2% over the past 12 months compared to the S&P 500's total return of 19.5%. The best-performing small-cap ETF for Q4 2020, based on performance over the past year, is the ETFMG Prime Junior Silver ETF (SILJ). We examine the top 3 best small-cap ETFs below. All numbers in this story are as of August 17, 2020.

ETFMG Prime Junior Silver ETF (SILJ)

  • Performance over 1-Year: 47.7%
  • Expense Ratio: 0.69%
  • Annual Dividend Yield: 0.07%
  • 3-Month Average Daily Volume: 1,677,494
  • Assets Under Management: $427.7 million
  • Inception Date: November 29, 2012
  • Issuer: ETF Managers Group

SILJ tracks the ISE Junior Silver (Small Cap Miners/Explorers) Index, which is designed to provide direct exposure to small-cap companies that mine, explore, and refine silver. Over 80% of the fund's holdings are based in Canada and the United States, with the remaining holdings located in Peru, South Africa, Turkey, and Mongolia. The ETF's top three holdings are Hecla Mining Co. (HL), a silver and gold producer; Pan American Silver Corp. (PAAS), a Canada-based mineral exploration, production, and refining company; and First Majestic Silver Corp. (AG), a Canada-based mineral exploration and production company.

Sprott Junior Gold Miners ETF (SGDJ)

  • Performance over 1-Year: 34.2%
  • Expense Ratio: 0.57%
  • Annual Dividend Yield: 0.48%
  • 3-Month Average Daily Volume: 38,849
  • Assets Under Management: $103.4 million
  • Inception Date: March 31, 2015
  • Issuer: Sprott Asset Management

SGDJ tracks the Sprott Zacks Junior Gold Miners Index, which is designed to identify between 30-40 junior gold stocks with market caps between $250 million and $2billion. The exclusion of companies with market caps below $250 million avoids exposure to very early stage exploration companies with low historical success rates. The fund's top three holdings include Hecla Mining; K92 Mining Inc. (KNT), a Canada-based mineral exploration and mining company; and Equinox Gold Corp. (EQX), a Canada-based gold mining company.

iShares Morningstar Small-Cap Growth ETF (JKK)

  • Performance over 1-Year: 21.7%
  • Expense Ratio: 0.30%
  • Annual Dividend Yield: 0.25%
  • 3-Month Average Daily Volume: 7,571
  • Assets Under Management: $250.8 million
  • Inception Date: July 7, 2004
  • Issuer: iShares

JKK tracks the Morningstar Small Growth Index, which is designed to measure the performance of small-cap stocks that have historically exhibited above-average growth characteristics. The fund focuses on investing in growth stocks throughout the U.S. The ETF holds about 225 securities and does not assign any single security more than 1.2% of its total assets. Its top three holdings are Match Group Inc. (MTCH), an online dating service company; Carvana Co. (CVNA), an online used car retailer; and Solaredge Technologies Inc. (SEDG), an Israel-based smart energy technology company.