Small-cap exchange-traded funds (ETFs) are designed to invest in a basket of stocks whose underlying companies have 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, small-cap ETFs are not necessarily restricted to that range, as evidenced by the holdings of some of the ETFs outlined below. Tesla Inc. (TSLA) is the big outlier with a market cap of about $138 billion. Albermarle Corp. (ALB) and Acceleron Pharma Inc. (XLRN), with market caps of around $9 billion and 5 billion respectively, while still above the traditional range, are in these funds. Because of their size, small-cap stocks have strong, albeit volatile, growth potential. A small-cap ETF can reduce some of that volatility while attempting to maximize growth through diversification of risk.

The small-cap ETF universe is comprised of about 70 funds, excluding inverse and leveraged ETFs. The best-performing small-cap ETF for Q1 2020, based on performance over the past year, is the ALPS Clean Energy ETF (ACES). We examine the top 3 best small-cap ETFs below. All numbers in this story are as of February 12, 2020.

ALPS Clean Energy ETF (ACES)

  • Performance over 1-Year: 56.4%
  • Expense Ratio: 0.65%
  • Annual Dividend Yield: 1.52%
  • 3-Month Average Daily Volume: 23,730
  • Assets Under Management: $158.6 million
  • Inception Date: June 29, 2018
  • Issuing Company: ALPS

ACES is a small-cap ETF focused on the alternative energy sector. The fund follows a blended strategy, investing in both growth and value stocks. The ETF's top three holdings include Tesla Inc. (TSLA), an electric vehicle and clean energy company; Enphase Energy Inc. (ENPH), an energy technology company; and Brookfield Renewable Partners LP (BEP.UN), a Canada-based limited partnership that owns and operates renewable power assets.

First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN)

  • Performance over 1-Year: 45.2%
  • Expense Ratio: 0.60%
  • Annual Dividend Yield: 0.75%
  • 3-Month Average Daily Volume: 62,203
  • Assets Under Management: $214.1 million
  • Inception Date: February 14, 2007
  • Issuing Company: First Trust

QLCN is a small-cap ETF that invests in alternative energy stocks. The fund follows a blended strategy, investing in a mix of growth and value stocks. The ETF's top three holdings include Tesla Inc. (TSLA); Brookfield Renewable Partners LP (BEP.UN); and Albemarle Corp. (ALB), a chemical manufacturing company.

ALPS Medical Breakthroughs ETF (SBIO)

  • Performance over 1-Year: 30.4%
  • Expense Ratio: 0.50%
  • Annual Dividend Yield: 0.04%
  • 3-Month Average Daily Volume: 57,835
  • Assets Under Management: $228.2 million
  • Inception Date: December 30, 2014
  • Issuing Company: ALPS

SBIO is a small-cap ETF focused on the U.S. health and biotechnology sector and invests in growth stocks. The fund's top three holdings include bluebird bio Inc. (BLUE), a biotechnology company; Acceleron Pharma Inc. (XLRN), a biopharmaceutical company; and United Therapeutics Corp. (UTHR), a biotechnology company.