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 between $300 million and $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 stocks while offering investors greater diversification.

Key Takeaways

  • The small-cap sector dramatically outperformed the broader market over the past year.
  • The ETFs with the best 1-year trailing total return are CNBS, MFMS, and JKK.
  • The top holdings of these ETFs are sponsored ADRs of GW Pharmaceuticals PLC, shares of Paylocity Holding Corp., and shares of Plug Power Inc., respectively.

There are about 39 distinct small-cap ETFs that trade in the U.S., 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 outperformed the broader market with a total return of 36.4% over the past 12 months compared to the S&P 500's total return of 18.4%, as of February 17, 2021. The best-performing small-cap ETF, based on performance over the past year, is the Amplify Seymour Cannabis ETF (CNBS). We examine the top 3 best small-cap ETFs below. All numbers below are as of February 17, 2021.

Amplify Seymour Cannabis ETF (CNBS)

  • Performance over 1-Year: 185.8%
  • Expense Ratio: 0.75%
  • Annual Dividend Yield: 0.29%
  • 3-Month Average Daily Volume: 212,960
  • Assets Under Management: $73.0 million
  • Inception Date: July 23, 2019
  • Issuer: Amplify

CNBS aims to provide investors exposure to the global cannabis industry. At least 80% of the fund's holdings are invested in companies that generate 50% or more of their revenue from the broader cannabis and hemp market, which includes production, real estate and devices. CNBS is not exclusively a small-cap fund, as the ETF invests in a portfolio of equities across the market-cap spectrum, from micro-cap to large-cap stocks. Over half of its assets are part of either the cultivation & retail or agricultural technology segments of the marijuana industry. Its top three stock holdings include sponsored ADRs of GW Pharmaceuticals PLC (GWPH), a British pharmaceutical company; class A shares of Silver Spike Acquisition Corp. (SSPK), a blank check company; and Village Farms International (VFF), which manages and operates greenhouse facilities producing vegetables and cannabis.

MFAM Small-Cap Growth ETF (MFMS)

  • Performance over 1-Year: 64.0%
  • Expense Ratio: 0.85%
  • Annual Dividend Yield: N/A
  • 3-Month Average Daily Volume: 39,939
  • Assets Under Management: $183.0 million
  • Inception Date: October 30, 2018
  • Issuer: Motley Fool Asset Management

MFMS is a growth fund targeting small-cap equities in the U.S. market. The fund aims to provide exposure to 30 small-cap names identified as having potential to generate high rates of return over long periods of time. The portfolio is weighted toward the health care and information technology sectors. About 44% of assets are invested in the top 10 holdings of the fund. The three top holdings of MFMS include Paylocity Holding Corp. (PCTY), a cloud-based payroll and HR company; Axon Enterprise Inc. (AXON), a maker of military and police weapons and technologies; and Heska Corp. (HSKA), a maker of animal health products.

iShares Morningstar Small-Cap Growth ETF (JKK)

  • Performance over 1-Year: 52.9%
  • Expense Ratio: 0.30%
  • Annual Dividend Yield: 0.09%
  • 3-Month Average Daily Volume: 23,166
  • Assets Under Management: $841.3 million
  • Inception Date: July 7, 2004
  • Issuer: iShares

JKK tracks the Morningstar U.S. 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 231 securities. The top three holdings are Plug Power Inc. (PLUG), a developer of hydrogen fuel cell systems; Axon Enterprise; and class A shares of Palantir Technologies Inc. (PLTR), a data analytics company.

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 to 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 on 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.