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 some of the holdings of the ETFs outlined below. Because of their size, small-cap stocks have strong, albeit volatile, growth potential. While small cap stocks as a group have nearly doubled in the past decade, they have plunged amid the COVID-19 pandemic, recouping less than half of their losses. A small-cap ETF can reduce the volatility associated with individual stocks while attempting to maximize growth through diversification of risk.

The small-cap ETF universe is comprised of about 36 funds, excluding inverse and leveraged ETFs as well as funds with under $50 million in assets under management. The best-performing small-cap ETF for Q3 2020, based on performance over the past year, is the ETFMG Prime Junior Silver ETF (SILJ). We examine the 3 best small-cap ETFs below. All numbers in this story are as of May 18, 2020.

ETFMG Prime Junior Silver ETF (SILJ)

  • Performance over 1-Year: 46.9%
  • Expense Ratio: 0.69%
  • Annual Dividend Yield: 0.10%
  • 3-Month Average Daily Volume: 721,664
  • Assets Under Management: $168.1 million
  • Inception Date: November 29, 2012
  • Issuing Company: ETF Managers Group

The ETFMG Prime Junior Silver ETF tracks the ISE Junior Silver (Small Cap Miners/Explorers) Index and aims to provide direct exposure to small-cap companies that mine, explore and refine silver. The stocks are screened for liquidity. Because silver is both a store of value and important for industrial applications, it tends to remain uncorrelated to equity market trends and is attractive to many investors during periods of market turmoil. The top holdings for SILJ include the mining companies Pan American Silver Corp. (PAAS); Hecla Mining Co. (HL); and First Majestic Silver Corp. (AG).

Sprott Junior Gold Miners ETF (SGDJ)

  • Performance over 1-Year: 40.4%
  • Expense Ratio: 0.57%
  • Annual Dividend Yield: 0.68%
  • 3-Month Average Daily Volume: 37,155
  • Assets Under Management: $61.4 million
  • Inception Date: March 31, 2015
  • Issuing Company: Sprott Asset Management

Like SILJ above, SGDJ focuses on a subset of the precious metals and mining industries and holds a portfolio of small-cap gold mining companies. The ETF tracks the Sprott Zacks Junior Gold Miners Index, which is designed to identify 30 to 40 junior gold stocks with market values ranging from $250 million to $2 billion. The index excludes younger companies with market capitalizations below $250 million whose historical success rate is low. The top three holdings include Saracen Mineral Holdings Ltd. (SAR) and Silver Lake Resources Ltd. (SLR), both Australian mining companies; and Teranga Gold Corp. (TGZ), the Canadian mining operation.

ALPS Medical Breakthroughs ETF (SBIO)

  • Performance over 1-Year: 20.9%
  • Expense Ratio: 0.50%
  • Annual Dividend Yield: 0.04%
  • 3-Month Average Daily Volume: 66,070
  • Assets Under Management: $188.3 million
  • Inception Date: December 30, 2014
  • Issuing Company: ALPS

SBIO is a fund focused on the U.S. health and biotechnology sector, targeting companies with drugs in Phase II or Phase III clinical trials. This fund invests in firms with market caps of $200 million to $5 billion, so it contains micro-cap and mid-cap companies, as well as small-cap, in its portfolio. The fund's top three holdings include Immunomedics Inc. (IMMU), a pharmaceuticals company focused on cancer treatments; United Therapeutics Corp. (UTHR), a biotechnology company; and Acceleron Pharma Inc. (XLRN), a biopharmaceutical company.