Best Small-Cap ETFs for Q3 2022

INFL, XSVM, and AVUV are the best small-cap ETFs for Q3 2022

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.

Key Takeaways

  • The small-cap sector significantly underperformed the broader market over the past year.
  • The small-cap exchange-traded funds (ETFs) with the best one-year trailing total returns are INFL, XSVM, and AVUV.
  • The top holdings of these ETFs are Archer Daniels Midland Co., Olympic Steel Inc., and PDC Energy Inc., respectively.

There are 48 small-cap ETFs that trade in the U.S., 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. The Russell 2000 posted a one-year trailing total return of -15.7% compared with the S&P 500’s 1.0% as of May 3, 2022. The best-performing small-cap ETF, based on one-year trailing total returns, is the Horizon Kinetics Inflation Beneficiaries ETF (INFL).

We examine the three best small-cap ETFs below. All numbers below are as of May 3, 2022, unless otherwise stated.

Horizon Kinetics Inflation Beneficiaries ETF (INFL)

  • Performance over one year: 10.2%
  • Expense ratio: 0.85%
  • Annual dividend yield: 0.50%
  • Three-month average daily volume: 451,334
  • AUM: $1.4 billion
  • Inception Date: Jan. 11, 2021
  • Issuer: Horizon Kinetics LLC

INFL is an actively managed ETF that aims to provide long-term growth of capital in real terms. Real returns, as opposed to nominal returns, are inflation-adjusted returns. To achieve those inflation-adjusted returns, the fund invests in stocks of companies that are expected to benefit from rising prices of real assets, such as commodities. The revenue of these companies is expected to grow along with inflation, while their expenses are expected to remain relatively steady. The ETF is primarily focused on small-cap growth stocks. Its top three holdings as of May 5, 2022, are Archer Daniels Midland Co. (ADM), an agricultural origination and processing company; Texas Pacific Land Corp. (TPL), an owner of land in Texas that earns income from land sales, oil and gas royalties, grazing leases, and interest; and Viper Energy Partners LP (VNOM), a developer of oil and natural gas properties in North America.

Invesco S&P SmallCap Value with Momentum ETF (XSVM)

  • Performance over one year: 4.3%
  • Expense ratio: 0.39%
  • Annual dividend yield: 0.83%
  • Three-month average daily volume: 170,637
  • AUM: $711.6 million
  • Inception date: March 3, 2005
  • Issuer: Invesco

XSVM seeks to track the S&P 600 High Momentum Value Index by investing at least 90% of its assets in the securities that make up the index. The index is comprised of 120 securities in the S&P SmallCap 600 Index that have the highest value and momentum scores. Within the index, securities with higher scores receive higher weightings. The ETF provides exposure to small-cap equities that are relatively undervalued and exhibit strong price momentum. While the fund is focused on value, it employs a blended strategy that also includes growth stocks. The fund's top three holdings are Olympic Steel Inc. (ZEUS), which processes flat-rolled carbon steel, stainless steel, and other products; class A shares of PBF Energy Inc. (PBF), an independent petroleum refiner and supplier; and Andersons Inc. (ANDE), an agriculture company that merchandises grain, distributes wholegrain agricultural fertilizer, and more.

Avantis U.S. Small Cap Value ETF (AVUV)

  • Performance over one year: 3.8%
  • Expense ratio: 0.25%
  • Annual dividend yield: 0.99%
  • Three-month average daily volume: 704,371
  • AUM: $2.9 billion
  • Inception date: Sept. 24, 2019
  • Issuer: American Century Investments

AVUV is an actively managed ETF that aims to provide long-term capital appreciation by investing in U.S. small-cap companies with low valuations and high profitability ratios. The fund has hundreds of holdings, providing exposure to a broad set of small cap stocks. Financial companies receive the largest weighting in the fund, followed by energy companies and industrials. Its top three holdings are PDC Energy Inc. (PDCE), a producer and distributor of petroleum products; class A shares of Triton International Ltd. (TRTN), a lessor of intermodal containers and chassis; and SM Energy Co. (SM), which explores for and produces crude oil and natural gas.

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