Best Small-Cap ETFs to Buy for Growth
Best Small-Cap ETFs to Buy for Growth
Small-cap stocks – those with market capitalizations between $250 million and $2 billion – are becoming increasingly popular among both retail and institutional investors. Small caps have lagged behind large caps and the broader market for most of the last few years but, for several interesting reasons, they are returning to favor.
One reason might be the economy. Small-cap stocks generally do well when economic growth is accelerating. That's because smaller companies tend to be more innovative and agile. Due to their size, they're often in a better position to respond to increases in consumer and business spending. If the U.S. economy continues to improve as it recovers from the post-COVID-19 inflationary shock it endured, small caps could thrive.
Interest rates are also a factor in the growing interest in small caps. After a prolonged period of rate hikes, the Federal Reserve has embarked on a rate-cutting program that, although slower and less aggressive than some experts predicted, may continue throughout 2025. The falling federal funds rate should eventually lower borrowing costs for corporations. Lower rates help small-cap stocks because smaller companies are more dependent on borrowing and subsequently benefit more from better loan terms.
The last and maybe the best explanation for the resurgence of interest in small caps is valuation. Many analysts and investors believe that small-cap stocks are trading at very attractive levels compared to larger companies that have appreciated much more over the last few years.
Investors willing to embrace the somewhat higher risks of investing in smaller companies should consider owning exchange-traded funds, or ETFs, that hold small-cap stocks. Small-cap ETFs are professionally managed by industry experts and provide a much greater degree of diversification than retail investors can achieve on their own.
To that end, here is a list of seven quality small-cap ETFs investors should consider buying today and holding through 2025 and beyond:
SMALL-CAP ETF
Vanguard Small-Cap Growth ETF (ticker: VBK)
iShares Morningstar Small-Cap Growth ETF (ISCG)
Invesco S&P Small Cap Momentum ETF (XSMO)
Janus Henderson Small/Mid-Cap Growth Alpha ETF (JSMD)
Schwab U.S. Small-Cap ETF (SCHA)
Vanguard S&P Small-Cap 600 Growth ETF (VIOG)
iShares MSCI International Small-Cap Equity Factor ETF (ISCF)
One reason might be the economy. Small-cap stocks generally do well when economic growth is accelerating. That's because smaller companies tend to be more innovative and agile. Due to their size, they're often in a better position to respond to increases in consumer and business spending. If the U.S. economy continues to improve as it recovers from the post-COVID-19 inflationary shock it endured, small caps could thrive.
Interest rates are also a factor in the growing interest in small caps. After a prolonged period of rate hikes, the Federal Reserve has embarked on a rate-cutting program that, although slower and less aggressive than some experts predicted, may continue throughout 2025. The falling federal funds rate should eventually lower borrowing costs for corporations. Lower rates help small-cap stocks because smaller companies are more dependent on borrowing and subsequently benefit more from better loan terms.
The last and maybe the best explanation for the resurgence of interest in small caps is valuation. Many analysts and investors believe that small-cap stocks are trading at very attractive levels compared to larger companies that have appreciated much more over the last few years.
Investors willing to embrace the somewhat higher risks of investing in smaller companies should consider owning exchange-traded funds, or ETFs, that hold small-cap stocks. Small-cap ETFs are professionally managed by industry experts and provide a much greater degree of diversification than retail investors can achieve on their own.
To that end, here is a list of seven quality small-cap ETFs investors should consider buying today and holding through 2025 and beyond:
SMALL-CAP ETF
Vanguard Small-Cap Growth ETF (ticker: VBK)
iShares Morningstar Small-Cap Growth ETF (ISCG)
Invesco S&P Small Cap Momentum ETF (XSMO)
Janus Henderson Small/Mid-Cap Growth Alpha ETF (JSMD)
Schwab U.S. Small-Cap ETF (SCHA)
Vanguard S&P Small-Cap 600 Growth ETF (VIOG)
iShares MSCI International Small-Cap Equity Factor ETF (ISCF)
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Re: Best Small-Cap ETFs to Buy for Growth
Vanguard Small-Cap Growth ETF (VBK)
Here's a low-cost way to capitalize on some of the fastest-growing small-cap companies in the U.S. VBK tracks the CRSP U.S. Small Cap Growth Index, which in turn tracks the performance of smaller companies with significant growth stock characteristics. With an expense ratio of only 0.07%, you'll be hard-pressed to find a cheaper fund that does this.
The portfolio is well diversified across 590 companies, none of which represent more than 1% of the whole shebang. You'll find something from every sector in the mix.
It's the second-best fund on the U.S. News & World Report Small Growth ranking. What's more, Morningstar analysts give it a gold badge, indicating they have the highest conviction it will outperform an index or its peer group over the near term. So, you should be in good, low-cost hands here.
Here's a low-cost way to capitalize on some of the fastest-growing small-cap companies in the U.S. VBK tracks the CRSP U.S. Small Cap Growth Index, which in turn tracks the performance of smaller companies with significant growth stock characteristics. With an expense ratio of only 0.07%, you'll be hard-pressed to find a cheaper fund that does this.
The portfolio is well diversified across 590 companies, none of which represent more than 1% of the whole shebang. You'll find something from every sector in the mix.
It's the second-best fund on the U.S. News & World Report Small Growth ranking. What's more, Morningstar analysts give it a gold badge, indicating they have the highest conviction it will outperform an index or its peer group over the near term. So, you should be in good, low-cost hands here.
Re: Best Small-Cap ETFs to Buy for Growth
iShares Morningstar Small-Cap Growth ETF (ISCG)
If VBK is the second-best small growth fund, according to U.S. News, which is the best? This one.
ISCG tracks the Morningstar US Small Cap Broad Growth Extended Index, which uses Morningstar's 10-factor "style box" to find American companies that are both small but mighty in terms of growth.
This leads to a well-diversified portfolio of nearly 1,000 names with only 5% in the top 10. Of course, that diversification mainly extends to the U.S. market. But you do get at least a little bit of every market sector here.
If VBK is the second-best small growth fund, according to U.S. News, which is the best? This one.
ISCG tracks the Morningstar US Small Cap Broad Growth Extended Index, which uses Morningstar's 10-factor "style box" to find American companies that are both small but mighty in terms of growth.
This leads to a well-diversified portfolio of nearly 1,000 names with only 5% in the top 10. Of course, that diversification mainly extends to the U.S. market. But you do get at least a little bit of every market sector here.
Re: Best Small-Cap ETFs to Buy for Growth
Invesco S&P SmallCap Momentum ETF (XSMO)
XSMO is an innovative, $1.4 billion ETF based on the concept of momentum investing. Momentum investing involves investing in stocks that exhibit a strong uptrend in share price appreciation over a predetermined time period, usually not more than one year. Hence, the turnover ratio for the fund is over 100%. In other words, the entire portfolio has been replaced over the past year.
XSMO tracks the S&P SmallCap 600 Momentum Index, which is a benchmark based on the themes of small-cap momentum investing.
The XSMO portfolio has 112 holdings, with the assets fairly well spread across sectors. No stock represents more than 3.2% of the portfolio, and less than one-quarter is in the top 10 names.
It gets five stars from Morningstar and a silver badge. The badge indicates the analysts have "high conviction" it will outperform an index or its peers over a market cycle.
XSMO is an innovative, $1.4 billion ETF based on the concept of momentum investing. Momentum investing involves investing in stocks that exhibit a strong uptrend in share price appreciation over a predetermined time period, usually not more than one year. Hence, the turnover ratio for the fund is over 100%. In other words, the entire portfolio has been replaced over the past year.
XSMO tracks the S&P SmallCap 600 Momentum Index, which is a benchmark based on the themes of small-cap momentum investing.
The XSMO portfolio has 112 holdings, with the assets fairly well spread across sectors. No stock represents more than 3.2% of the portfolio, and less than one-quarter is in the top 10 names.
It gets five stars from Morningstar and a silver badge. The badge indicates the analysts have "high conviction" it will outperform an index or its peers over a market cycle.
Re: Best Small-Cap ETFs to Buy for Growth
Janus Henderson Small/Mid-Cap Growth Alpha ETF (JSMD)
Index funds are great, but sometimes active management is worth its higher price. Such may be the case with JSMD.
The fund leverages Janus Henderson's nearly half-century of fundamental research to find what they consider to be top-tier small- and mid-cap funds. These are companies managers say have "some of the strongest fundamentals" and the potential to "deliver sustainable growth in a variety of market environments."
It whittles a universe of 2,500 names down to just over 260 holdings with the best growth, profitability and capital efficiency. These are, once again, nearly all American names, but they do cover every stock market sector. Morningstar gives it four stars and a silver badge.
Index funds are great, but sometimes active management is worth its higher price. Such may be the case with JSMD.
The fund leverages Janus Henderson's nearly half-century of fundamental research to find what they consider to be top-tier small- and mid-cap funds. These are companies managers say have "some of the strongest fundamentals" and the potential to "deliver sustainable growth in a variety of market environments."
It whittles a universe of 2,500 names down to just over 260 holdings with the best growth, profitability and capital efficiency. These are, once again, nearly all American names, but they do cover every stock market sector. Morningstar gives it four stars and a silver badge.
Re: Best Small-Cap ETFs to Buy for Growth
Schwab U.S. Small-Cap ETF (SCHA)
SCHA is another great small-cap ETF if you want a broadly diversified fund with a low-cost structure. The fund has assets close to $17 billion and an expense ratio of just 0.04%. It also has a massive portfolio of over 1,700 names, none of which account for more than 0.5% of the fund's assets.
While this one is more of a small-cap blend than a small-cap growth fund, it has still provided solid returns over the past year. It mirrors the Dow Jones U.S. Small-Cap Total Stock Market Index. The index was designed to be an accurate representation of the entirety of the domestic small-cap market segment. So you get a bit of all 11 sectors in the SCHA portfolio.
SCHA is another great small-cap ETF if you want a broadly diversified fund with a low-cost structure. The fund has assets close to $17 billion and an expense ratio of just 0.04%. It also has a massive portfolio of over 1,700 names, none of which account for more than 0.5% of the fund's assets.
While this one is more of a small-cap blend than a small-cap growth fund, it has still provided solid returns over the past year. It mirrors the Dow Jones U.S. Small-Cap Total Stock Market Index. The index was designed to be an accurate representation of the entirety of the domestic small-cap market segment. So you get a bit of all 11 sectors in the SCHA portfolio.
Re: Best Small-Cap ETFs to Buy for Growth
Vanguard S&P Small-Cap 600 Growth ETF (VIOG)
Vanguard does it again with another top-ranked small-cap growth fund. This one comes in No. 3 on U.S. News' list, and gets a silver badge from Morningstar. However, the analysts give it only three out of five stars.
The S&P 600 is like the S&P 500's cousin. While the S&P 500 tracks 500 of the largest U.S. companies, the S&P 600 tracks 600 small-cap companies. To qualify, these firms must be profitable.
"This should reduce the number of struggling companies included in the portfolio and should give the fund a modest quality tilt," writes Morningstar Analyst Zachary Evens. "Tiny and unprofitable firms usually perform best during market rallies, but they also tend to fall especially quickly when markets sour."
Vanguard does it again with another top-ranked small-cap growth fund. This one comes in No. 3 on U.S. News' list, and gets a silver badge from Morningstar. However, the analysts give it only three out of five stars.
The S&P 600 is like the S&P 500's cousin. While the S&P 500 tracks 500 of the largest U.S. companies, the S&P 600 tracks 600 small-cap companies. To qualify, these firms must be profitable.
"This should reduce the number of struggling companies included in the portfolio and should give the fund a modest quality tilt," writes Morningstar Analyst Zachary Evens. "Tiny and unprofitable firms usually perform best during market rallies, but they also tend to fall especially quickly when markets sour."
Re: Best Small-Cap ETFs to Buy for Growth
iShares MSCI International Small-Cap Equity Factor ETF (ISCF)
The U.S. stock market has been on a roll of late, making it one of the best sources of growth over the past decade. However, that may not always be the case. If growth should slow or investors lose confidence in domestic companies, international markets may surge ahead. This is why it's always important to include some foreign stocks in your portfolio. You don't have to own foreign small caps, which may be more volatile than larger companies. But if you do want some international small-cap exposure, ISCF is a great way to get it.
The fund invests in small companies from developed nations outside of the U.S., with an eye toward factors that have historically outperformed the broad market. These include value, quality, momentum, low size and low volatility.
The portfolio of over 1,000 stocks brings a bit of every sector from 17 countries. Japan represents the bulk of this at about one-quarter of the fund's assets, followed by the U.K. at just over 13%.
While the under 5% returns over the past year may not seem impressive, Morningstar gives the fund four stars and a gold badge. So, these analysts are at least optimistic about its future. It's also the No. 3 Foreign Small/Mid Blend ETF ranked by U.S. News & World Report.
The U.S. stock market has been on a roll of late, making it one of the best sources of growth over the past decade. However, that may not always be the case. If growth should slow or investors lose confidence in domestic companies, international markets may surge ahead. This is why it's always important to include some foreign stocks in your portfolio. You don't have to own foreign small caps, which may be more volatile than larger companies. But if you do want some international small-cap exposure, ISCF is a great way to get it.
The fund invests in small companies from developed nations outside of the U.S., with an eye toward factors that have historically outperformed the broad market. These include value, quality, momentum, low size and low volatility.
The portfolio of over 1,000 stocks brings a bit of every sector from 17 countries. Japan represents the bulk of this at about one-quarter of the fund's assets, followed by the U.K. at just over 13%.
While the under 5% returns over the past year may not seem impressive, Morningstar gives the fund four stars and a gold badge. So, these analysts are at least optimistic about its future. It's also the No. 3 Foreign Small/Mid Blend ETF ranked by U.S. News & World Report.