Small-cap stocks have delivered greater returns than large-cap stocks historically. Below we’ll review some of the best small cap ETFs to capture that risk premium in 2023.
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In a hurry? Here’s the list:
- VB – Vanguard Small-Cap ETF
- ISCB – iShares Morningstar Small-Cap ETF
- IJR – iShares Core S&P Small-Cap ETF
- VIOO – Vanguard S&P Small-Cap 600 ETF
- SCHA – Schwab U.S. Small-Cap ETF
- IWM – iShares Russell 2000 ETF
- VSS – Vanguard FTSE All-World ex-US Small-Cap ETF
Contents
Introduction – Why Small Cap Stocks?
Small-cap stocks account for roughly 10% of a total market index fund by weight. Many investors like to overweight or tilt small-cap stocks due to their historical outperformance:
Small-cap stocks tend to have more room to move than large-caps, so they exhibit greater volatility. More importantly, small-caps are more risky than more stable, large-cap stocks. Because of this, investors demand higher returns for this greater risk, so small-cap stocks have historically paid a risk premium, referred to as the Size factor premium. As an added bonus, small caps aren’t perfectly correlated with large caps, offering a small diversification benefit.
Including small caps also took the famous 4% Rule up to 4.5% historically.
For those wanting to specifically focus in narrower on small cap value or small cap growth, I made lists for them here and here respectively.
So now that we know why small-caps may deliver market outperformance, let’s explore the best small cap ETFs.
The 7 Best Small Cap ETFs
Below are the 7 best small cap ETFs:
VB – Vanguard Small-Cap ETF
The Vanguard Small-Cap ETF (VB) seeks to track the CRSP US Small Cap Index. With over $90 billion in assets, it is the one of the most popular ETFs to capture the small cap market segment. The fund has over 1,300 holdings and an expense ratio of 0.05%.
ISCB – iShares Morningstar Small-Cap ETF
iShares recently slashed fees on some of their funds. ISCB is one. It now only costs 0.04%, 1 basis point less than Vanguard’s VB above. ISCB also conveniently captures smaller stocks, whereas VB above has some mid-caps. The fund seeks to track the Morningstar US Small-Cap Extended Index and has about $230 million in assets.
IJR – iShares Core S&P Small-Cap ETF
The iShares Core S&P Small-Cap ETF (IJR), as the name suggests, seeks to track the S&P Small Cap 600 Index. The fund has over $40 billion in assets, 600 holdings, and an expense ratio of 0.06%.
This fund has the most loading on the Size factor of all the funds on this list, meaning it captures the smallest stocks. It also provides some convenient exposure to Profitability through the S&P earnings screen. IJR would my choice out of this list for a U.S. small cap blend fund.
VIOO – Vanguard S&P Small-Cap 600 ETF
VIOO from Vanguard tracks the same index as IJR above (the S&P Small Cap 600 Index), so it provides excellent exposure to small stocks, albeit at a slightly higher price of 0.10%. That said, if for some reason you prefer Vanguard funds, this would be my choice. This fund has about $1.75 billion in assets.
SCHA – Schwab U.S. Small-Cap ETF
The Schwab U.S. Small-Cap ETF (SCHA) seeks to track the Dow Jones U.S. Small-Cap Total Stock Market Total Return Index. This fund is another great, low-fee option for investing broadly in small-cap stocks. This ETF ties for the cheapest on the list with an expense ratio of 0.04%.
IWM – iShares Russell 2000 ETF
Investors seeking broader exposure to the small-cap segment may want to target the Russell 2000 Index with the iShares Russell 2000 ETF. The fund has over $40 billion in assets and has an expense ratio of 0.19%.
VSS – Vanguard FTSE All-World ex-US Small-Cap ETF
Ready to target international (ex-US) small-cap stocks? The Vanguard FTSE All-World ex-US Small-Cap ETF (VSS) tracks the MSCI ACWI ex USA Small Cap Index at a low fee of only 0.11%.
Where to Buy These Small Cap ETFs
All these small cap ETFs should be available at any major broker. My choice is M1 Finance. M1 has zero trade commissions and zero account fees, and offers fractional shares, dynamic rebalancing, and a sleek, user-friendly interface and mobile app. I wrote a comprehensive review of M1 Finance here.
Canadians can find the above ETFs on Questrade or Interactive Brokers. Investors outside North America can use eToro or possibly Interactive Brokers.
Disclosures: None.
Interested in more Lazy Portfolios? See the full list here.
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.
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I just heard of an interesting one today. XSVM. I came back here because I thought you might like it.
It screens the s&p600 for the top 240 based on p/e, p/s and p/b.
Then out of the 240 best “value” names, it somehow calculates the top half of those based on momentum. So you sorta get 2 factors in this. Size and momentum.
Reasonable expense ratio and a backtest shows it, so far, has done well against AVUV
Sorry I just realized this wasn’t a small cap value article. But I’m out for time and the info is hopefully still useful.
I just heard of an interesting one today. XSVM. I came back here because I thought you might like it.
It screens the s&p600 for the top 240 based on p/e, p/s and p/b.
Then out of the 240 best “value” names, it somehow calculates the top half of those based on momentum. So you sorta get 2 factors in this. Size and momentum.
Reasonable expense ratio and a backtest shows it, so far, has done well against AVUV
Sorry I just realized this wasn’t a small cap value article. But I’m out for time and the info is hopefully still useful.
Jim, XSVM is definitely not a bad choice, but its factor loading looks pretty different than AVUV. Its index has also changed several times. Why did you submit the same comment 3 different times?
Can you go into more detail on why you prefer VIOO over VB/VSMAX? Especially since Vanguard recommends the opposite? Any good advice or articles on holding small cap in a taxable brokerage account?
Just superior exposure to the Size and Profitability factors. I detailed some of this in relation to Value here. Vanguard doesn’t really “recommend” one, they just assume most people are naively looking for the lowest fee for a stated market segment, which is true. Not much to know about small caps in taxable. All things being equal, they’ll be less tax-efficient than a large cap fund due to higher turnover, especially when talking about small cap value.