Small-cap stocks have delivered greater returns than large-cap stocks historically. Below we’ll review the 8 best small-cap ETFs to capture that risk premium in 2021.
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In a hurry? Here’s the list:
- VB – Vanguard Small-Cap ETF
- VBR – Vanguard Small-Cap Value ETF
- VBK – Vanguard Small-Cap Growth ETF
- IJR – iShares Core S&P Small-Cap ETF
- SCHA – Schwab U.S. Small-Cap ETF
- IWM – iShares Russell 2000 ETF
- VSS – Vanguard FTSE All-World ex-US Small-Cap ETF
- DLS – WisdomTree International SmallCap Dividend Fund
Introduction – Why Small Caps?
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.
So now that we know why small-caps may deliver market outperformance, let’s explore the best small cap ETFs.
The 8 Best Small Cap ETFs
Below are the 8 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%.
VBR – Vanguard Small-Cap Value ETF
Many investors prefer to tilt small-cap value, as they’ve outperformed small-cap growth stocks historically due to the Value premium. The Vanguard Small-Cap Value ETF (VBR) is the most popular ETF to capture this market segment. It holds over 800 small-cap value stocks and seeks to track the CRSP US Small Cap Value Index. This fund has an expense ratio of 0.07%.
VBK – Vanguard Small-Cap Growth ETF
While small-cap value stocks have beaten small-cap growth stocks historically, small-cap growth stocks have beaten small-cap value stocks over the past decade or so. If you prefer to bet on small-cap growth, the Vanguard Small-Cap Growth ETF (VBK) is a great choice. The fund tracks the CRSP US Small Cap Growth Index and has an expense ratio of 0.07%.
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 SmallCap 600 Index. The fund has over $40 billion in assets, 600 holdings, and an expense ratio of 0.06%.
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 is 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%.
DLS – WisdomTree International SmallCap Dividend Fund
You may be interested in specifically targeting international (ex-US) small-cap value stocks. The best proxy to access that narrow segment seems to be a dividend fund from WisdomTree, the WisdomTree International SmallCap Dividend Fund (DLS). This fund tracks the WisdomTree International SmallCap Dividend Index. Unfortunately, targeting international small-cap value stocks is comparatively more expensive than our other funds on this list; this ETF has an expense ratio of 0.58%.
Where to Buy These Small Cap ETFs
M1 Finance offers all these small cap ETFs. 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. Investors outside the U.S. can find these ETFs on eToro.
Disclosures: I am long VBR.
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.