Small-cap companies can offer the potential for big returns…and big losses. Anyone sick of the plodding returns offered by large- and mega-cap companies and ready to take some chances for a shot at big upswings can look to smaller companies with big potential. When one gets traction, it’s not totally unusual to see a stock double or triple in value over the course of a year. Or more. The phrase “ten-bagger” exists for a reason.
But WHICH small-caps to invest in? That’s the key question. There’s more of them out there, they’re harder to get information about, and certain issues, like the quality of management, can make a tremendous difference in a company’s ability for long-term success. Not to mention that comparing relative potential across sectors and industries can be extremely difficult, with the quality of a business plan not always being something one can gauge clearly.
If only there were a way to bet on a broad basket of small-cap companies, one that would give an investor a shot at the big returns while mitigating the risk of pumping money into a single, relatively unproven entity. Well, there is. Small-cap ETFs that track indices like the Russell 2000 ($RUT) contain shares of a multitude of different small caps. And, while they tend to get hit in down times harder, they can also show bigger returns than the market during periods of economic growth. Year-to-date, the Russell 2000 is up 31.43 percent to the S&P’s 22.84 percent.
The Russell 2000 Index
Before looking at small-cap ETFs, it’s probably a good idea to crack open the Russell 2000 for a second. The Russell 2000 is generally considered the benchmark index for tracking small-cap companies, and the highest-volume ETFs all track this index or one of its variants. It’s a subset of the Russell 3000 ($RUA), which is itself an index comprised of 3,000 publicly-held American companies that make up 98 percent of the investable U.S. market. The Russell 2000 consists of the 2,000 smallest companies on the Russell 3000, good for about 8 percent of the larger index’s market capitalization. While other indices are sometimes used (like the S&P 600), the Russell 2000 is generally considered the benchmark.
The following ETFs represent the highest-volume funds tracking small-cap stocks.
iShares Russell 2000 Index Fund ($IWM)
Tracks the Russell 2000 index.
iShares S&P SmallCap 600 Index Fund ($IJR)
Tracks the S&P SmallCap 600 Index, which is an index of 600 small-cap companies put together by Standard & Poors.
Vanguard Small-Cap Fund (VB)
Tracks the Center for Research in Security Prices (CRSP) U.S. Small Cap Index.
Small-cap Growth Stocks
Small-cap growth indices are focused on tracking indices that specifically focus on those small-cap companies consistently showing the characteristics of growth stocks.
iShares Russell 2000 Growth Index Fund ($IWO)
Tracks the Russell 2000 Growth Index.
iShares S&P SmallCap 600 Growth Index Fund ($IJT)
Tracks the S&P SmallCap 600/Citigroup Growth Index.
Vanguard Small-Cap Growth Fund (VBK)
Tracks the MSCI US Small Cap Growth Index.
Small-cap Value Stocks
For those investors looking for companies whose stock price appears to offer a bargain, small-cap value ETFs are one method of making a combined small-cap and value play.
iShares Russell 2000 Value Index Fund ($IWN)
Tracks the Russell 2000 Value Index.
iShares S&P SmallCap 600 Value Fund ($IJS)
Tracks the S&P 600/Citigroup Value Index.
Vanguard Russell 2000 Value Fund (VTWV)
Tracks the Russell 2000 Value Index.
Of course, for those of you who ARE interested in making more specific small-cap plays, you can take a look at our list of Small-Cap Stars. These 400 or so companies have all been subjected to fundamental analysis that identified specific factors that they have in common with the most-successful small-cap companies in their sectors, giving them a distinct potential for growth.
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