ETF Investing

Small Cap Funds: Options for Investing

One of the most popular modes of investing for growth-minded investors is small cap funds. A small cap ETF accentuates the upside of small cap stocks, while mitigating the volatility that comes with them. As a result, these investment products have become very popular among savvy investors who want to manage risk. 

While there are general small cap ETFs that pace larger indexes, there are even more opportunities out there for small cap investors. From growth funds to value-focused ETFs, these funds give investors plenty of opportunities to stay true to their core investing theses while capitalizing on small caps’ upside. 

Here’s a quick breakdown of the different small cap funds. It’s worth considering the pros and cons of these investment products as you explore safer ways of investing in small caps. 

There are many different small cap funds to consider

General Small Cap ETFs

Not sure which sector you’re interested in? Just want exposure to small caps? A general small cap fund is likely your speed. These funds typically pace a major small index like the Russell 2000 and are very representative of the average. In many ways, owning one of these ETFs is like owning an index fund. 

While some go even smaller – pegged to the smallest 600 stocks – they’re generally representative of small cap performance across the market. They offer the greatest hedge against volatility thanks to their diversity. Some of the most popular generalist small cap ETFs include…

  • iShares Russell 2000 ETF 
  • Vanguard Russell 2000 ETF
  • iShares Core S&P Small-Cap ETF
  • SPDR S&P 600 Small Cap ETF
  • Vanguard S&P Small-Cap 600 ETF
  • Schwab U.S. Small-Cap ETF.

Small Cap Growth Funds

While most people consider small caps growth-focused stocks to begin with, there are, nevertheless, small cap growth funds. These funds track stocks in more volatile industries and are more suited for individuals who accept more risk. They offer broad exposure, but also more upside, thanks to the strong trajectories of the assets within them. 

The downside, obviously, is that there’s an equal amount of downside risk. And while the ETF mitigates some of this volatility, growth-focused funds tend to be more aggressive and leveraged. Some of the most popular small cap growth funds include…

  • Vanguard Small Cap Growth ETF
  • iShares Russell 2000 Growth ETF
  • iShares Morningstar Small-Cap Growth ETF
  • Vanguard Russell 2000 Growth ETF
  • Motley Fool Small-Cap Growth ETF.

Small Cap Value Funds

If your risk pendulum swings the other way, a value fund might be the best place to make a small cap investment. These funds focus on undervalued companies or those in depressed sectors, with an emphasis on the strong upside they could have when adequately valued by the market. Small cap funds tend to be lower risk, with moderate reward. 

The problem with small cap value funds is that it can be difficult to find value in small cap companies. These are companies that are relatively unproven, which means the success of the fund hinges on a breakout from the companies it tracks. If that breakout never comes, a value fund could languish. Here are a few funds targeted more toward value-driven investors willing to wait on small caps:

  • Vanguard Small Cap Value ETF
  • Avantis U.S. Small Cap Value ETF
  • iShares Morningstar Small-Cap Value ETF.

Small Cap Emerging Market Funds

Thinking about an investment outside of the United States? Small cap emerging market funds are a gateway to lucrative opportunities. Companies in these funds tend to be more volatile and less transparent, due to their international status. That said, there’s also a much longer runway for growth – especially in up-and-coming industries and markets. They’re also a hedge against domestic market headwinds. 

While they offer global exposure, the pool of reputable international companies isn’t always as big as many investors might hope. That means there’s plenty of overlap between companies tracked by emerging market ETFs. It could be difficult to get the exposure you want. Here are a few examples of emerging market small cap funds:

  • WisdomTree Emerging Markets SmallCap Dividend Fund
  • Avantis International Small Cap Value ETF
  • iShares MSCI Emerging Markets Small-Cap ETF.

Small Cap Index Funds

Like generalist ETFs, small cap index funds are a hedge against the volatility associated with small caps. They track the broadest swath of small caps and use cross-sector exposure to create a true average for small cap performance. There’s no better hedge against volatility or general market instability. In fact, small cap index funds are some of the best performing indexes historically. 

As most investors already know, index investing comes with limitations. It focuses on market averages, which sometimes means watching sector-specific ETFs and single small caps stocks put up major returns while you settle for the average. If you’re a risk-averse investor, these are among the safest small cap funds to consider:

  • Russell 2000 Index
  • Fidelity Small Cap Index
  • Northern Small Cap Index
  • Praxis Small Cap Index
  • Vanguard Small Cap Index.

Stick to Your Investment Thesis

Investing in ETFs is a popular play in today’s market. If you’re interested in ETFs, sign up for the Liberty Through Wealth e-letter below. You can learn more about these funds and how you can build wealth in your life.

Are you a value investor? Growth focused? Want exposure outside of the United States? Whatever your core investment thesis, it’s not difficult to find an ETF that aligns with it. And if you’re enthralled by the potential of small caps, there are no shortage of small cap funds to consider. Choose one that fits your investment criteria. Then reap the benefits of small cap stocks with an investment product designed to mitigate the volatility that comes with them.

Read Next: Small Cap Outlook – What to Expect


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