Best small cap ETFs to buy in 2022
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Small cap companies have a market cap of between $200 million and $2 billion. Investing in this space can be a difficult task but can offer strong growth opportunities. Buying small cap ETFs is a great way to reduce volatility of individual stocks. That’s why our expert analysts have selected five of the best ETFs in this guide.
What are the top small cap ETFs to buy?
Our experts have selected five of the top small cap ETFs for the year ahead listed in the table below. You can scroll lower to find information on each one and invest straight away.
|#||ETF symbol||ETF name||Where to Trade|
|1||VBR||Vanguard Small Cap Value|
|2||VBK||Vanguard Small Cap Growth|
|3||XSMO||Invesco S&P Small Cap Momentum|
|4||VSS||Vanguard FTSE All-World ex-US Small Cap|
|5||SCZ||iShares MSCI EAFE Small Cap|
1. Vanguard Small Cap Value (NYSEARCA: VBR)
The Vanguard small cap value is a US focused ETF that seeks to track the performance of an index called the CRSP US Small Cap value. It contains over 950 stocks and no single company makes up more than 1% of the fund.
Its top ten companies account for just 5% of its total holdings, making it well diversed and a good way to get exposure to a large part of the small cap sector. Its three largest stocks include DiamondBack Energy, VICI Properties, and Signature bank.
VBR is well spread across all industries, however around 40% of its holdings operate in either the consumer, financial, or industrial sectors. It takes top spot on our list due to its diverse and large portfolio. Since its inception in 2004, it has been a well performing ETF gaining nearly 300% in that time.
2. Vanguard Small Cap Growth (NYSEARCA: VBK)
The second spot on our list goes to another Vanguard ETF, this time the Small Cap Growth (VBK). Similar to the above ETF, it contains a large number of holdings; over 700. All of its stocks are US companies and it offers a mostly equal weighting across the board.
VBK was created in 2004 and aims to track the performance of the CRSP US Small Cap Growth index. Since its inception it has performed very well, growing by over 500%. It favours stocks from the tech industry and healthcare sector which make up nearly 40% of its total.
Our analysts have placed it second on our list as it is more geared towards value companies, which makes it suited to longer term investors. It’s a slightly more aggressive ETF than above, however it offers exposure to some of the best small cap stocks in the United States.
3. Invesco S&P Small Cap Momentum (NYSEARCA: XSMO)
XSMO invests at least 90% of its total assets in securities that comprise the S&P Small Cap Momentum 600 index. It contains 120 stocks from the index which have the highest ‘momentum scores’, as calculated by Invesco.
It focuses on US small-cap stocks and its biggest two-sector allocations are financials and consumers. One of the largest stocks it holds is Macy’s Inc, which operates well-known department stores such as Macy’s and Bloomingdales.
Since its inception in 2005, it has shown its ability to perform well in all economic climates. Most notably, in the aftermath of the covid pandemic, XSMO rallied in excess of 100% following a drop in price. It joins our list as it invests in companies that are undervalued and show strong momentum.
4. Vanguard FTSE All-World ex-US Small Cap (NYSEARCA: VSS)
The largest ETF on our list consisting of over 4000 stocks, VSS aims to track the performance of the FTSE all world ex-US small cap index. Unlike the previous three funds we’ve mentioned above, this Vanguard ETF focuses on non US companies.
It has a fairly equal geographical weighting, including Europe, emerging markets, and the Pacific region. These regions amount to three quarters of the fund’s total distribution. Due to the large number of stocks it contains, no single holding is larger than 0.5% and its top ten equals just 3% of total assets.
VSS provides a way to get broad exposure across developed and emerging non-US small cap equity markets around the world. Its equal weighting protects it from single-company volatility.
5. iShares MSCI EAFE Small Cap (NASDAQ: SCZ)
Taking the final place on our best small cap ETFs list is the iShares MSCI EAFE. Like the Vanguard above, SCZ gives investors exposure to small cap companies not located in the US. It invests in businesses in Europe, Australia, and Japan. Around 40% of the funds companies reside in Japan and the UK.
It spreads across all sectors, however it has a preference for industrials and consumer discretionary where 30% of its stocks operate. SCZ is made up of over 2000 companies, none of which have a higher weighting than 0.5%, making it a well-diversified ETF.
Where to buy the best small cap ETFs
You can sell and buy ETFs in the same way as any normal stock. That means that before buying shares in an ETF you will need to sign up to a broker. The table below shows some of the best brokers offering ETFs. You can click the links and sign up in just a few minutes.
What is a small cap ETF?
It is an exchange traded fund that includes a basket of companies with small market capitalisations. These companies can function in any sector of the economy and be located around the world. However, to be regarded as a small cap, their market capitalisation must be between $300 million and $2 billion.
ETFs trade on stock exchanges just like regular stocks and can be bought and sold when markets are open. Investors are drawn to ETFs because they offer a way to diversify a portfolio while gaining exposure to specific sectors, geographical locations, and industries.
Are small cap ETFs a good investment?
Yes they can be and are an easy way to allocate part of a portfolio to smaller companies with growth potential. Investing in small cap ETFs is often a better option than picking individual stocks because they offer less volatility and allow for spreading risk across a broad sector.
The small cap sector often outperforms the broader market, however it is known for its volatile environment. ETFs in this space, especially those which include numerous industries give access to the whole sector.
Before buying an ETF you’ll need to register with a broker and keep upto date with the latest news and developments. Both of which you can do by clicking on the links below.
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