Top 10 U.S. Small-Cap ETFs

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 |  Includes: FYX, IJR, IWC, IWM, JKJ, RWJ, SCHA, SLY, VB, VTWO
by: David Fry

3-24-2013 6-47-58 PM small caps

Our goal in this profile is to help investors wade through the many competing ETF offerings available. There are currently over 50 U.S. small-cap issues whether categorized as growth, value or blend. This is overwhelming for most investors. We try to help select those ETFs that matter even if they might be repetitive. The result is a more manageable list of issues from which to choose varying ETFs, perhaps by fees and history.

Our focus is to stick with the "blend" category since they should satisfy most investor needs. We believe these constitute the best index-based offerings individuals and financial advisors may utilize.

Uniquely, investors should remember: Small-cap issues usually carry higher beta (volatility or higher risk levels) than their large cap peers. This means during times of higher economic growth combined with accommodative Fed monetary policies returns in this sector should outperform larger cap issues. But, the opposite situation may occur should conditions reverse. Investors should remain aware of these risk characteristics.

One thing you'll note with charts posted is the similarities in trends and performance. This isn't a coincidence given overall index constituent similarities.

We feature a technical view of conditions from monthly chart views. Simplistically, we recommend longer-term investors stay on the right side of the 12 month simple moving average. When prices are above the moving average, stay long, and when below remain in cash or short. Some more interested in a fundamental approach may not care so much about technical issues, preferring instead to buy when prices are perceived as low and sell for other reasons when high - but, this is not our approach. Premium members to the ETF Digest receive added signals when markets become extended such as DeMark triggers to exit overbought/oversold conditions.

For traders and investors wishing to speculate or hedge, leveraged and inverse issues are available from ProShares and DirexionShares.

We choose not to rank these issues allowing investors to find those that best match their needs.

iShares Morningstar Small Core ETF (JKJ)

JKJ follows the Morningstar Small Core Index which measures the performance of small-cap stocks that have exhibited average growth and value characteristics. The fund was launched in June 2004. The expense ratio is 0.25%. AUM equal $160 M and average daily trading volume is over 6K shares. (Given light volume it's recommended to use "limit orders" when buying or selling.) As of first quarter 2013 the annual dividend yield was 1.65% and YTD return was 13.03%. The 1YR return was 17.05%.

JKJ

First Trust Small Cap Core AlphaDEX ETF (FYX)

FYX follows the Defined Small Cap Core Index which is an "enhanced" index created and administered by Standard & Poor's which employs the AlphaDEX stock selection methodology to select stocks from the S&P SmallCap 600 Index. The fund was launched in May 2007. The expense ratio is 0.70%. AUM equal $200M and average daily trading volume is 45K shares. As of first quarter 2013 the annual dividend yield was 1.01% and YTD return was 10.80%. The 1YR return was 15.96%.

FYX

Revenue Shares Small Cap ETF (RWJ)

RWJ follows the Revenue Shares Small Cap Index which is comprised of the same securities as the S&P Small Cap 600 but weights the stocks according to top line revenue instead of market capitalization. The fund was launched in February 2008. The expense ratio is 0.54%. AUM equal $143 M and average daily trading volume is less than 20K shares. As of first quarter 2013 the annual dividend yield was 1.15% and YTD return was 11.25%. The 1YR return was 17.65%.

SPDR S&P 600 Small Cap ETF (SLY)

SLY follows the S&P Small Cap Index which measures the performance of the small capitalization sector of the U.S. equity market. The fund was launched in August 2005. The expense ratio is 0.20%. AUM equal $277M and average daily trading volume is less than 20K shares. As of first quarter 2013 the annual dividend yield was 1.55% and YTD return was 11.03%. The 1YR return was 16.50%.

Vanguard Russell 2000 ETF (VTWO)

VTWO follows the Russell 2000 Index which measures the performance of the small-cap segment of the U.S. equity universe and is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 10% of the total market capitalization of that Index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The fund was launched in September 2010. The expense ratio is 0.21%. AUM equal $200M and average daily trading volume is 35K shares. As of first quarter 2013 the annual dividend yield was 1.41% and YTD return was 11.40%. The 1YR return was 17%. VTWO trades commission free at Vanguard.

iShares Micro-Cap ETF (IWC)

IWC follows the Russell Microcap Index which measures the performance of the microcap sector of the U.S. equity market. The fund was launched in August 2005. The expense ratio is 0.71%. AUM equal $530M and average daily trading volume is 45K shares. As of first quarter 2013 the annual dividend yield was 1.75% and YTD return was 12.10%. The 1YR return was 17.85%. IWC trades commission free at TD Ameritrade.

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iShares Russell 2000 ETF (IWM)

IWM tracks the Russell 2000 index which consists of the smallest 2000 stocks in the Russell 3000 index. The fund was launched in May 2000. The expense ratio is 0.28%. AUM equal $21 billion and average daily trading volume is 33M shares. As of first quarter 2013 the annual dividend yield was 1.80% and YTD return was 11.67%. The 1YR return was 17.05%.

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iShares S&P 600 SmallCap 600 ETF (IJR)

IJR follows the S&P SmallCap 600 Index. The fund was launched in May 2000. The expense ratio is 0.16%. AUM equal nearly $10 billion and average daily trading volume is around 900K shares. As of first quarter 2013 the annual dividend yield was 1.50% and YTD return was 11.25%. The 1YR return was 17.05%. IJY trades commission free at Fidelity and TD Ameritrade.

Vanguard Small-Cap ETF (VB)

VB follows the MSCI US Small Cap 1750 Index which consists of 1750 small cap stocks in U.S. markets. The fund was launched in January 2004. The expense ratio is 0.16%. AUM equal $5.8 billion and average daily trading volume exceeds 420K shares. As of the first quarter 2013 the annual dividend yield was 1.65% and YTD return was 11.80%. The 1YR return was 18.35%, demonstrating high volatility. VB trades commission free at TD Ameritrade and Vanguard.

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SCHA follows the Dow Jones U.S. Small Cap Total Stock Market Total Return Index which (aside from a mouthful) is a subset of the Dow Jones U.S. Total Stock Market Index, which measures all U.S. equity securities with readily available prices. The index represents the stocks ranked 751-2,500 by full market capitalization and is float-adjusted market cap weighted. The fund was launched in November 2009. The expense ratio is 0.10%. AUM equal $1 billion and average daily trading volume is 270K shares. As of first quarter 2013 the annual dividend yield was 1.65% and YTD return was 11.81%. The 1YR return was 18.15%. SCHA trades commission-free at Charles Schwab.

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CONCLUSION

As noted in the introduction and within many charts the Small Cap sector has the highest beta of the larger indexes. This means more volatility overall and better returns theoretically as overall stock markets rise. On the other hand, it can also mean underperformance as markets fall. This is why we believe it's important to incorporate long-term technical indicators like DeMark to prevent large drawdowns like we've seen over the last decade especially.

Remember, small caps are the most addicted to Quantitative Easing (QE) that the Fed is undertaking. The more this occurs the more small caps respond positively.

It's also important to remember that ETF sponsors have their own competitive business interests when issuing products which may not necessarily align with your investment needs. New ETFs from highly regarded and substantial new providers are also being issued.

The ETF Digest is long IWM in the featured ETFs.

Disclosure: I am long IWM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.