A Guide to U.S. Small Cap and Microcap ETFs

by: SA Editors

US Small Cap and Microcap ETFs List
(click on symbol for data and articles)

Small Cap Traditional Index ETFs
iShares S&P SmallCap 600 Index Fund (NYSEARCA:IJR)
iShares Russell 2000 Index Fund (NYSEARCA:IWM)
iShares Morningstar Small Core Index Fund (NYSEARCA:JKJ)
SPDR DJ Wilshire Small Cap ETF (DSC)
Vanguard Small-Cap ETF (NYSEARCA:VB)
Schwab U.S. Small-Cap ETF (NYSEARCA:SCHA)

Small Cap Non-Traditional Index ETFs
PowerShares FTSE RAFI US 1500 Small-Mid (NASDAQ:PRFZ)
PowerShares FTSE NASDAQ Small Cap (PQSC)
Claymore/Sabrient Stealth ETF(STH)

Small Cap Dividend ETFs
WisdomTree SmallCap Dividend Fund (NYSEARCA:DES)

Small Cap Earnings ETFs
WisdomTree SmallCap Earnings Fund (NYSEARCA:EES)

Small Cap Quant Strategy ETFs
PowerShares Dynamic Small Cap Portfolio (PJM)
PowerShares Zacks Small Cap Portfolio (PZJ)
First Trust Small Cap Core AlphaDEX (NASDAQ:FYX)

Small Cap Revenue Weighted ETFs
RevenueShares Small Cap ETF (NYSEARCA:RWJ)

Small Cap Leveraged 2X and 3X ETFs
ProShares Ultra Russell 2000 ETF (NYSEARCA:UWM)
ProShares Ultra SmallCap 600 ETF (NYSEARCA:SAA)
Rydex 2x Russell 2000 (RRY)
Direxion Daily Small Cap Bull 3X Shares (NYSEARCA:TNA)
ProShares UltraPro (3X) Russell 2000 (NYSEARCA:URTY)

Small Cap Inverse (Short) and Leveraged 2X and 3X Inverse ETFs
ProShares Short Russell 2000 ETF (NYSEARCA:RWM)
ProShares Short SmallCap 600 ETF (NYSEARCA:SBB)
ProShares UltraShort Russell 2000 ETF (NYSEARCA:TWM)
ProShares UltraShort SmallCap 600 ETF (NYSEARCA:SDD)
Rydex Inverse 2x Russell 2000 ETF (RRZ)
Direxion Daily Small Cap Bear 3X Shares (NYSEARCA:TZA)
ProShares UltraPro Short (3X) Russell 2000 (NYSEARCA:SRTY)

Microcap Traditional Index ETFs
iShares Russell Microcap Index Fund (NYSEARCA:IWC)

Microcap Quant Strategy ETFs
First Trust Dow Jones Select MicroCap Index Fund (NYSEARCA:FDM)
PowerShares Zacks Micro Cap Portfolio (NYSEARCA:PZI)

What Are They?

  • The definition of small cap stocks varies by index provider. For example, S&P defines "small cap" as companies with a market cap of $300 million to $1.5 billion, while Dow Jones takes the largest 5,000 stocks and places stocks ranked 751 to 2,5000 in the Wilshire Small-Cap Index and those ranked 2,501 to 5000 in the Wilshire Micro-Cap Index.
  • The ETFs in the list provide three fundamentally different approaches to investing: (1) traditional market-cap weighted indexing, (2) fundamental weighting based on earnings or dividends, and (3) rules-based "quant" investing, such as selecting stocks based on P/E ratios and other quantitative metrics.
  • Leveraged and short ETFs use traditional market-cap based indexes, and offer vehicles to bet against the index or to increase exposure to the index above 100%.

Why & How To Use Them

  • Long term investors looking to build an ETF portfolio need to decide how many ETFs to use to cover US stocks. One option is to use 3 ETFs covering large cap/mid cap/small caps.
  • Micro cap stocks often aren't included in some Total Market ETFs, so if you chose to use a Total Market ETF in place of 3 separate ETFs covering large caps, mid caps and small caps, it may still make sense to add a microcap ETF to your portfolio.
  • Traditional index ETFs tend to be cheap (ie. have low expense ratios) and liquid. That makes them suitable for short-term traders as well as longer term investors.
  • Market-cap-defined ETFs are also suitable for hedging. For example, if you significant illiquid exposure to a single stock, you can hedge that exposure by selling short an ETF of the suitable market cap. Note, however, that shorting carries risks and disadvantages, including the requirement to pay dividends, and that capital gains will be short term (unless you use a short ETF).
  • For hedge funds and sophisticated individual investors: It's hard to short individual microcap stocks, so if you want to hedge long positions in microcap stocks, shorting the microcap ETF is arguably the best way.

What to Look Out For

  • Differences between the small cap ETFs are important. The Russell 2000 Index Fund (IWM), for example, covers more of the small cap market and is less concentrated than the S&P SmallCap 600 Index Fund (IJR).
  • There are significant differences in composition and methodology between the traditional index ETFs and the more exotic ETFs.
  • The cheapest ETFs (ie. those with the lowest expense ratios) are the traditional market cap weighted index ETFs. They're also the most tax efficient, because market cap weighting tends to result in low turnover in the underlying stocks.
  • The Morningstar series ETFs may be less liquid than other ETFs. Morningstar was relatively late to the ETF market and by the time they arrived the Morningstar series ETFs seemed redundant to many people, potentially resulting in lower liquidity and wider buy-sell spreads.
  • Vanguard's ETFs have a different structure from other ETFs, and may be less tax efficient. See Further Reading below.

Further Reading

This page is part of The Seeking Alpha ETF Selector which sorts ETFs by type, highlights how to use them and what to look out for, and provides links to articles that discuss key issues for investors.