Going For Growth: Small-Cap ETFs Win Big

Includes: IJT, IWM, JKK, SPY, VBK
by: Tom Lydon

Small-cap ETFs handily outperformed the S&P 500 in August, as investors preferred riskier asset classes over the larger, more-established companies that have been in favor through most of 2012.

For example, the small-cap iShares Russell 2000 (NYSEARCA:IWM) rose about 5.6% for the month while SPDR S&P 500 (NYSEARCA:SPY) gained 3.2%.

For those investors with higher risk tolerance, small-cap exchange traded funds offer a growth investment for the long term. As the U.S. equity market bounces back, the risk endured with a small-cap investment will pay off if a recovery gets under way.

"Strong bull markets tend to be characterized by leadership and outperformance in small-cap stocks as money grows more confident about the future and positions for higher risk with higher return potential," writes Pension Partners chief investment strategist Michael Gayed at MarketWatch.

"Arguably, growth firms could be just the kick that many portfolios need as these offer above-average revenue and earnings growth with high price-to-book ratio but yield lower than the value and blend counterparts, making them interesting choices as yields are already depressed and not really up to historical levels," Eric Dutram wrote for Zacks.

There are plenty of small-cap focused exchange traded funds on the market. For those investors seeking more exposure to U.S. equities with some diversification, the following small-cap funds growth have been good performers in 2012. All three have outperformed the S&P 500 in a 52-week period. They are heavy on information technology and healthcare sector exposure.

  • Vanguard Small-Cap Growth ETF (NYSEARCA:VBK) This ETF is up 12.17% so far this year. However, like many on this list, the yield is lacking coming in at just 0.48% annually. The trading volume is healthy, with about 1 million shares trading per day and the expense is about 10 basis points.
  • iShares Morningstar Small Growth Index fund (NYSEARCA:JKK) The fund has delivered returns of about 22.32% over the last year and 10.48% year-to-date. It pays an annual dividend of about 0.29%. There are about $92.1 million in AUM.
  • iShares Small Cap 600 Growth Index Fund (NYSEARCA:IJT) With AUM of $1.6 billion, the fund returned about 23.80% in the last one-year period (as of August 24) and 10.48% year-to-date. The fund costs 0.25% and has a yield of 0.59%.

Tisha Guerrero contributed to this article.

Disclosure: I am long SPY, 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.