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2 Small-Cap ETFs For Growth Portfolios

Published 06/11/2021, 09:20 AM
US2000
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GME
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IWM
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NVAX
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PLUG
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MED
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CZR
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RZG
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RZV
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AMC
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CELH
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COOP
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VSTO
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FLGT
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Small-cap stocks can boost portfolio diversification and increase potential returns over time. While the definition of small-caps may vary slightly across US brokerages, it is generally defined as a company with a market capitalization (cap) of between $150 million and $2 billion.

Small-caps have smaller balance sheets and less cash in relative terms versus their large-cap peers. Both academic research and market evidence highlight that over the long run, small-cap stocks often outperform their large-cap counterparts. However, they are typically more volatile.

Many investors include small-cap stocks in growth portfolios. Therefore today’s article introduces two exchange-traded funds (ETFs) that focus on small-caps.

1. iShares Russell 2000 ETF

  • Current Price: $229.28
  • 52-week range: $133.28 - $234.53
  • Dividend Yield: 0.87%
  • Expense Ratio: 0.19% per year

For those looking to invest in US small-caps, the iShares Russell 2000 ETF (NYSE:IWM) could be a fund to research further.

IWM Weekly

The fund tracks the Russell 2000, index. Let’s first briefly discuss Russell indices that are created by FTSE Russell—a UK-based provider of a wide range of stock market indices and associated data services.

A given Russell index tracks the performance of a broad asset class, or may focus on a narrower part of the market, like technology shares. There are several Russell index examples with a US equity focus, including the Russell 1000, Russell 2000, Russell 3000, Russell Microcap, and Russell Top 200.

The Russell 3000 index represents about 98% of the investable US equity market, and encompasses all sub-indexes. The large-cap Russell 1000 index and the small-cap Russell 2000 index are regarded as two of the most important US indices. Thus, the IWM ETF tracks the small-cap Russell 2000 index and is generally used by traders and investors as the index's proxy.

The fund started trading in May 2000. The top 10 holdings make up less than 5% of net assets of $69.2 billion. In other words, short-term price moves in a given stock would not be able to affect the moves in the fund.

Among the leading names are the movie theatre operator, AMC Entertainment (NYSE:AMC), which has become a “meme-stock” (covered here); casino operator Caesars (NASDAQ:CZR); another meme-stock GameStop (NYSE:GME), omnichannel video game retailer; Plug Power (NASDAQ:PLUG), alternative energy group focusing on hydrogen fuel cell systems, and late-stage biotech group Novavax (NASDAQ:NVAX).

Year-to-date, IWM is up around 18%, and hit an all-time high (ATH) of $234.52 in mid-March. As it is currently close to those levels, a new record high could come in the summer months. We believe the fund deserves to be on an investor's watchlist, with a view to buy the dips.

2. Invesco S&P SmallCap 600 Pure Growth ETF

  • Current Price: $159.48
  • 52-Week Range: $94.51 - $175.53
  • Dividend Yield: 0.30%
  • Expense Ratio: 0.35% per year

The Invesco S&P SmallCap 600® Pure Growth ETF (NYSE:RZG) gives exposure to US-listed small-cap growth companies that are expected to grow faster than their peers. Such businesses are typically at a much earlier stage in their life cycles.

RZG Weekly

RZG tracks the S&P SmallCap 600® Pure Growth Index, which measures the performance of securities demonstrating strong growth characteristics. The stocks are selected based on their value and three-year growth factors.

The fund, which is rebalanced annually, has 127 holdings. Since its inception in March 2006, net assets have grown to $141.5 million. The top five industries (by weighting) include consumer discretionary (22.47%), health care (22.11%), information technology, IT, (14.33%), financials (12.81%) and industrials (10.17%).

Top ten holdings comprise 19.62% of the fund. Among the leading names are outdoor sports and recreation products company Vista Outdoor (NYSE:VSTO), mortgage servicing and loan originations platform provider Mr. Cooper Group (NASDAQ:COOP), genetic testing focused technology company Fulgent Genetics (NASDAQ:FLGT), weight management products provider Medifast (NYSE:MED), and Celsius (NASDAQ:CELH), which develops calorie-burning beverages.

Since the start of the year, the fund has returned 15.5%, and hit a record-high in February. Long-term investors could consider investing in around $155. It is important to note that along with increased potential returns, most small-cap growth stocks generally carry more risk. Therefore, funds like RZG tend to be volatile.

On a final note, RZG has a counterpart that could appeal to value investors. The Invesco S&P SmallCap 600® Pure Value ETF (NYSE:RZV) concentrates on small-caps that are likely to offer value. That ETF is up over 47% in 2021 and hit an ATH in recent days.

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