The landscape for ETF investment continues to alter as new and stranger ETFs come on the market every month. It is enticing to drop some money into something like GuruTrader’s Clown Car Blend ETF — which doesn’t actually exist but might be fun if it did — and think some mix of stocks aggregated by a clown running through a minefield will have market-beating returns.
Actually, it might. Some investment managers are a bit like clowns running through minefields.
In any event, while exotic ETFs might have a place in your portfolio, I’m here to suggest three of the best ETFs that very well should have a place in the portfolio of the conservative investor, the aggressive investor and the all-around investor alike.
Today, I’m looking at one of my favorite sectors: small-cap growth. Small-caps have a greater chance for returning multiples of your investment over time than large caps. So far, this asset class isn’t blowing away other sectors, but that’s not the point. We look at the long-term.
According to ETFdb.com, there are 11 non-inverse small-cap growth ETFs, with expense ratios ranging from just 0.09% to 0.95%. Their year-to-date (YTD) returns range from a loss of 3.4% to a gain of 3.99%.
These are three of the best ETFs for small-cap growth:
3 Best ETFs for Small-Cap Growth: SPDR S&P 600 Small Cap Growth ETF (SLYG)
For aggressive investors, I suggest SPDR S&P 600 Small Cap Growth ETF (SLYG). It is the ninth-best ETF in its class YTD, and only up 0.75% year-to-date, but has delivered five-year returns of 141%, the highest of any non-leveraged ETF in the sector.
It has performed better than the S&P 500 from financial crisis peak-to-trough and back again, and tends to track the Nasdaq Composite index fairly closely.
It tosses of a very tiny yield of 0.67%, but that’s not why you buy this ETF. You buy it for the performance, and the low expense ratio of 0.25%.
You also buy it for its diversification. It holds 364 stocks that are designed to mirror the return on the aforementioned index. The actual stocks it holds include Tyler Technologies, Inc. (TYL), West Pharmaceutical Services Inc (WST), my favorite small-cap stock PRA Group Inc (PRAA) and Buffalo Wild Wings (BWLD).
3 Best ETFs for Small-Cap Growth: PowerShares Fundamental Pure Small Cap Growth Portfolio (PXSG)
The best ETF for conservative small-cap growth holdings might just be the PowerShares Fundamental Pure Small Cap Growth Portfolio (PXSG). The “fundamental” approach is what I like about this fund. It isn’t just a straight-ahead market-cap-weighted index that’s subject to the market’s popularity contests.
PXMV knocks out the largest 90% of cumulative fundamental weight, and then examines the final 10% of stocks. Of those, the companies selected for the index must meet certain fundamental analysis screens, including five-year average sales, cash flow, latest book value and five-year average dividend. Then the stocks are compared to the sector to see which are growing faster than its peers.
This ETF holds 421 stocks, which offers plenty of diversification in case some of these growth stocks blow up from lack of performance or failing to hit growth targets.
The top 10 holdings account for less than 10% of the assets. The sector breakdown is 26% financials, 7% energy, 11% healthcare, 13% consumer discretionary, 23% IT, 13% industrial, and 3% consumer staples.
The “fundamental” approach has led it to include the following in its top three holdings: Skyworks Solutions Inc (SWKS), Triumph Group Inc (TGI) and ITC Holdings Corp. (ITC). PXSG has a reasonable expense ratio of 0.41%.
3 Best ETFs for Small-Cap Growth: Vanguard Small-Cap Growth ETF (VBK)
If you’re looking for the best ETF for all-around small-cap growth, I suggest Vanguard Small-Cap Growth ETF (VBK). The ever-reliable Vanguard ETF offers no frills with its 0.09% expense ratio.
This is a straight-up, passively-managed, full-replication strategy, as you expect from the venerable fund family.
You are massively diversified with its 731 holdings. The top 10 account for only 5.1% of the total asset base, so this is one of the best ETFs when it comes to diversification in the small-cap space.
There aren’t a lot of familiar names here, but you wouldn’t expect there to be since these are small companies trying to get a name for themselves. The top holdings include The Cooper Companies, Inc. (COO), followed by Medivation Inc (MDVN) and Harman International Industries Inc./DE/ (HAR).
This ETF also offers sector diversity. It has 5% of assets invested in financials, 16% in industrials, 15% in consumer cyclical, 21% in tech, 1% in utilities, 14% in healthcare and 7% in energy.
As of this writing, Lawrence Meyers does not hold a position in any of the aforementioned securities.
