When it comes to growth, small-cap stocks take the cake. The asset class has managed to outperform their larger brethren over the long haul.
According to studies conducted by famous economists Eugene Fama and Kenneth French from 1926 to 2012, small-cap stocks managed to outperform large-caps by a cumulative extra return of 253%. That’s an extra 253%.
The crux in those extra returns is that the period is over the long haul and it came with an extra big dose of volatility.
For many investors in retirement, the extra volatility and time needed to really capture the best of what small-cap stocks have to offer is too much. So many older investors ignore them and limit their exposure to small caps.
However, this is poppycock. The truth is investors in retirement are long-term investors. With retirements lasting 30 years or more, investors still need plenty of growth to get them through their golden years.
And small-cap stocks still are one of the most powerful ways to get that growth. Older investors nearing or in retirement need them just as much as someone younger.
With that in mind, here’s one stock, one exchange-traded fund and one mutual fund that makes it easy to add a dose of small-cap stocks to your portfolio.
Small-Cap Stocks for Retirement: Diebold (DBD)
You may not be familiar with its name, but odds are you’ve used one of Diebold’s (DBD) main products at least one time this week. DBD is the largest manufacturer of ATMs for banks and other financial institutions. That’s a pretty good business to be in.
As more banks look to cut labor costs and reduce overhead, the number of ATMs worldwide continues to grow. DBD is already one of the dominant players in the industry — which provides plenty of stability and cash flows for its bottom line. And it continues to grow its market share — either through innovation (live, two-way Concierge Video Services or millennial-inspired ATM concepts) or mergers and acquisitions.
Diebold recently announced that it was in talks to buy out Germany-based ATM producer Wincor Nixdorf. Diebold isn’t just a one-trick ATM pony, however; the firm is also a leading provider of new touchscreen voting machines and innovative pay/banking software solutions for the financial industry.
The combination of old and new businesses has helped DBD become the perfect blend of growth and stability that retired investor’s looking at small-cap stocks need. Also helping is the firm’s dividend that has been paid for 61 consecutive years.
DBD currently yields 3.15%.
Small-Cap Stocks for Retirement: WisdomTree SmallCap Dividend ETF (DES)
For those investors in retirement, small-cap stocks that pay dividends could be their best friends.
Dividends are ultimately a sign of financial discipline when it comes to smaller firms. Often small-cap dividend payers come with steady cash flows and low debt. That has many has positive effects, including lower volatility, and perhaps most important of all, higher returns.
The WisdomTree SmallCap Dividend ETF (DES) is the way to get those small-cap stocks dividends.
Like all of WisdomTree’s ETFs, DES tracks a propriety index. In this case, DES focuses on the bottom quarter of the broader WisdomTree Dividend Index. DES uses screens and weights its portfolio according to the “proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year.” Basically, DES overweight’s small-cap stocks that pay bigger dividends. Top holdings for the ETF include cigarette vendor Vector Group (VGR), regulated-utility firm UIL Holdings (UIL) and refiner PBF Energy (PBF).
Currently, DES has a 30-day SEC yield of 3.05%.
That yield, along with small-cap stocks dominance has helped DES produce an annual total return of nearly 12% over the last five years. Expenses run 0.38%, amounting to $38 per $10,000 invested.
Small-Cap Stocks for Retirement: Baron Small Cap Retail (BSCFX)
For investors looking for a more active approach to their small-cap stocks exposure, the Baron Small Cap Retail (BSCFX) mutual fund could be a prime pick. BSCFX has done a pretty good job of beating its benchmark — the Russell 2000 Growth Index — over the longer haul.
While categorized as a “growth” fund, fund manager Cliff Greenberg is more of a value hound and prefers to buy beaten shares, fallen angels and other special situations where BSCFX can benefit from strong franchises and lack of investor awareness.
Additionally, the fund is pretty concentrated with 91 different holdings. That produces a portfolio, where each holding actually influences returns. Top holdings include small-cap stocks like aircraft-component maker TransDigm Group (TDG) and tech consultant Gartner (IT).
So far, that has worked out pretty well for BSCFX and its shareholders.
Since the fund’s inception in 1997, BSCFX has produced an annual total return of 9.09% and a cumulative return of 378.63%. The Russell Growth Index only managed to produce annual returns of around 5% and cumulative return of just 137.91%. BSCFX also has managed to smash the S&P 500 as well.
Expenses for the fund run 1.3%. Ultimately, BSCFX could be one of the best picks for small-cap stocks exposure.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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