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7 Micro-Cap ETFs That Punch Above Their Weight

ETFs to buy - 7 Micro-Cap ETFs That Punch Above Their Weight

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Most financial experts, including Warren Buffett, believe the best exchange-traded funds (ETF) to buy for the average person saving for retirement are the large-cap funds tracking the performance of the S&P 500, or the Dow Jones. Over the very long term, it turns out that these micro- and small-cap ETFs to buy might deliver better returns.

Mike Skillman and Bob Fitzpatrick, co-managers of the AMG Managers Cadence Emerging Companies Fund (MUTF:MECAX), a mutual fund that invests in a portfolio of 90-100 micro-cap and small-cap stocks. Their data suggests that between January 1926 and December 2017, U.S. micro-cap stocks and small-cap stocks achieved an annualized return of 12.2% and 11.6%, respectively. For those counting that’s 190-250 points higher than U.S. large caps over the same period.

However, before you run out and buy a bunch of micro-cap and small-cap stocks, mutual funds, or ETFs, it’s important to remind readers that over the past ten years, U.S. large-cap stocks have done marginally better than micro-caps and small caps. I believe the best portfolios cover companies of all sizes whether we’re talking micro cap, small cap, mid-cap, or large cap.

To get you part way there, here are seven micro- and small-cap ETFs to buy for your portfolio.

Small-Cap ETFs to Buy: Invesco S&P SmallCap 600 Pure Growth ETF (RZG)

My favorite ETFs are those that don’t have too many holdings, are reasonably inexpensive, and do a decent job of tracking the stocks I’m looking to gain exposure.

The Invesco S&P SmallCap 600 Pure Growth ETF (NYSEARCA:RZG) tracks the performance of the S&P SmallCap 600 Pure Growth Index, a group of stocks exhibiting strong sales and earnings growth.

RZG has $287 million in assets, owns 137 stocks with a weighted average of $2.0 billion, charges 0.35% annually, and its top ten holdings account for 16.3% of its overall portfolio. Year-to-date it is up 2% through Nov. 15. Over the past five years, it’s achieved an annualized total return of 9.5%, 160 basis points less than the S&P 500.

Of the top ten holdings, I’m most familiar with Insperity (NYSE:NSP) and Qualys (NASDAQ:QLYS). In May, I suggested that Insperity CEO Paul Sarvadi would continue to deliver for shareholders.

Small-Cap ETFs to Buy: Motley Fool Small-Cap Growth ETF (MFMS)

Tom and David Gardner launched the Motley Fool in August 1994. It became so successful the duo went on to set up an asset management business in 2008 to create Mutual Funds and ETFs based on their philosophy of investing. In 2016, they created a wealth management division to help people invest through separately managed accounts.

I’m not recommending the Motley Fool Small-Cap Growth ETF (NYSEARCA:MFMS) because of their success. Instead, I like the concentrated portfolio of 30 stocks, which puts the asset management division’s money where its mouth is.

Charley Travers Jr. and Nate Weisshaar are the lead portfolio managers for the ETF with chief investment officer Bryan Hinmon overseeing things. Actively managed, the portfolio managers are looking for high-quality businesses that have strong market positions and growing free cash flow.

Evaluating a company’s corporate culture and management team along with its economic viability and competitive advantage, they’re able to whittle the number of stocks down to a manageable list of 30. If you’re not familiar with small-cap stocks, you’ll likely only recognize a few of the 30 holdings. Shake Shack (NYSE:SHAK) is the company most familiar to me.

Charging only 0.50% for active management, it’s worth a look.

Small-Cap ETFs to Buy: Vanguard S&P Small-Cap 600 (VIOO)

It’s pretty hard to have a list of ETF buys without a least one Vanguard fund in the bunch. I’m neither a growth investor or value investor, so I’ve chosen the Vanguard S&P Small-Cap 600 (NYSEARCA:VIOO) which tracks the performance of the S&P SmallCap 600, a collection of smaller companies with market caps between $450 million and $2.1 billion. The index rebalances four times year in March, June, September and December.

Why the VIOO, which charges 0.15%, when I could recommend the Vanguard Small-Cap ETF (NYSEARCA:VB) at 0.05%, ten basis points less?

Well, even though VB has outperformed VIOO over the past ten years, I like the fact VIOO has only 603 stocks in its $985-million portfolio as opposed to 1,413 for VB spread amongst its $23 billion in assets.

Also, VIOO is true to its small-cap name with a median market cap of $1.7 billion, less than half VB’s.

While you’re not going to go wrong with VB, I prefer VIOO.

Small-Cap ETFs to Buy: JPMorgan Diversified Return U.S. Small Cap Equity ETF (JPSE)

The one thing you’ll notice about my list is that I’ve included six different ETF providers diversifying the potential options beyond iShares and Vanguard. Nothing against the big players but it’s always nice to have some diversity. Did you know that there are 3.73 million published indices globally? Well, there are, up 17% in the last year alone.

The JPMorgan Diversified Return U.S. Small Cap Equity ETF (NYSEARCA:JPSE) tracks the performance of the JP Morgan Diversified Factor US Small Cap Equity Index, a collection of stocks selected from the Russell 2000.

The methodology for selecting stocks for the index include relative valuation, momentum and quality of the company. Currently, the market caps of the stocks in the index range from $22 million to $12 billion, solidly in the mid-cap or smaller large-cap category.

The ETF had 832 holdings as of Nov. 14, the top ten is a group of companies I’m far more familiar including Columbia Sportswear (NASDAQ:COLM) and Boston Beer (NYSE:SAM), both solidly in the mid-cap camp. I wouldn’t call JPSE a SMID fund, though. At 0.29%, I’d consider it a reasonably inexpensive ETF to own.

Micro-Cap ETFs to Buy: iShares Micro-Cap ETF (IWC)

Although the iShares Micro-Cap ETF (NYSEARCA:IWC) isn’t on the list of 100 largest ETFs in America, it is a popular option for investors looking to own the country’s smallest public companies.

Around since August 2005, IWC has $925 million in total assets spread amongst 1,452 companies. You’re certainly not buying this ETF for a focused portfolio but rather too spread your bets across various sectors and industries.

The ETF tracks the performance of the Russell Microcap Index, which invests in stocks ranging from a $4 million market cap all the way up to $4.6 billion. The index is comprised of the smallest 2,000 stocks from the Russell 3000.

I believe that well-constructed ETF portfolios should have a healthy mix of micro-cap, small-cap, mid-cap, and large-cap stocks. IWC does an excellent job capturing the bottom end of America’s public companies.

At 0.60%, it’s not cheap, but you get what you pay for. IWC is worth the extra money.

Micro-Cap ETFs to Buy: First Trust Dow Jones Select MicroCap Index Fund (FDM)

As ETF providers go, First Trust is one of my favorites. They do a good job capturing specialty areas of the market without getting too esoteric or off the beaten track.

The First Trust Dow Jones Select MicroCap Index Fund (NYSEARCA:FDM) tracks the performance of the Dow Jones Select Microcap Index, a group of 258 stocks with an average market cap of $490 million.

The ETF itself has 242 stocks with a median market cap of $445 million — the largest is $4.3 billion; the smallest $445 million. It too charges 0.60% annually. However, over the past five years through Oct. 31, it’s achieved a total return of 10.24%, 269 basis points higher than IWC.

A combination of fewer stocks and better performance makes FDM a better pick than IWC in my estimation.

Micro-Cap ETFs to Buy: Invesco Wilshire Micro-Cap ETF (WMCR)

The least popular of my three micro-cap ETF buys at $26 million in total assets, the Invesco Wilshire Micro-Cap ETF (NYSEARCA:WMCR) tracks the performance of the Wilshire US Micro-Cap Index, a collection of 981 micro-cap stocks selected from the Wilshire 5000 Total Market Index.

The market caps in the index range from $1 million all the way up to $2 billion, the lowest ceiling of the three micro caps I’ve recommended.

At first glance, you’ll probably dismiss WMCR because it charges 0.85% annually, the highest of the three, but don’t.

WMCR has a five-year total return of 7.93%, which is better than IWC, but not quite as strong as FDM. More importantly, its average market cap of $338 million makes it more like a micro-cap ETF than the other two mentioned here.

In the end, I wouldn’t blame you if you went with FDM. It’s bigger, cheaper, and a better performer over the long haul. That said, WMCR is not a dud.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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