Size Matters: The 3 Best Small-, Mid- and Large-Cap ETFs to Buy

ETFs to buy - Size Matters: The 3 Best Small-, Mid- and Large-Cap ETFs to Buy

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There are countless small-cap, mid-cap and large-cap exchange-traded funds on the market. But picking the right ETFs to buy isn’t an easy task. After all, when just considering size alone, they are markedly different.

The ETFs in one cap-size often contain much different sorts of companies than are found in another cap-size. That’s true, even if the ETFs are in the same sector. Also, valuations are different. Because of their smaller size, small-cap stocks are expected to grow at a higher percentage rate than mid-cap or large-cap stocks.

This is one of the reasons that small caps often sell at higher multiples than the bigger cap sizes. As such, the best ETFs to buy are the ones that fit your goal, both fundamentally and technically. This includes making sure you select the right cap-size.

For example, look at the financial sector ETFs. A big-cap ETF for this sector is Financial Select Sector SPDR (NYSEARCA:XLF). XLF has many banks in its portfolio; this sector comprises almost 40% of the portfolio. And, these are the major banks … the big names. The six largest holdings in XLF are Berkshire Hathaway (NYSE:BRK.B), JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), Citigroup (NYSE:C) and Morgan Stanley (NYSE:MS).

The other major sectors in XLF are: capital markets (25.25%); insurance (17%); financial services (13%) and consumer finance (5.32%).

This portfolio differs greatly from a small-cap financial sector ETF, such as the Invesco S&P SmallCap Financials ETF (NASDAQ:PSCF). PSCF first considers all of the companies in the S&P 600 small-cap index. It then selects all of the financial and real estate companies and puts them into the portfolio.

Banks comprise 35.2% of PSCF’s portfolio. Unlike XLF, these are not the big-name banks but smaller banks — community banks and savings and loans associations. The other major position is the equity real estate investment trust sector (30.45%). The other sectors are insurance (11.47%); thrifts and mortgage companies (8.69%); mortgage and real estate (4.24%); capital markets (4.10%); consumer finance (3.56%) and real estate management (2.08%).

The six largest holdings in PSCF are also not household names like you find in XLF. Its six biggest holdings are: Community Bank Systems (NYSE:CBU); Bank United (NYSE:BKU); First Hawaiian (NASDAQ:FHB); Innovative Industrial Properties (NYSE:IIPR); Trupanion (NASDAQ:TRUP) and Agree Realty (NYSE:ADC).

Considering this example of the stark difference ETF composition can make in terms of strategy, let’s take a look at what I consider to be the best small-, mid- and large-cap ETFs to buy today:

  • SPDR Portfolio S&P 600 Small Cap ETF (NYSEARCA:SPSM)
  • Invesco NASDAQ Next Gen 100 ETF (NASDAQ:QQQJ)
  • SPDR Portfolio S&P 1500 Composite Stock Market ETF (NYSEARCA:SPTM)

ETFs to Buy: SPDR Portfolio S&P 600 Small Cap ETF (SPSM) 

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Best Small-Cap ETF to Buy
Expense Ratio: 0.05%, or $5 annually per $10,000 investment

When it comes to small-cap ETFs to buy, the SPDR Portfolio S&P 600 Small Cap ETF is an attractive pick.

It was an ETF that underperformed for a number of years, but it’s now outperforming. For about five years, the S&P 500 beat the S&P Small Cap 600 Index in performance, but for the last year, the small-cap index has made up a lot of ground, outperforming the S&P 500. That helps makes the SPSM ETF a buy on a fundamental and technical basis.

SPSM is cap-weighted — the same weighting as the S&P 500 and the S&P mid-cap 400. This means that the bigger the company — based on its market price and number of outstanding shares — the more weight it has in the index. Momentum investors like this weighting: the better performing stocks have more weight in the index.

Its major sector holdings break down as follows: 17.9% for industrials; 17.3% for financials 17.3%; 15.48% for consumer discretionary; 13.90% for information technology and 11.57% for healthcare. The broad sector exposure offered by SPSM includes good exposure to the faster growth areas of the market. (Tech and healthcare, which are two key market growth leaders, comprise about 25% of SPSM.)

According to State Street’s estimate, the PEG ratio on SPSM is 1.20x, which is reasonable for a small-cap portfolio.

Invesco NASDAQ Next Gen 100 ETF (QQQJ)

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Best Mid-Cap ETF to Buy
Expense Ratio: 0.15%

The Invesco NASDAQ Next Gen 100 ETF follows the formula used by the successful Invesco QQQ Trust (NASDAQ:QQQ). That is, it relies on cap size to determine which companies to include in the index. The only difference between the two ETFs is cap size: QQQ uses the biggest companies for portfolio inclusion; QQQJ uses the second-biggest companies for portfolio inclusion.

QQQJ includes the second-biggest non-financial 100 companies based on company market capitalizations that are listed on the Nasdaq.

This formula creates a growth portfolio of companies: companies have to grow to get big enough to be included in the index and must continue to grow to continue being included.

Certainly, the sectors that mostly comprise QQQJ’s are in the growth areas. The largest sector holdings in QQQJ are information technology at 44.01%; healthcare at 20.17%; communication services at 13.59% and consumer discretionary at 13.04%.

Morningstar shows the QQQJ price/earnings to growth ratio at 1.95x. That’s high, but growth portfolios often have high PEG ratios. Also, this is a mid-cap ETF, and small- and mid-cap portfolios often sell at higher ratios than large-cap portfolios.

SPDR Portfolio S&P 1500 Composite Stock Market ETF (SPTM)

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Best Large-Cap ETF to Buy
Expense Ratio: 0.03%

In the large-cap space, unless you are willing to take on some extra risk and possible higher reward by buying either more focused ETFs, such as tech, healthcare, financials, energy and/or other sector ETFs, it is hard to beat the performance of the SPDR Portfolio S&P 1500 Composite Stock Market ETF.

You receive a lot of exposure with this ETF. After you get S&P 500 Index stocks, S&P 400 Mid-Cap Index stocks and S&P 600 Small-Cap Index stocks all in one ETF.

A glance at the charts will show you that SPTM consistently beat the S&P 500’s performance, which is the index that many investors try to beat. The small- and mid-cap indexes are also in the ETF, so if one or both of those class sizes come into favor, the SPTM’s performance will still be good. And the S&P 500 has been a good performer for the last ten years or so, beating other markets around the world.

This doesn’t happen by accident, the S&P performing so well. The S&P Index Committee does a very good job of researching the companies that best represent their sectors, and also keeping the index sector sizes to the right amount so that they represent the overall U.S. economy. The cap-weight methodology of the index helps keep momentum in the better performing stocks.

SPTM relieves investors of picking the right cap-size and gives broad market exposure. SPTM is well-used as portfolio augmentation: it can be invested in while an investor is considering more focused investments, such as cap-size, sector representation or stock selection, in the case of bottom-up investors. All of these elements combine to make it one of the better ETFs to buy if you’re considering a large-cap approach.

Max Isaacman is a Registered Investment Advisor in San Francisco. His investment books were published by McGraw-Hill and Financial Times Press, including the first book on ETFs, How to be an Index Investor (McGraw-Hill, 2000), and the first book on understanding the Nasdaq Market, The Nasdaq Investor (2001). He wrote for the Emmy award-winning Website His email is

He, and some of his clients, own XLF, QQQJ, PSCF and SPSM.

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