- SUMMARY
Investing in small-cap companies, those with market capitalizations between $300 million and $2 billion, offers the potential for higher returns but also carries greater risk.
These smaller companies have historically outperformed large-cap companies due to their higher growth potential but can be more volatile and sensitive to market fluctuations.
To mitigate risk, it’s recommended to diversify investments by including an ETF that tracks a basket of small-cap companies rather than focusing on individual stocks.
This approach reduces the impact of any single company’s performance on your overall portfolio.
Among the various small-cap ETFs available, here are four that offer a diverse range of strategies and performance: 1.
Schwab US Small-Cap ETF (SCHA): Tracks the total return of the Dow Jones US Small-Cap Total Stock Market Index, providing exposure to a wide range of smaller companies within the United States.
2. iShares MSCI Emerging Market Small-Cap ETF (EEM): Offers diversification outside the US by investing in small-cap companies from Emerging Markets, such as Taiwan, India, and Brazil, which have high growth potential but may come with additional currency risk.
3.
Pacer US Small Cap Cash Cows 100 ETF (CALF): Selects small-cap companies with high free cash flow yields, indicating a company’s ability to generate cash relative to its market value, signaling the potential for investment and growth.
4.
Vanguard Small-Cap Value Index Fund (VBR): Follows the FTSE US Small-Cap Value Index, comprised of low-valuation small-cap companies with strong fundamentals like low price-to-earnings ratios, providing a value-oriented approach to small-cap investing.
Deciding how much to allocate to small-cap investments depends on an investor’s individual strategy and risk tolerance.
Beginners and conservative investors may prefer to stick to a more moderate allocation, while those seeking higher returns and willing to accept greater risk may consider a more substantial investment in small-cap funds.
- Key Takeaways
Small-cap investment carries higher risk but higher growth potential than large-cap investment.
Small-cap companies have historically outperformed large-cap companies due to their higher growth potential but can be more volatile and sensitive to market fluctuations.
Diversification is important for risk mitigation.
To mitigate risk, it’s recommended to diversify investments by including an ETF that tracks a basket of small-cap companies rather than focusing on individual stocks.
Consider a value-oriented index fund
Investors may consider Vanguard Small-Cap Value Index Fund (VBR), which follows the FTSE US Small-Cap Value Index, for a value-oriented approach to small-cap investing.