As the ETF universe continues to expand, more and more issuers are digging deeper into the existing categories, trying to once again carve out their own niche market. From a historical perspective in the ETF universe, small cap stocks have exhibited favorable return profiles relative to their large cap counterparts and because their operations are relatively risky, investors expect to receive additional returns over the long run to compensate for additional volatility. Small cap growth funds focus on this risk and could spell disaster in the wrong hands, or huge returns in the right ones [see Visual History Of The S&P 500].
Portfolio Size and Strategy Matter
These ETFs are highly attractive for investors who generally avoid large cap stocks, focusing instead on smaller companies that may maintain more promising long-term growth potential. Since small cap growth stocks tend to have an even smaller customer base, shorter operating histories and less cash on hand, they are often far more volatile than their large cap counterparts or even the average small cap stock. But because this asset class possesses greater growth potential, small caps also carry potential for unparalleled returns [see 10 Questions About ETFs You've Been Too Afraid To Ask].
The chart below highlights mostly domestic small cap growth ETFs, revealing the differences in returns that can come from changes in the size of each fund. Notice how much more the smaller funds like SLYG and IJT have returned in the last three years while still maintaining relatively low 200-day volatility ratings:
- S&P SmallCap 600 Growth Index Fund (IJT, A)
- Russell 2000 Growth (IWO, A-)
- Morningstar Small Growth Index Fund (JKK, B-)
- RAFI Fundamental Pure Smal Growth Portfolio (PXSG, B+)
- SPDR S&P 600 Small Cap Growth ETF (SLYG, B)
- Small-Cap Growth ETF (VBK, A+)
This comparison is only based on the number of holdings of small-cap growth ETFs; it is also important for investors to take a close look under the hood at the focuses and weighting methodologies behind these ETFs, as these can greatly influence the future outcomes of the funds.
Disclosure: No positions at time of writing.