Financial Pros Top Small Cap ETF Searches

Something odd is going on…

Rarely does the S&P 500 ETF SPY not come in as the top ETF search by financial pros.

When it gets displaced, it’s usually by the Nasdaq 100 ETF QQQ.

But this week, the iShares Russell 2000 Small Cap ETF IWM took the top spot.

Small caps have underperformed large caps for years, even decades.

Year-to-date, the IWM is basically flat.

However, the IWM is weighted more heavily to financials and industrials than the other major indexes.

So, maybe, this says something about future growth.

Here’s what we know.

Key Facts About IWM

• Net assets: $59.7 billion
• 12-month trailing yield: 1.32%
• Inception: May 22, 2000
• Expense ratio: 0.19%
• Number of holdings: 1926

Tracking the 2000 stocks that comprise the Russell 2000 index, the IWM holds a few less than that at any given time (currently 1926).

These companies are the smallest of the Russell 3000 index, which includes 98% of the investable stocks in the U.S. It selects the companies based on market capitalization.

Unlike the SPY, the IWM is an equal weighted index, meaning no stock should make up more than 0.5% of the index.

Source: iShares

Super Micro Computers’ meteoric rise will eventually cause it to be eliminated from the ETF holdings because it has grown so big.

While the larger indexes are dominated by technology, the IWM is more evenly distributed, with financials and industrials making up a much larger percentage of the holdings.

Source: iShares

Performance

Small caps have lagged behind the broader indexes, which have been driven by large technology companies.

You can see below how returns are negative looking back over 3 years.

Source: iShares

Competition

With the IWM as the most popular and liquid small-cap index, we wanted to offer some alternatives in the same area.

• First Trust SMID Cap Rising Dividend Achievers ETF (SDVY): SDVY focuses on small and mid-cap companies with a history of rising dividends and is market cap weighted.
• Direxion Daily Small Cap Bull 3X Shares (TNA): This ETF aims to provide 300% of the daily performance of the Russell 2000 Index, making it a leveraged, market cap weighted fund. 
• Avantis International Small Cap Value ETF (AVDV):  AVDV targets international small-cap value stocks, using a market cap weighted approach with a tilt towards value factors, distinguishing itself by focusing on lower-priced small-cap stocks outside the U.S.
• iShares Russell 2500 ETF (SMMD): SMMD tracks the Russell 2500 Index, which includes both small and mid-cap U.S. stocks, using a market cap weighted methodology. 

What’s interesting in this group is the dividend achievers outperformed the rest, which isn’t what we typically see.

Our Opinion 8/10 

As far as small cap ETFs go, the IWM is the best. It’s liquid with plenty of options.

However, we’re not a big fan of the small cap index itself. Large companies that grow in size eventually exit the index, leaving you with the lowest performers.

That said, investing in small caps individual is difficult. So, for the average investor, the IWM is an excellent choice for their portfolio.

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