Zacks Investment Research
The ongoing chaos in the domestic and European markets has put
pressure on the growth of the global economy, just a few short
years after the collapse of the market in 2008. Still, in an
uncertain economic scenario, small cap growth funds are shining and
outperforming their large and mid-cap counterparts.
Small Caps in Focus
These securities tend to have less correlation with the
macroeconomic trends and offer investors a great opportunity to tap
into a local economic performance. This makes these securities
perfect for today's environment, in which the American economy is
arguably leading the way higher, despite the global turmoil (read:
Guide to Small Cap Emerging Market ETFs
Furthermore, since these companies are so small, they have a
much easier time growing than their already tapped out large cap
counterparts. This trend is expected to continue in the remainder
of 2012 and into 2013, especially if emerging markets stay weak and
Europe continues to fight debt issues.
Yet not all small caps are created equal with some being more
focused on value and others targeting the growth segments of the
market. Arguably, growth firms could be just the kick that many
portfolios need as these offer above-average revenue and earnings
growth with high price-to-book ratio but yield lower than the value
and blend counterparts, making them interesting choices as yields
are already depressed and not really up to historical levels.
Growth funds also increase more than the other funds in the
booming period and falls drastically in the bearish phase. Since
many are looking for a modest recovery, growth funds seem like a
logical choice for those expecting a return to market health in the
Small Cap Growth ETFs
Taken together, small cap growth funds are poised to offer
larger returns but with higher risk. Investors seeking to invest in
these funds should have higher risk tolerance, as these are
extremely volatile and may lose or gain a great deal in a very
As the market has come back and the focus has been on U.S.
securities, there have been a number of ETFs in the space that have
beaten the S&P 500 over the past year (as of August 24), making
these great picks for diversified investors. Given this, risk
tolerant investors might consider them in their portfolio for the
So while many funds have beaten out large caps and value funds,
we have taken a closer look at three of the best performing small
cap growth ETFs so far this year. Compared to the S&P 500,
these ETFs produced higher returns over the last year but lower
year-to-date returns, making them intriguing choices for investors
seeking more diversification and a greater focus on U.S.-centric
Vanguard Small-Cap Growth ETF
This is one of the largest and the most popular ETFs in the
small cap growth space. The product outperformed the S&P 500
index by more than 180 basis points over the last year thanks to
its diversification benefits and low cost structure.
The fund is well spread across various sectors and securities
Build a Complete Portfolio with These Three
). Information technology takes the top spot in the basket followed
by health care, industrials and consumer discretionary. With
holdings of 930 securities, the ETF puts about 5.4% of the assets
in top 10 firms, suggesting concentration risk of only 3.26%. Each
security holds less than 1% share in the basket.
The product is the low cost choice in the small cap growth ETF
space, charging only 10 bps in annual fees. It trades in good
volumes of more than 1 million shares per day on average,
suggesting a relatively low bid-ask spread.
The ETF uses full replication strategy to track the performance
of the MSCI US Small Cap Growth Index, a subset of the MSCI US
Small Cap 1750 Index. The fund has so far attracted about $2.1
billion in assets and was initiated in January 2004.
The product gained about 23.60% over the past year and 12.17% so
far this year. However, like many on this list, the yield is
lacking coming in at just 0.48% annually.
iShares Morningstar Small Growth Index Fund
This fund also outperformed the S&P 500 benchmark over the
last year (as of August 24th) by more than 50 basis points. Like
its counterparts, the product is widely spread across securities
with less than 1% of assets in an individual firm. The top 10
holdings make up for 9% of assets in the basket.
The ETF also has nice allocations to various sectors. Technology
represents the key element in the basket followed by health care,
real estate and industrials (read:
Why SSDD Is The Top Tech ETF
The product seeks to replicate the Morningstar Small Growth
Index, holding 257 securities in its basket. Launched in June 2004,
the fund charges 30 basis points in fees per year. It produces a
relatively higher bid/ask spread due to minimal daily transaction
and has managed assets of $92.1 million so far this year.
The fund has delivered returns of about 22.32% over the last
year (as of August 24) and 10.48% year-to-date. It pays an annual
dividend of about 0.29%.
iShares S&P SmallCap 600 Growth Index Fund
Launched in July 2000, the fund seeks to match the price and
yield of the S&P SmallCap 600 Growth Index, before fees and
expenses. The ETF outperformed the S&P 500 benchmark by 200
basis points in the last one-year period.
Like VBK, this product also has nice allocations to individual
securities and sectors. It puts less than 10% of assets in top 10
holdings, each representing 1% share in the basket. From the
sectors' look, the fund is slightly tilted towards information
technology sector but makes a nice mix with other sectors such as
health care, consumer discretionary and financials.
This diversification provides the fund with a portfolio of 329
securities in total. The product is quite inexpensive given an
expense ratio of 0.25%, low bid/ask spread and good tracking error.
It trades in a volume of about 150,000 shares on a daily basis and
yields low dividend of 0.59% per annum.
With AUM of $1.6 billion, the fund returned about 23.80% in the
last one-year period (as of August 24) and 10.48% year-to-date.
The following table describes the returns of the three small cap
growth ETFs, which are higher than the returns of the S&P 500
index for the one-year period:
YTD Performance (as of 08/24/12)
1-Yr Performance (as of 08/24/12)
It should also be noted that all three of the ETFs allocate a
large portion to information technology and health care sectors
that are performing better than expected. As a result, the returns
from these funds exceed the returns from the S&P 500, at least
in the trailing 52 week period.
This focus on these two sectors could be helping all of these
funds outperform in the time period in question. After all, IT
demand is still pretty high in the U.S. market, especially on the
consumer side, while health care has seen something of a boost
thanks to a lower level of uncertainty after the Obamacare
Given these factors, many investors have been piling into both
of these market segments as of late, pushing values up for these
sectors. With this backwind and the growth nature of these funds
that target the small cap market, it has certainly been an
advantageous time to get in on this economic sector. While there is
no telling if this trend will continue, for investors who like IT
and health care, any of the above listed market leaders could make
for excellent picks in the short term.
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