Best Small-Cap ETFs for Q1 2022

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Small-cap exchange-traded funds (ETFs) are designed to invest in a basket of stocks with relatively small market capitalizations. A small-cap company is generally one whose market value is somewhere between $300 million and $2 billion. However, small-cap ETFs are not necessarily restricted to that range, as evidenced by some of the holdings of the ETFs outlined below.

Because of their size, small-cap stocks have strong—albeit often volatile—growth potential. A small-cap ETF can reduce the volatility associated with individual small-cap stocks while offering investors greater diversification.

Key Takeaways

  • The small-cap sector underperformed the broader market over the past year.
  • The small-cap exchange-traded funds (ETFs) with the best one-year trailing total returns are XSVM, CALF, and AVUV.
  • The top holdings of these ETFs are Veritiv Corp.(VRTV), Macy’s Inc.(M), and PDC Energy Inc. (PDCE) respectively.

There are 50 small-cap ETFs that trade in the United States, excluding inverse and leveraged ETFs as well as funds with less than $50 million in assets under management (AUM). The small-cap sector, as measured by the Russell 2000 Index, underperformed the broader market over the past 12 months, posting a 1-year trailing total return of 20.4% compared to the S&P 500’s 28.8%, as of Dec. 7, 2021. The best-performing small-cap ETF in 1-year trailing return is the Invesco S&P Small-Cap Value with Momentum ETF (XSVM). We examine the three best small-cap ETFs below. All numbers below are as of Dec. 9, 2021.

Invesco S&P Small-Cap Value with Momentum ETF (XSVM)

  • Performance Over One-Year: 56.8%
  • Expense Ratio: 0.39%
  • Annual Dividend Yield: 0.83%
  • Three-Month Average Daily Volume: 114,038
  • Assets Under Management: $ 503 million
  • Inception Date: March 3, 2005
  • Issuer: Invesco

XSVM is based on the S&P 600 High Momentum Value Index, which is comprised of undervalued small-cap stocks that show strong price momentum. The Index is comprised of 120 securities in the S&P SmallCap 600 Index with the highest value and momentum scores. The fund invests at least 90% of its asset in components of the index.

XSVM’s major sector allocations are the financial, consumer discretionary, and industrial sectors. The fund’s top three holdings are Veritiv Corp. (VRTV), a logistics and supply chain management company; United Natural Foods Inc. (UNFI), which distributes organic and speciality foods; and Group 1 Automotive Inc. (GPI), which sells new and used cars through auto dealerships in the U.S., the UK, and Brazil.

Pacer US Small Cap Cash Cows 100 ETF (CALF)

  • Performance Over One-Year: 44.1%
  • Expense Ratio: 0.59%
  • Annual Dividend Yield: 0.55%
  • Three-Month Average Daily Volume: 129,386
  • Assets Under Management: $594.3 million
  • Inception Date: June 16, 2017
  • Issuer: Pacer Advisors

CALF selects 100 companies with the highest 12-month trailing free cash flow yields in the S&P 600 Small Cap Index. The fund then uses an internal index in which the 100 companies are weighted by free cash flow and capped at 2%. The index is reconstituted and rebalanced on a quarterly basis. The ETF’s biggest sector weightings were in consumer discretionary, industrials and healthcare, which accounted for more than 70% of the fund’s holdings, as of Sept. 30, 2021, the latest available data. CALF’s top holdings are Macy’s Inc. (M), a major U.S. online and department store retailer; Group 1 Automotive; and PDC Energy Inc. (PDCE), which acquires and develops oil and gas properties.

Avantis U.S. Small Cap Value ETF (AVUV)

  • Performance Over One-Year: 44%
  • Expense Ratio: 0.25%
  • Annual Dividend Yield: .99%
  • Three-Month Average Daily Volume: 248,971
  • Assets Under Management: $2.2 billion
  • Inception Date: Sept. 24, 2019
  • Issuer: American Century Investments

AVUV is an actively managed fund that invests in U.S. small-cap companies that have low valuations but higher profitability ratios. The ETF invests in a broad array of small-cap stocks and has hundreds of holdings. The fund’s largest allocations are in the financial, consumer discretionary, and industrial sectors, which together comprise more than half of the portfolio. The ETF’s top three holdings are companies involved in the exploration and production of crude oil, natural gas and oil. They are PDC Energy, SM Energy Co. (SM) and Matador Resources Co. (MTDR).

The comments, opinions, and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or adopt any investment strategy. While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described in our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.

Source: Investopedia

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