If you’re looking to add smaller companies to your investment portfolio, small-cap ETFs make it easy to invest in lots of small-cap companies at once.
Small-cap ETF definition
A small-cap ETF is a type of exchange-traded fund that invests in small companies whose value is less than $2 billion. And while $2 billion may sound like a lot, these companies are relatively tiny compared with mid-cap, or even large-cap companies, which start at $10 billion. So if you invest in a small-cap ETF, you’re essentially investing in a collection of small companies in a single investment.
The ETFs below are small-cap growth ETFs. These funds invest in companies that are predicted to increase in price faster than other small-cap stocks.
Why invest in small-cap ETFs?
One reason small-cap ETFs may be attractive to investors is that they provide further diversification to a portfolio that has exposure to large or medium-sized companies.
Some investors believe in what’s called the “small-cap effect,” a theory that smaller companies have more room to grow than larger companies — and thus have more potential for a bigger return.
Since smaller companies don’t have as much financial wiggle room, they are often riskier than larger companies. But when those single stocks are rolled into an ETF, it can smooth out the overall risk. For example, if one company goes out of business, the other companies in that ETF may help buoy your portfolio.
And while it’s impossible to know if investing in smaller companies will definitively lead to a more significant profit, diversifying the companies in your portfolio, even if they are smaller, can help you safeguard against risk.
