Top 10 Small Cap ETFs

There are currently over 50 U.S. Small-Cap issues whether categorized as, growth, value or blend. This is overwhelming for most investors. Using our long experience as an ETF publication, we try to help select those ETFs that matter even if where they might be repetitive. The result is a more manageable list of issues from which to choose.

We stick with the “blend” category since they should satisfy most investor needs. We believe these constitute the best index-based offerings individuals and financial advisors may utilize.

Uniquely, investors should remember, small cap issues usually carry higher beta (volatility or higher risk levels) than their large cap peers. This means during times of higher economic growth combined with accommodative Fed monetary policies returns in this sector will outperform larger cap issues. But, the opposite situation does occur (should conditions reverse).  Investors should remain aware of these risk characteristics.

One thing you’ll note is similarities in trends and performance in the charts posted below. This isn’t a coincidence given overall index constituents.

We feature a technical view of conditions from monthly chart views. Simplistically, we recommend longer-term investors stay on the right side of the 12 month simple moving average. When prices are above the moving average, stay long, and when below remain in cash or short. Some more interested in a fundamental approach may not care so much about technical issues preferring instead to buy when prices are perceived as low and sell for other reasons when high; but, this is not our approach.

Premium members to the ETF Digest receive added signals when markets become extended such as DeMark triggers to exit overbought/oversold conditions.

For traders and investors wishing to hedge, leveraged and inverse issues are available to utilize from ProShares and Direxion and where available these are noted.

#10: iShares Morningstar Small Core ETF JKJ ***

JKJ follows the Morningstar Small Core Index which measures the performance of small cap stocks that have exhibited average growth and value characteristics. The fund was launched in June 2004. The expense ratio is 0.25%.

AUM equal $146 M and average daily trading volume is less than 6K shares. (Use “limit orders” here especially.) As of May 2012 the annual dividend yield was 0.77% and YTD return was 9.11%. The 1YR return was -4.31%.

Data as of May 2012

JKJ Top Ten Holdings & Weightings

• Superior Energy Services Inc SPN: 1.14%
• Home Properties, Inc. HME: 0.81%
• United Rentals Inc URI: 0.80%
• Corrections Corporation of America CXW: 0.79%
• Wesco International, Inc. WCC: 0.78%
• Regal-Beloit Corporation RBC: 0.77%
• Valmont Industries, Inc. VMI: 0.77%
• SVB Financial Group SIVB: 0.76%
• Carter's, Inc. CRI: 0.75%
• Tanger Factory Outlet Centers SKT: 0.74%

#9:  First Trust Small Cap Core AlphaDEX ETF FYX ***

FYX follows the Defined Small Cap Core Index which is an "enhanced" index created and administered by Standard & Poor's which employs the AlphaDEX stock selection methodology to select stocks from the S&P SmallCap 600 Index. The fund was launched in May 2007.

The expense ratio is 0.70%. AUM equal $161M and average daily trading volume is 51K shares. As of May 2012 the annual dividend yield was 0.19% and YTD return 5.78%. The 1 YR return was -0.22%.

Data as of First Quarter 2012

FYX Top Ten Holdings & Weightings

• American Vanguard Corporation AVD: 0.54%
• VOXX International Corp Class A VOXX: 0.54%
• Almost Family, Inc. AFAM: 0.52%
• Liz Claiborne, Inc. LIZ: 0.52%
• Select Comfort Corporation SCSS: 0.50%
• Sturm, Ruger & Company RGR: 0.49%
• Zoll Medical Corporation ZOLL: 0.49%
• Insight Enterprises, Inc. NSIT: 0.48%
• Triquint Semiconductor TQNT: 0.47%
• Multimedia Games Holding Co Inc MGAM: 0.46%

#8: Revenue Shares Small Cap ETFRWJ ***

RWJfollows the Revenue Shares Small Cap Index which is comprised of the same securities as the S&P Small Cap 600 but weights the stocks according to top line revenue instead of market capitalization. The fund was launched in February 2008. The expense ratio is 0.54%.

AUM equal $125 M and average daily trading volume is 24K shares. As of May 2012 the annual dividend was 0.44% and YTD return was 6.03%. The 1 YR return was -0.45%.

Data as of May 2012

RWJ Top Ten Holdings & Weightings

• World Fuel Services Corporation INT: 3.79%
• Synnex Corporation SNX: 1.75%
• Sonic Automotive Inc SAH: 1.53%
• Group I Automotive Inc GPI: 1.27%
• EMCOR Group, Inc. EME: 1.18%
• OfficeMax Inc OMX: 1.18%
• Anixter International Inc AXE: 1.06%
• Kelly Services, Inc. A KELYA: 1.04%
• United Stationers Inc. USTR: 1.01%
• Molina Healthcare, Inc. MOH: 0.98%
•  

#7: SPDR S&P 600 Small Cap ETFSLY ***

SLY follows the S&P Small Cap Index which measures the performance of the small capitalization sector of the U.S. equity market. The fund was launched in August 2005. The expense ratio is 0.20%. AUM equal $77M and average daily trading volume is less than 25K shares.

As of May 2012 the annual yield was 0.78% and YTD return 7.23%. The 1YR return was 1.46%.

Data as of May 2012

SLY Top Ten Holdings & Weightings

• Kilroy Realty Corporation KRC: 0.65%
• Extra Space Storage, Inc. EXR: 0.62%
• Salix Pharmaceuticals, Ltd. SLXP: 0.59%
• Questcor Pharmaceuticals, Inc. QCOR: 0.57%
• Tanger Factory Outlet Centers SKT: 0.57%
• Mid-America Apartment Communities MAA: 0.56%
• Proassurance Corporation PRA: 0.54%
• Cubist Pharmaceuticals, Inc. CBST: 0.53%
• Post Properties Inc PPS: 0.52%
• Lufkin Industries, Inc. LUFK: 0.51%

#6.  Vanguard Russell 2000 ETFVTWO ***

VTWO follows the Russell 2000 Index which measures the performance of the small-cap segment of the U.S. equity universe and is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 10% of the total market capitalization of that Index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

The fund was launched in September 2010. The expense ratio is 0.15%. AUM equal $81M and average daily trading volume is 18K shares. As of May 2012 the annual dividend was 0.86% and YTD return 7.53%. The 1 YR return was -3.51%. VTWO trades commission free at Vanguard.

Data as of May 2012

VTWO Top Ten Holdings & Weightings

• CMT Market Liquidity Rate: 1.50%
• Healthspring, Inc. HS: 0.33%
• NetLogic Microsystems, Inc. NETL: 0.30%
• SuccessFactors, Inc. SFSF: 0.30%
• Clean Harbors, Inc. CLH: 0.26%
• World Fuel Services Corporation INT: 0.26%
• Henry Jack & Associates, Inc. JKHY: 0.26%
• American Campus Communities, Inc. ACC: 0.25%
• Salix Pharmaceuticals, Ltd. SLXP: 0.25%
• Onyx Pharmaceuticals, Inc. ONXX: 0.25%

#5: iShares Micro–Cap ETF IWC ***

IWC follows the Russell Microcap Index which measures the performance of the microcap sector of the U.S. equity market. The fund was launched in August 2005. The expense ratio is 0.71%. AUM equal $443M and average daily trading volume is 120K shares.

As of May 2012 the annual dividend yield was 1.01% and YTD return was 9.72%. The 1 YR return was -4.14%. IWC trades commission free at TD Ameritrade.

Data as of First Quarter 2012

IWC Top Ten Holdings & Weightings

• Pharmacyclics, Inc. PCYC: 0.52%
• ARMOUR Residential REIT Inc ARR: 0.48%
• Sturm, Ruger & Company RGR: 0.41%
• Liquidity Service, Inc. LQDT: 0.41%
• Education Realty Trust, Inc. EDR: 0.40%
• Peet's Coffee & Tea, Inc. PEET: 0.39%
• Shuffle Master SHFL: 0.38%
• Prestige Brands Holdings Inc PBH: 0.33%
• LivePerson, Inc. LPSN: 0.33%
• BBCN Bancorp Inc BBCN: 0.33%

#4: iShares Russell 2000 ETF IWM ****

IWM tracks the Russell 2000 index which consists of the smallest 2000 stocks in the Russell 3000 index. The fund was launched in May 2000. The expense ratio is 0.28%.

AUM equal $14.244M and average daily trading volume 51M shares. As of May2012 the annual dividend yield was 1.09% and YTD return 7.53%. The 1 YR return was -3.65. IWM trades commission free at Fidelity.

Data as of May 2012

IWM Top Ten Holdings & Weightings

• American Campus Communities, Inc. ACC: 0.27%
• Kilroy Realty Corporation KRC: 0.27%
• Clean Harbors, Inc. CLH: 0.27%
• World Fuel Services Corporation INT: 0.26%
• BioMed Realty Trust Inc BMR: 0.25%
• Signature Bank SBNY: 0.25%
• Home Properties, Inc. HME: 0.24%
• Henry Jack & Associates, Inc. JKHY: 0.24%
• Nu Skin Enterprises, Inc. Class A NUS: 0.24%
• United Rentals Inc (URI): 0.24%

#3:iShares S&P 600 SmallCap 600 ETF IJR ****

IJR follows the S&P SmallCap 600 Index. The fund was launched in May 2000. The expense ratio is 0.20%. AUM equal nearly $7.462M and average daily trading volume is around 1.4M shares. As of May 2012 the annual dividend yield was 0.77% and YTD return was 7.66%. The 1 YR return was 0.36%.

Through the third quarter of 2011 the fund was down -9.06%.  IJY trades commission free at Fidelity and TD Ameritrade.

Data as of May 2012

IJR Top Ten Holdings & Weightings

• Kilroy Realty Corporation KRC: 0.65%
• Extra Space Storage, Inc. EXR: 0.62%
• Salix Pharmaceuticals, Ltd. SLXP: 0.59%
• Questcor Pharmaceuticals, Inc. QCOR: 0.57%
• Tanger Factory Outlet Centers SKT: 0.57%
• Mid-America Apartment Communities MAA: 0.56%
• Proassurance Corporation PRA: 0.54%
• Cubist Pharmaceuticals, Inc. CBST: 0.54%
• Post Properties Inc PPS: 0.52%
• Lufkin Industries, Inc. NASDAQ: LUFK): 0.51%

#2:Vanguard Small Cap ETF VB ****

VBfollows the MSCI US Small Cap 1750 Index which consists of 1750 small cap stocks in U.S. markets. The fund was launched in January 2004. The expense ratio is 0.16%. AUM equal $4,213M and average daily trading volume exceeds 330K shares. As of May2012 the annual dividend yield was 1.24% and YTD return 9.06%. The 1YR return was -2.10%.

As of the third quarter end in 2011 the YTD return was -8.89% demonstrating high volatility.  VB trades commission free at TD Ameritrade and Vanguard.

Data as of May 2012

VB Top Ten Holdings & Weightings

• Panera Bread Company, Inc. A PNRA: 0.27%
• Corn Products International, Inc. CPO: 0.27%
• Oil States International, Inc. OIS: 0.26%
• ITC Holdings Corp ITC: 0.26%
• Biomarin Pharmaceutical, Inc. BMRN: 0.26%
• Signet Jewelers Ltd. SIG: 0.25%
• BRE Properties, Inc. BRE: 0.25%
• Arthur J. Gallagher & Co. AJG: 0.25%
• Foot Locker Inc FL: 0.24%
• Senior Housing Properties Trust SNH: 0.24%

#1: Schwab Small Cap ETF SCHA ****

SCHA follows the Dow Jones U.S. Small Cap Total Stock Market Total Return Index which (aside from a mouthful) is a subset of the Dow Jones U.S. Total Stock Market Index, which measures all U.S. equity securities with readily available prices. The index represents the stocks ranked 751-2,500 by full market capitalization and is float-adjusted market cap weighted. The fund was launched in November 2009. The expense ratio is 0.13%.

AUM equal $635M and average daily trading volume is 156K shares. As of May 2012 the annual dividend yield was 0.88% and YTD return was 8.62%. The 1YR return was -2.62%.  SCHA trades commission-free at Charles Schwab.

Data as of May 2012

SCHA Top Ten Holdings & Weightings

• Micros Systems, Inc. MCRS: 0.28%
• Taubman Centers, Inc. TCO: 0.28%
• Arthur J. Gallagher & Co. AJG: 0.26%
• Cooper Companies COO: 0.26%
• Wabco Holdings Incorporated WBC: 0.26%
• Biomarin Pharmaceutical, Inc. BMRN: 0.24%
• Gartner, Inc. Class A IT: 0.24%
• Thomas & Betts Corporation TNB: 0.24%
• Catalyst Health Solutions, Inc. CHSI: 0.23%
• Ariba, Inc. ARBA: 0.23%

We rank the top 10 ETF by our proprietary stars system as outlined below. However, given that we’re sorting these by both short and intermediate issues we have split the rankings as we move from one classification to another.

****
Strong established linked index
Excellent consistent performance and index tracking
Low fee structure
Strong portfolio suitability
Excellent liquidity

***
Established linked index even if “enhanced”
Good performance or more volatile if “enhanced” index
Average to higher fee structure
Good portfolio suitability or more active management if “enhanced” index
Decent liquidity

**
Enhanced or seasoned index
Less consistent performance and more volatile
Fees higher than average
Portfolio suitability would need more active trading
Average to below average liquidity

*
Index is new
Issue is new and needs seasoning
Fees are high
Portfolio suitability also needs seasoning
Liquidity below average

As noted in the introduction and within many charts the Small Cap sector has the highest beta of the larger indexes. This means more volatility overall and better returns theoretically as overall stock markets rise. On the other hand, it can also mean underperformance as markets fall. This is why we believe it’s important to incorporate long-term technical indicators like DeMark to prevent large drawdowns like we’ve seen over the last decade especially.

It’s also important to remember that ETF sponsors have their own competitive business interests when issuing products which may not necessarily align with your investment needs. New ETFs from highly regarded and substantial new providers are also being issued. These may include Scottrade’s Focus Shares as other brokerage firms try issuing new ETFs with low expense ratios and commission free trading at their respective firms. These may also become popular as they become seasoned. 

For further information about portfolio structures using technical indicators like DeMark and other indicators, take a free 14-day trial at ETF Digest. Follow us on Twitter and Facebookas well and join our group conversations.

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The ETF Digest has no current positions in the featured ETFs.